Hey, guys. Good afternoon. My name is Tejas Savant, and I'm the life sciences analyst here at Morgan Stanley. Before we begin, for important disclosures, please see the MS Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your sales rep. So it's my pleasure this afternoon to host PacBio, and speaking on behalf of the company, we have Christian Henry, CEO. I'm not sure if Susan is here. I guess she's not here. No worries. Thank you for joining us, Christian. Maybe just to, you know, set the stage, it's been a really eventful action-packed sort of year for PacBio. You know, sometimes some investors feel like you've bitten off more than you can chew because you have all these different initiatives underway. What key accomplishments are you most sort of proud of year to date, and what gives you the confidence that you've got this? Well, I think, first of all, Tejas, thank you for the opportunity to speak here today. This is always a great conference, and so we appreciate that. Also, just a reminder, check our website, too, for disclosures. I may make forward-looking comments, and so- We encourage them. Yeah. And I know Tejas will get them out of me. But when I think about you know, our story in PacBio in 2023, what I'm most proud about is that we've really set out to... We've accomplished everything that we said we were going to accomplish back in late 2020 and early 2021, when I became the CEO. In early 2021, we said we were going to build a commercial team and drive placements of the Sequel II platform at the time, and then drive innovation to create new long-read platforms. Later in 2021, we acquired a company called Omniome to develop some short-read technology. We said that would take to develop the products, would take about two years. You know, so as you got into 2020 through 2023, we started shipping Revio, a completely groundbreaking long-read sequencer that is 15 times more powerful than anything that we had ever created before. Customer uptake has been nothing short of dramatic and quite remarkable. And then, in August, we started shipping the Onso platform, which is our short-read offering, as a result of the acquisition of Omniome. So, quite frankly, in less than 2 years from the date of acquisition, we're now shipping that product. So I'm very proud of those accomplishments because we want to be perceived as a company that when we say we're going to do something, we get it done in the time frame. The other thing I would say, the last thing I'll say, and I'll let you move on to the next, is that I'm really proud of the team that we've built. We've built a very experienced leadership team in life sciences that knows the genomics market extremely well, that has been involved in major product launches, major execution, has tremendous customer relationships. And so when you put the combination of those things together, we started with a strong vision. We're, quite frankly, we're ahead of schedule, and so I'm, I'm quite gratified by that. Got it. Let's start with, you know, Revio, topic du jour. Shape of the order curve there, you know, after the second quarter when we spoke, Christian, you talked about, you know, it's an increasing curve, then you hit a plateau, and then you increase again. Mm-hmm. And, and Revio orders, at least at the end of the second quarter, you thought were sort of at the tail end of that initial bolus and then heading into that plateau phase, right? Now, can you just sort of provide some context for why you think that's how things generally shake out? And that, that second inflection that you talked about, is that more of a first-half 2024 phenomenon, or do you think it's more of a second half of 2024 phenomenon? Yeah, that's a good question. I think I, on the conference call, when I talked about this, I probably didn't characterize it as well, and it's a difficult place. You have an hour to talk about something that's a little bit nuanced. When I think about the market and the demand for sequencers in any new technology or product cycle, the first bolus of demand, very first, comes from those customers that are already existing customers that are willing to buy your product sight unseen. They, you know, you put out the press release, or you show them, you show them the demo of the instrument at the trade show booth, and POs come in. The second group of customers is that group of customers that are believers, and they, and they've seen the technology and they know it works, but they want to, you know, they want to trust but verify, so to speak. They want to verify that the system works. The next group of customers are those that haven't been engaged in the technology but have always wanted to get engaged, and now you've reached a level of either economic performance or technical performance that said, that pushes them over the edge. And then the last group is that group that, quite frankly, didn't even know about your company, and you needed a new product like a Revio to, you know, engage those customers. So that's the, that's the shape of the curve, and you can use Crossing the Chasm or whatever, whatever terms you want to use, but that really happens. And what happened was we had a very, very fast start of the customers buying sight unseen. And my only, what I was trying to elucidate in that, in that conference call was the group that were trust but verify were just starting, you know, to emerge. Either they didn't have budget in place, either they, they, they wanted to see how the system worked. They, you know, for other various reasons, they, they weren't ready to buy yet... and my point was, the people that were buying sight unseen, we're kind of, we're kind of reaching the, the tail, the tail end of those people. The reality is that that's fine, because now we've got lots of Revios in the field, lots of great data being generated, and early publications