All right. Thank you very much for joining us today. My name is Mike Podoll. I lead Morgan Stanley's U.S. Life Science Tools and Diagnostics Coverage in the Healthcare Investment Banking Group. It's my pleasure to introduce Mark Van Oene, Chief Executive Officer of Pacific Biosciences. Mark, welcome. Thanks, Mike. Thanks for having me today. Absolutely. Congratulations again on stepping into the new CEO role. As you've gotten settled into the company, from your vantage point, where do you see the clearest opportunities to enhance the company's strategy or execution? Well, fortunately, I've been here for a little over five years, and Christian and I worked hand-in-hand on really defining where we could build out the portfolio and the strategy for PacBio. This is not me making a wholesale change on the strategy. It really is what you asked about, is the execution. I think really making sure that we're really focused on driving into some of these clinical markets where our technology's differentiated, and that's really around germline genomics right now. Think about carrier screening, newborn screening, rare disease. How do we better execute there? A piece of this is just bringing the commercial organization together to properly drive and go after those markets and seize the momentum that we're starting to see both in Europe and now starting in the rest of the world. To me, it's a very execution-focused change, more so than a big strategic shift for the organization. What should your customers or investors expect to be different? Obviously, execution is a big part of this, but as you think about your two or three biggest priorities for the next 12 - 18 months, what are those, and what kind of evidence should investors look for that you're driving that execution the way that you hope to? Yeah. First we did just go through some restructuring and reduced some cash burn. Look for me to land the restructuring for the organization and settle the rest of the commercial and R&D groups back down that have been impacted. That's top of mind for me, is making sure that we're fully focused on moving forward from the restructuring. You guys should look for the cash savings next year. We're talking about a $40 million savings between headcount and non-recurring expenses. You should be looking for me over the next year to make sure that we deliver those savings on the operating expenses. From an overall product perspective, we've just started shipping our SPRQ-Nx reagents. For those of you that don't follow us closely, these are reagents that let us reuse the chip up to 3x. This multi-use chip really gives us the economics to think about how we can drive gross margin and drive some price elasticity in the market by lowering the price. This SPRQ-Nx transition that started in May is really important for us to execute on this year so that we exit 2026, with consumable growth, margin growth, setting ourselves up on Revio for 2027. The other big product, obviously, to execute on over the next 18 months is the high throughput platform. SPRQ-Nx is giving us the economics to have conversations for large deals that we haven't been involved with in the past. Now people do want higher throughput platform. Continuing to make sure that we're focused and this piece of the company was not impacted through the restructuring, but focused on driving that high throughput platform through development to execute on later on next year. Maybe just looking ahead maybe three to five years, longer term type of time horizon, anything else that you'd like investors to understand about the broader vision for PacBio and how you see PacBio within the broader genomics ecosystem that, I think as we all know, is an ever-changing environment? Yeah. It's been fun for life science tools companies the last two years, hasn't it? I'm joking. It's been tough. I think because of that, we're starting to see some new opportunities emerge that aren't the traditional funding sources for us. The first is PacBio has been built in the most part from plant, animal, non-human, and some more recently, growing human academic research. I think we're here to catch and support that as much as we can, and we will, because those are important customers and markets for us. But this drive into clinical is just critically important, and I think we have an opportunity in the longer term, three to five years, with higher throughput technologies, with even more affordable pricing per genome, to really cement ourselves in the rare disease clinical diagnostics. I say that because in the rare disease odyssey, it's a bunch of different technologies that are used that we can consolidate onto our test. Being able to change the economics of the labs that can consolidate tests, to be able to change the economics of health systems that are deploying those tests and drive up the clinical evidence and clinical utility of combining those is a real opportunity, and publications are coming out regularly now to show the increased diagnostic yield and benefits of using HiFi as frontline. If I think about three to five years, it's making HiFi a frontline genetic test using whole genome sequencing, not just a reflex or not just a subset, but a frontline test for rare disease diagnostics. I also see a big opportunity emerging, and you're seeing it in the tools companies in our space as well. There is this intersection of AI and healthcare. It is data hungry, the comprehensiveness of our data is meaningful for them. I do think, over the next three to five years, you will see us get funding from more of these AI therapeutic companies and non-traditional customers. I think of this as a new category of customers to start to drive the understanding of multimodal data into different models of biology and healthcare and therapeutics and diagnostics. I think that will likely replace academic and government in many ways, as a real opportunity for us, given the quality of the data that we have. You mentioned SPRQ-Nx and the rollout there. What are you hearing from your early customers? How should investors understand what successful adoption might look