showing how powerful the system is. Mm. And so that next bolus of customers has completely engaged, and I, I think, I think the other thing that you have to remember is that, you know, at the end of the day, orders are great, and they're, obviously, they're the first part of the process. Backlog isn't so great- Mm. - really. Mm. Because the reality is that the bigger your backlog is, the less revenue you're generating you could be on consumables. This is a razor-razor blade business model, so every Revio that's sitting in a crate, even though it's allocated to an order, isn't generating the lifetime value of that revenue or that instrument, and so it's really important. And I wasn't able to get that point across as well, and so my expectation is that shipments- Mm-hmm. are going to go up every single quarter. Mm. Now, how far out that is? Well, I don't know, and today I'm not going to give- Mm-hmm. - you know, 24 guidance, but the reality is, is that we're seeing increasing excitement, increasing demand. We're increasing our shipments- Mm-hmm. and, you know, we expect to be increasing shipments every quarter through the remainder of this year. Mm-hmm. - and into next year. And so on balance, I think the business is, quite frankly, it's in the best place it's ever been. Got it. That's a great segue into my next question. You know, you announced the launch of PacBio Capital this morning. Yep. You know, it sounds like it's basically a way for customers to lease sequencing systems, not just the Revio, but also the Onso and then Sequel as well. Tell us more about sort of the rationale behind launching that program. Mm-hmm. In terms of the Revio context, you know, to your point around, the trust but verify or perhaps the more hesitant customers, how does this impact, you know, their decision in your mind, or was it just a response to sort of macroeconomic realities? Yeah. So, so we've had leasing programs in place for several years, so this is nothing new. There's no fundamental change. Mm-hmm. We announced it today 'cause it's ready today. We have a new leasing partner, and it's branded PacBio, so that's, that's what's cool. The point of leasing programs is to give customers more flexibility. Some customers have budget allocations that are capital-heavy on capital and light on operating expenses. Some have low capital but lots of operating expenses. Some have, you know, have a lot... have a need, but necessarily don't have all the capital today, but are willing to pay over time. This gives us the ability to serve all of those different customers and get into, get into the Revio or, or Onso- Mm-hmm You know, that much faster. So it's really just increasing flexibility. It represents, on any given quarter over the last many quarters, you know, it's a small portion of our orders. I don't know the exact numbers, you know, I'm not going to quote them here, but it's a small portion every quarter that we've had, so it's not a new thing at all. Okay. It's not in response to macroeconomic conditions. It's a way for us to increase customer flexibility, enable them to get into technology sooner, reach more customer segments, and then also do creative bundles, 'cause you can do things with the leasing company. So, for example, you could do a bundle where, hey, we're going to ship you reagents every month- Mm-hmm. - and we're going to ship you the instrument, and you're going to pay, a monthly, you know, a monthly charge- Mm-hmm. that's spread out over X amount of time. So it just gives us a lot more flexibility. Got it. Makes sense. You know, one of the things that was impressive in the second quarter was about, you know, little less than half of the orders were new to PacBio customers. Mm. Can you just share some color around the types of applications that these new customers are using the Revio for? And what was the clinching factor for them in terms of platform specs? Was it just throughput, or was it something else that really sort of sold them on Revio? Yeah. So, so new customers, Tejas is right. We have a very significant proportion of, you know, over 40% of our new orders are, are new customers at this point, and to start, that is the most, in my view, probably the most important metric for people to look at, because if we're going to create a scale business as we move towards $500 million in revenue and $1 billion in revenue and beyond, we have to acquire those new customers. Why are those customers, you know, coming to PacBio? First of all, they see the Revio is, you know, industrialized, reliable, the most powerful long-read sequencer on, on the market, clearly. But they're, what we're doing is we're starting to reach the economics and throughput barriers that we had been unable to reach in the past. In 2019, we developed HiFi. HiFi chemistry allows us to have highly accurate sequencing, so very competitive against short read. But Revio really allows us to have the throughput to do scaled science and the economics on a price per sample. And some of the, you know, core applications are really all about whole genome sequencing, both in a clinical translational context, but also in a research context. There's new customers in agriculture, there's new customers in targeted sequencing and RNA. Our MAS-Seq kit, which we launched last year, really is enabling us to do whole transcriptome research in a way no other technology's ever been able to do. We can look at, you know, quite frankly, it's the most elegant gene expression- Mm-hmm ... tool that's perhaps ever existed. And yeah, I'm probably biased, but the reality is, you can see the entire transcriptome, you can see all the splice variation at incredible resolution. And so these are all game-changing applications that we're bringing to the market. Got it. Quickly on manufacturing, and installation capacity, Christian, are you essentially in at steady state at this point, or is there more work to be done there in terms of scaling it further, to your point, around, you know, shipping sequentially greater number of Revios every quarter for the foreseeable future? I think we're at a good first spot, but our intent is to scale further. What we wanted to do is, we wanna start whittling our backlog down as we start generating revenue. We wanna keep growing. You know, we do believe we'll keep growing orders and shipments so that we keep growing, and as a result, we'll need to scale the manufacturing further at some point here. The keys to scaling are really all for now, and actually into the reasonable foreseeable future, is really driving supply chain and acquiring the components that we need for scaling earlier. Because we have a very large footprint- Mm-hmm. - and so we have a lot of optimization in terms of multiple shifts, more leverage of the CM, our contract manufacturer, so that we can drive, you know, the throughput of the factory, which will in fact drive gross margins up too, at the same time. And so where we sit today, you know, we can scale within a quarter, quarter and a half to whatever we need, because it's really driven off of the supply chain and purchasing. We may have to hire a few people at the margin- Yeah. but we have the footprint and the core, the core capability right now to do whatever we need to do. Got it. What's the customer experience been like? I mean, as with most launches, there's usually some sort of pain point hiccups during the initial rollout. What's been your experience with the Revio? And second, you've talked about sort of system updates to add more functionality and improve performance later this year. Can you just, like, share some color on what those entail? Is ASHG sort of the natural venue to be sort of looking forward to those? Yeah, I think... So, going back to starting with customer experience, you know, we have a corporate goal, which our bonus plan is partly predicated on, is hard failures of Revio in the field. And we set a very pretty tough metric for six months post-launch. Quite frankly, we were achieving that metric, you know, three months out of the gate, basically. And so, you know, so far, hard failures have been, you know, just a couple percentage points. It's very low hard failure rate. The out-of-box experience has been pretty good for customers. Yeah, we did have some. Every platform launch had some challenges, and we had some out-of-box issues that we had to manage. And when I say out-of-box issues, what I mean is, we track everything. Was all the paperwork in the box? Was every screw tied down to the right specification, et cetera, et cetera? We've dramatically reduced those, and quite frankly, the vast majority of those issues, customer never even saw them. They were just internally, you know, focused issues. So far, the experience has been pretty good. We've had a couple software patches. Software is always the hardest thing at the end of the day, when you're developing these sophisticated instruments. It happens at the end of the development process, so you're pushing them really hard. And so we've had a couple patches that have gone through to improve the performance. And so, you know, on balance, we've actually seen the systems continue to get better. We haven't had any real catastrophic issues, so to speak. Coming in the future, we do... You know, one of the value propositions of working with PacBio is that we're very focused on taking the instrumentation we have and improving it, improving it over time, and actually improving the entirety of the workflow. And so, you know, we will have software updates and other kinds of updates that will come, and ASHG is a great time to talk about a lot of those. But by the end of the year, we would expect to have, you know, increases in functionality that we wanna have, user-friendly features, things like being able to look at smaller inserts. Got it. So, for example, part of the power of long-read sequencing is you wanna look at long reads. But sometimes customers only wanna look at a 5 kb read or a 3 kb read, or a 7 kb read, when we're looking at 15-20 kb reads. And so the system today is optimized for looking at 15-20 kb, but adding functionality into the protocols and the software and the way we do our sequencing so that you can look at 3 or 5 kb, that, those are the kinds of improvements that we'll make this year, that they didn't get, they didn't get into the product, at initial launch, but they'll be available. Expand our customer base- Mm-hmm. makes our customers happy because they have more flexibility on what they do with the instrument, et cetera. Got it. I think you or perhaps Mark, I can't remember, have talked about sort of, you know, 25%-40% utilization versus a theoretical maximum, as a reasonable way to frame, you know, pull through across- Mm-hmm ... the installed base in steady state. But clearly, you know, you, you've started off stronger than that. I mean, you're already at, I think, last quarter was $440K. Now, there's the stocking element to it. But beyond that, given that, you know, you're selecting the customers that have samples ready to go early in the launch, and they're generally, you know, long-read power users, if you will, do you expect consumable pull-through to... dip a little bit and then sort of start inflecting again? You know what? It's difficult to know, and we have been very crystal clear that we're not gonna predict and game this thing out, because until you have a couple of hundred instruments in the field, it's difficult to know what the true rate is. But you are right, Tejas, we had a very nice start to Revio, and we've seen very strong people actually using and using their systems quite a bit. And so my expectation is, yeah, it probably will be, you know, probably be flattish