like? Yeah. So the early data has been really encouraging with the SPRQ-Nx rollout. Again, it has only been, what, end of May we started shipping, so it has only been a few months of getting really meaningful feedback. The customers are experiencing really good first and second runs, a little bit less yield on the third runs, so a lot of it is just working through the workflow and the timing and how that will play out in the customer's hands. Our team is fully equipped to have those conversations, and I think the customers are understanding that dynamic a little bit better now. What they do love is the economics, so we have been able to lower our list price by 30%. That is driving new conversations, that is driving new projects for us and higher scale projects. It is leading to some fleet expansion in cases where now they are getting enough interest that they need to add some Revio to their fleet, so it is doing what we would expect it to do, both with current customers and then driving new projects and growth. I think for investors, you should really look at how long does this transition take. You saw an impact in the second quarter, our utilization and the average, not the utilization, but the pull-through per instrument per year came down closer to $200,000 in the second quarter. You should expect that to continue through this quarter, but by the end of this year, I do think this is a two-quarter transition, and by the end of this year, we should be getting the revenues from the consumable product line back up again and start to drive that annual pull-through back up again. Again, setting ourselves up for 2027. The other thing you should start to look for is this is the first product that is going to help us start to increase the gross margin for the company again more meaningfully. We have the margin that as we drive adoption and drive utilization of this, you are going to start to see us recover some of the gross margin that we had to hit on last quarter. Got it. Are there any particular barriers that you want investors to be aware of as you go through the earlier phases of this new adoption? No, I don't think it is a barrier. To me, the slowness has just been getting people to put testing into clinical production. It is not a barrier, it is more of just getting through that process. Just like we have a product development process for making and commercializing our products, these labs have a commercialization process of taking the testing that are validated in R&D, transfer that to their production or manufacturing sites, and training their commercial teams. To me, it is just let us pay attention to the process of getting this going at scale with the SPRQ-Nx in the clinic. They are on board, they are validating, they are working with us, and now I just think we can do a better job of supporting them as a customer segment overall. As you look across the different clinical applications, what do you think is most likely to become the most meaningful beachhead for HiFi? Or how do you think about that? It is germline genomics initially, and it depends on where in the world you are. Right now we are seeing great growth and success with whole genome sequencing in Europe. The Revio and the sample volumes in the academic and medical centers in Europe are of the thousands of samples, not of the tens or hundreds of thousands of samples, so we are seeing great success with rare disease whole genome sequencing in Europe. I expect that to continue and expand across different hospitals within the countries that are supporting that as a frontline test. I think the nuance here is Europe has already started to transition this to frontline, not reflex, not a subset, but let us make this a frontline test for these different rare disease conditions. When I talk about transitioning that success in Europe to the rest of the world, it is about getting it to frontline. The fragmented U.S. system and the centralized testing in the U.S. does not afford itself to the same ways of thinking about deploying this as it is in Europe. In the U.S., I think the earlier clinical test adoption will likely be carrier screening. We've already seen Quest launch ataxia panels. I expect others to launch ataxia carrier screening panels, more targeted panels, in advance of going fully into the whole genome sequencing for rare or undiagnosed disease. I only say that because of the volumes. We can do hundreds of thousands of samples on Revio for targeted approaches. We can't yet do hundreds of thousands of samples well on Revio for whole genome sequencing in the U.S. It's getting them started, and so the activity in the U.S. is let's get them started on subsets or reflex testing so that they're scaled and ready, because I do think longer term, the higher throughput platform and economics will give us a real opportunity to drive into whole genome sequencing here in the U.S. and Asian markets as well. Maybe just shifting gears for a moment, as you think about the U.S. academic or government research funding markets, based on where we are today, recognizing there's been a massive amount of volatility here over the last couple of years, how would you characterize the funding environment today from your vantage point? Yeah, it's been a tough few years. Even before this administration, it was hard with the NIH funding for us as grants got smaller and more decentralized and supported the smaller researchers. I think we had challenges even before this administration, but it's continued, and it's the uncertainty. It's the uncertainty of the timing of the funding. It's the uncertainty of the next round of funding. It's middle of September. I was hoping there might be a flush. I haven't seen a budget flush. I don't know if others in our industry are yet, but I haven't seen. Traditionally, we would never count on it or never bake it into our forecast, but love the upside of a budget flush. I'm not seeing that this September either. I think it's just the uncertainty, and so we're not expecting any major changes in the U.S. NIH academic environment for us, which is why you're seeing us focus on different