and maybe up a little bit higher, maybe lower a little bit, but kind of in that sort of range. And then over time, and that over time could be anywhere from, you know, two quarters to two years, quite frankly, that you would see it trend down a bit. But when, you know, this is what I want people-- the takeaway is the following: First of all, we're selling each instrument for more than twice as much as what we sold the Sequel II's. The pull-through on each instrument is probably 3-4, maybe even five times as much as any historical instrument, and we're getting 40% new customers every quarter. The combination of all those sets us up extremely well for long-term growth. And the market's there, right? And it's there for us to execute on, and we're executing. Got it. I want to talk a little bit about the competition. Are you starting to run into, you know, Oxford Nanopore at all? You know, they've had significant improvements on the accuracy. I think now it's at, like, Q20 or even perhaps Q30. They've talked about enabling some sort of $700, like, 30x coverage genome. What are your thoughts on their view that perhaps the All of Us paper, you know, used an older paper on an older pore, and then perhaps, you know, the performance in customer hands is better than that? I mean, does that sort of shift the competitive dynamic that you're seeing in terms of the feedback you hear from salespeople, et cetera? Well, I definitely think... Look, the sequencing market is large, and it's certainly competitive, whether it's short-read sequencing competing against long reads or long reads against long reads. You know, I can't necessarily comment on all the ONT, what, what they're doing or not doing, but what I do know is that if you're generating Q20 data, and we're generating Q30 data, our data is 10 times, tenfold more accurate, and that's pretty much indisputable. I do think that their accuracy is, as they've claimed it to be, improving over time. But they're also... what we also are seeing is that by implementing duplex reads and other types of things, the level of sequencing required to get a whole genome at that level of accuracy, quite frankly, is cost prohibitive. You know, we've done our internal calculations that, you know, a Q30 genome using duplex reads costs, you know, thousands and thousands of dollars. I also know that the data type and the runtime, you know, it's not just about the accuracy of the system, it's about the entirety of the workflow. You know, when you come up to a Revio machine, in 2 minutes, you load your samples, and you walk away in 24 hours. Not only do you get your data, you get your data fully processed into HiFi reads, so you don't need to do incremental processing. With other technologies, the runs are 72 hours long. They require manual intervention three times during the run, where you have to actually go up to the machine, manually pipette onto the flow cells and to make sure, you know, to make sure that you have enough sample. And then, at the end of the day, you get 2.4 TB of data out that needs to be processed, very expensive to process, very expensive to store. When you're storing 2.5, you know, TB of even at cheap, in a very inexpensive storage, that's still $600+ a year. So if the actual sequencing is $600, let's just say, and it costs $600 to store it, you know, it's still pretty expensive, where it costs... Now, you say, "Well, gosh, don't you guys have to pay for storage, too?" Of course, we do. Our storage costs are, like, less than $50 a genome- Mm-hmm. per year, much more competitive with short reads. And so it's a very different proposition. I do think that long reads in general are gaining traction against short reads, which I think is good for both companies. I do think that the industrialization and the simplicity and the thought we've put into, you know, creating a scaled system to do big time biology is giving us very significant competitive advantages. Now, we're growing faster. We're certainly growing faster than they are, according to at least the reports that, you know- Mm-hmm ... we've all seen, and I'm quite encouraged by what we've got going on. Got it. I want to switch quickly to Onso, Christian, recent launch. I mean, any color you can share on the early user experience, are these mainly NextSeq users who are placing a premium on higher accuracy relative to throughput? Yeah, I think that so far, the early experience, it's still very early. You know, we're not gonna ship you know 50 units this quarter. Kind of, it's not like a Revio launch. It's a lot - we have - it's a new technology, and so we're going slow with that. But the experience has been tremendous in the sense that what many customers or some of our core customers are doing is they're doing actual head-to-head comparisons. What can I see with Onso, and what can I see with you know other short-read technologies? And what the simple fact is that you can see variants - Mm-hmm. that you just can't see, even with UMIs or other molecular biology tricks. And so these customers are very excited about that, and they're focused in, MRD and, you know, cancer identification and different kinds of, of collaborations, or, or different kinds of, of applications that, you know, are why we actually, why we built Onso in the first place. We didn't build Onso to be the sequence, you know, germline genomics, oncology, et cetera, to be a jack-of-all-trades sequencer. We're really focused on, you know, where does, where is the power of looking deep into a sample to find those needles in a haystack? Because, for example, our belief is that in an MRD application, if you could see a variant earlier, perhaps you can, do something about it sooner. Now, that needs to be proven out, and that's what these early customers- Mm. are working on. Then what's great about it is Onso will help prove out the value