sources of funding, biopharma, philanthropy, different types of clinical opportunities. I think the U.S. business was relatively flat because we're growing the clinical business to offset the NIH shortfalls, but it's the reason why we're not growing. That being said, we are absolutely poised to take full advantage of that if the money starts flowing again. Are there particular areas where you are seeing any resilient demand, or how do you think about more in the near term or medium term if the funding environment remains more uncertain, does that change how you think about different priorities within the company? Well, that is part of the why the new focus on better supporting the clinical markets. When I say that is we have really good workflows for academics right now, but we kind of stop. We have invested in all of the DNA prep and the library prep and the automation around that. So we have invested to feed the Revio. We have invested in computational biology tools to get to variant calls across a number of different pipelines. Great for the academics or the really sophisticated clinical labs. We have not really invested in the end of the workflow through interpretation and clinical reporting, so thinking about how we partner into that becomes really important and driving the recurring revenue then from those clinical customers in a more decentralized way. I think we are going to be able to rely on more routine sample volumes and more routine revenue in the clinic in general as one. We are also seeing renewed interest from biopharma, not just for access to data, but larger data sets for enrichment of their data sets for their own target discovery work. I do think biopharma is a really important other segment for us to spend some resources and time on it outside of just clinical and preclinical trial recruitment. I think it is still discovery work for biopharma through enrichment with HiFi. Got it. With the recent restructuring, obviously you have talked a little bit about the focus now on clinical. Any other changes in the product roadmap or your capital allocation priorities or anything else that you think is important for investors to understand? I think we've done the hard work. We've had to go through three restructurings in three years, and we've exited the short-read business that we thought was going to help us get the piece of oncology that long-reads can't really go after very well. I think we've done a lot of the hard works from a capital deployment and are very focused on Menlo Park. I would say we've started insourcing all of our Vega manufacturing, so look for me to even better utilize the space we have in Menlo Park and better absorb that manufacturing footprint. So think of it as just optimizing and further enhancing the capital deployment there. The biggest expense right now is the R&D program around the high throughput platform, and that's not going to change. We are committed to getting that out, and that's the priority. Got it. To me, it's stopping all the distractions of other things and really focusing on that. I don't want to add a bunch of new stuff to development pipeline. I want us to be successful in creating and launching our complete portfolio of the three different HiFi sequencing technologies. Got it. Anything else within the R&D pipeline that still remains a focus, or is it pretty well-focused, as you mentioned? Yeah, we have some updates to the Kinnex RNA. We have some smaller updates to some improved automation around DNA prep. I see a lot of these efforts now, whether it is in front of the sequencer or in the back end, because we are still making big investments in the data and the use of the data in the back end. I see those still as extensions of our high throughput. You cannot launch a high throughput platform to market and not fully enable people to access and utilize that data. When I talk about the R&D programs around high throughput, it is end to end. I do not want you to confuse that for just making another sequencing box. It really does encompass the utility of the data on the back end. That includes things like building a software stack and partnering to a software stack. I think of it as precision health intelligence. Other people will call it an AI platform. To me, it is creating the accessibility of the data for customers that are generating it or other people that just want to access the data as a product. How do we productize our software in a better way so that people can come and through data exchange, get access to what we have and better leverage the information that we are generating? That is maybe a helpful topic to just double-click on. What are you seeing today? How should investors think about, or even customers think about your capabilities there on the software side? What does that look like a year or two from now? Yeah, we have made big investments in all of the secondary analysis pipelines. Looking at phasing and structural variations and copy number and all the unique stuff that has not really been built out, paralogs, I could go on, methylation. There are all these different things that our data encompasses that has not been built out because it is not really a native short-read set of information. We have built and created the pipelines for that. Now we have done a lot to really integrate those and streamline those so that they are more useful. We have also started incorporating those into some of the interfaces that our partners have, and a good example of this is what we call HiFi Solves. This is a federated network of hospital systems around the world that can run their HiFi data, that can share their HiFi data, and now they can actually run the secondary analysis and some new tertiary analysis pipelines within that federated network. They can query it to look for low frequencies. We're starting to build up the sovereign data infrastructure and the federated network for people to go and learn from other labs that are generating the data. I think the way we have to build the infrastructure and the software and make it more seamless for people to access is a really important