of accuracy and drive that mid-throughput market. And then we acquired Apton in August, and Apton, that acquisition will give us the ability to launch a high-throughput sequencer capable of billions and billions of reads per run, billions and billions of reads per flow cell, actually, multi-flow cell- Mm-hmm. ... you know, set up. So you can, you can really create a very high-throughput system, and if you can leverage Q40 or better reads at high throughput capability, you'll have a very, very competitive entry as you start to think of scaling into, MRD in a clinical, in a clinical context. And so that's kind of the strategy. Mm. And my long-term view is that this, the sequencing market, you know, we kind of estimate the TAM to be $12 billion-$14 billion, depending on how you look at it. But we actually believe that, you know, germline genomics, over the next five years, will largely move to long-read applications because of the comprehensiveness, because of the economics, and now the throughput is where it needs to be. And somatic and looking for variants will continue to be a heavily short-read platform. And so the cool thing for us is, we're going to talk to customers about selling a solution, not a technology. Mm. That's why we're seeing nice traction on bundling. Mm. People wanting to buy an Onso and a Revio. Of course, we're giving a nice economic discount for that, but we're leveraging our channel, we're leveraging our technology, we're leveraging our heavy, heavy differentiation. The combination of all those things are enabling us to make competitive inroads against, you know, the largest sequencing companies in the world, and to, you know, have a strong position against all the emerging companies. And so it puts us in a very nice position. Fair enough. On Apton, Christian, I mean, our checks suggest that, you know, the optics on the platform were particularly impressive- Yeah. And then a point of differentiation. Can you just elaborate on that? And then, how long does it take for, you know, optimization and scale-up now that you've established that, you know, SBB chemistry will work on that instrument? Yeah. So, Tejas, you're exactly right. The optics... When you think about sequencing systems, you know, the most advanced systems, there's really two fundamental: the fundamental chemistry and the optics, and everything else around it is kind of the supporting cast. The optics, in this case, what they've done is they've actually taken, you know, experience from telecom and other industries and implemented the ability to see single-molecule resolution in highly packed on clusters on pieces of glass. Mm. Pretty amazing stuff. Mm-hmm. Very impressive. This Super-Res, that we call it, we are gonna take that and then embed SBB on top of it. It'll take us some time, take a couple years or less, you know, some kind of a framework. So what I've been saying so far is that, you know, this product should have an impact on our 2026, you know, on our—in our guidance window that we've given to 2026. So we should be generating revenue, but we don't have the exact dates yet. But what we have to—here's what we have to do. We have to marry the optics with the chemistry in a much more robust and consistent way. We need to modify the ID of the instrument a little bit, adjust the fluidics, because when you're looking at that high level of resolution, the viscosity of the reagents and the way the reagents interact actually have a pretty big impact, the amount of heat generated. We also have to integrate the compute into the instrument, and so we have to do that. But these are engineering problems, not necessarily innovation problems, and so the combination of that gives me a lot of confidence that we'll be able to create a pretty cool product in a reasonably short window, make us very competitive in the market. Got it. Last question on China and the guide. A lot of companies here are sounding increasingly worried about what's happening in China. I think it's about 13% of your total revenue. Mm. What are you seeing in the region? Clearly, 2Q was fine, but the concern is more around, does this, you know, perhaps limit upside to the guide? And has anything changed, I guess, in July and August? Nothing's changed from our perspective, and Q2 was the best quarter we've ever had in the history- Mm ... of the company in China. So it was fine. Mm-hmm. I agree, but it was really the best quarter we've ever had. What we're seeing is, you know, we kind of are unique. We have a very concentrated customer base. The customer base are principally service providers, and so those service providers are serving the Chinese market as Chinese companies. And then the last piece, of course, and probably perhaps the most important piece, is that there, there, our technology is so differentiated. There are no other long-read offerings in China by Chinese companies. Right. So from a competitive dynamic, we are, we are it. From a customer perspective, you know, we're, we're very concentrated. Could, could we be doing better in China if the environment was better? Perhaps. Mm-hmm. But I don't think, I don't think China on its own has an impact on, you know, our guide or our numbers. So far, July and August, you know- Mm-hmm ... it's not as big a deal for us- Mm-hmm ... as perhaps it is for others. But we're also in a new product cycle, so we have a lot of favorable factors in this context. Mm-hmm. So, I'm probably not the best person to ask for, "Well, how long is it gonna persist," or, "What is it?" I know there's some companies at this conference, and much bigger than we are, that have much more entrenched into China. Mm-hmm. Mm-hmm. You know, we're just not feeling the impact as much. Great. That's a great place to leave it at. Thank you so much, Christian. Appreciate it. Thank you, Tejas. Yeah, of course. Thank you, everyone.