part of this next phase of PacBio. Maybe at a higher level, how do you want investors to think about what has to go right for PacBio to re-accelerate growth well into next year and beyond? I guess, what are some of the indicators that you're paying attention to that'll be good evidence that you're getting the traction that you've set out to execute on? Yeah, I'll start with SPRQ-Nx because it's the most immediate. We need a successful transition to SPRQ-Nx through 2027 to start to drive the gross margin above the 40% threshold that we're under right now. You should be watching SPRQ-Nx and the gross margin inflection that can come from that. It's also a really important stepping stone. A lot of the deals and multisystems we're doing around SPRQ-Nx right now, multisystem Revio deals, are customers that fully have the demand for the high throughput, and we've figured out how to price these deals to get them ready and scaled for the high throughput when we launch it later next year. I do think watching the utilization of Revio over the course of 2027 in set-up for higher throughput is an important part because that's going to mean a more seamless transition in the community for embracing higher throughput technologies with us, because not many labs have ever run 10,000 genomes in a year. They have to prepare for that. I think SPRQ-Nx is a really important first indicator. The second to me is the clinical growth, and especially around consumables. If you take out the lumpiness of when they add infrastructure or don't from Revio, I would look at the clinical consumable growth as a real indicator of getting into that routine testing. You talked about the recurring revenue, the routine testing. That to me is how do we keep growing our clinical consumables 50%+ over the course of the next couple of years. The third thing I'll say is the real growth starts to happen from the high throughput platform. High throughput technologies and sequencing is where the majority of the revenues are made. It's where the majority of the margin comes from. For us to really inflect both revenue and margin as a company, it's making sure we execute on the high throughput platform next year, build a pipeline of sales for that, execute on getting it out there, and then drive the utilization, because in my mind, that's what sets up 2028 with the gross margin and the higher utilization of a high throughput technology to get to cash flow breakeven. You mentioned AI as being something of an emerging theme. How should investors think about the relative value of long-read sequencing versus short-read in the type of data that you all generate and why that could be so valuable in this ecosystem? Yeah, I've been really excited by some of the learnings of the first deal we've done in and around this AI world of healthcare, and that was with the Basecamp Research Group in England. For those of you who don't know, they're building a foundation model of biology based on a trillion gene atlas of genes found in soil samples, so these are metagenomic samples, bacterial. The diversity of the genes and biology there, they believe, is going to help them build a better model for looking at antibiotics and vaccines and other therapeutics. We started a deal with them where they're now sending us the soil samples and the DNA from the soil samples around the world to sequence with HiFi to help improve their model. The early indicators are just really encouraging that higher quality data is what they've been looking for, and I expect this to continue. Basecamp has been a real example of a large deal for PacBio to get involved in using its data to build a model of biology for therapeutics and therapeutic development. I expect us to have more of those over time. The differentiator to me is the comprehensiveness and the quality of the data. If you're going to go and build these models, let's enrich and use the most comprehensive genome or transcriptome, and I don't think this will just be genomics. We're having conversations around using Kinnex and transcriptomics for this as well, and build the most comprehensive model that we can. That is future-proof because you are going to want to go back to those samples and that data set over time and retrain and relook at your model. We have the most complete genome, which I think gives us a really good opportunity to make this a meaningful part of our business over time. That being said, I am not putting any of this in our base case model. When we talk about gross margin and we talk about times to cash flow breakeven, that is outside of anything that I think would be a unique category and a new category of customers here for us. Right. Maybe just to round it out, what is one thing that you think is maybe most underappreciated or most misunderstood about PacBio? I think the biggest breakthrough, internally, I think that we recognize it, but I do not think externally people realize how big a breakthrough being able to use our SMRT Cell more than once was. It is the majority of the cost of our sequencing, and it is what has held us back from being able to be economical at large-scale programs because we were throwing away this really expensive chip every time we sequenced. Being able to amortize that over two or three or over time, four or five uses of sequencing really starts to change the way we think about not just the price that we can do to the market, but the gross margin as a company. For the first time, I am staring at a product line that will have the gross margin that will actually make us a sustainable company. One of the biggest questions I had in advance of even joining PacBio, forget about this recent transition, but even joining PacBio was do they have a technology that will give them the gross margin to be successful? I do not think people appreciate how big a breakthrough that multi-use of the SMRT Cell was to really start to inflect the revenue through elasticity of pricing and inflect the company through the gross margin it affords us. All right. Well, thank you very much for joining us. It has been a pleasure to have you here. Great. Thanks, Mike.