Pacific Biosciences of California Inc (PACB) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pacific Biosciences of California, Inc. First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions).

I would now like to hand the conference over to your host today, Todd Friedman, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to the Pacific Biosciences First Quarter 2021 Earnings Conference Call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors Section at our website at www.pacb.com or as furnished on the Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.

With me today are Christian Henry, President and Chief Executive Officer; Susan Kim, Chief Financial Officer; and Mark Van Oene, Chief Operating Officer. Similar to last quarter, we are hosting our call from a number of different locations, so please bear with us if there are any technical issues or pauses.

Before we begin, I'd like to remind you that on today's call, we will be making forward-looking statements, including providing predictions, estimates, plans, expectations and other information. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties and may differ materially from actual results. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise these forward-looking statements.

In addition, please note today's call is being recorded and will be available for audio replay on the Investor Section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call.

I'll now turn the call over to Christian.

Thank you, Todd, and good afternoon, everybody. Thanks for joining us today. I'll start today's call with an overview of our first quarter results and business highlights, then Susan will provide some more detail on the financials and some thoughts regarding the second quarter. PacBio had the strongest first quarter in its history, delivering record quarterly product and services revenue of $29 million in the first quarter, an increase of 86% compared to the first quarter of last year. Revenue also grew 7% sequentially and exceeded our expectations. The strong quarter was driven in part by record Sequel II and IIe placements as we delivered 41 new Sequel II and IIe systems, growing our installed base to 244 units as of March 31.

Our new placements included 10 Sequel II and 31 Sequel IIe. 2 quarters into the launch of the Sequel IIe, we continue to be pleased with its reception and through new purchases and instrument upgrades, about 1/3 of the Sequel II installed base is now IIe. Sequel IIe's reduced data footprint with its own instrument data processing and cloud enablement, combined with our industry-leading HiFi sequencing, are enabling us to reach a broader customer base. In fact, roughly 1/4 of Sequel IIe placed in the first quarter were new PacBio customers. These customers include a pharmaceutical company using the system for in-house development associated with an AAV gene therapy vector and Biotools, our first Sequel IIe service provider in Taiwan, who plans to use its Sequel IIe for 16S metagenomics among other applications.

We also installed a Sequel IIe at Queens University Belfast, the first PacBio instrument on the island of Ireland, where researchers expect to use highly accurate long reads in human whole-genome and plant and animal genome research. Several multisystem installs also drove record Sequel II quarter as existing customers scale to address a diverse set of sequencing applications. For example, we installed multiple units at LabCorp to support its contract with the CDC to sequence positive SARS-CoV-2 cases in the U.S. In the first quarter, LabCorp represented about half of all CDC related GISAID submissions. This led to COVID-19 surveillance related revenue in the first quarter in the low single-digit millions.

We are pleased with the Biden administration's recently announced plans to invest $1.7 billion into a national network to identify and track coronavirus mutations. Genomics will be at the heart of this endeavor and these congressionally approved dollars will expand the government's genomic sequencing efforts while also creating critical research partnerships under a consortium called the Centers of Excellence in Genomic Epidemiology. We stand ready to support everyone involved in this critical work. We believe our technology is uniquely positioned to build a surveillance foundation to better prepare for future pathogen related health crises.

Our flexible and scalable protocols can be used not only on SARS-CoV-2, but for surveillance and influenza, HIV, HAIs, Food Borne pathogens, community antibiotic resistance and strain level identification of microbes in complex samples. Finally, with respect to COVID and consistent with our strategy to simplify our workflow for customers, we are developing a fully kitted product for COVID surveillance, which we expect will be available later this year. We intend to leverage the development of this kit to offer a suite of best-in-class solutions for infectious disease surveillance as we believe this will be an important area for the company in the future.

We also delivered a multisystem order of Sequel IIe at the Wellcome Sanger Institute in the first quarter related to the Darwin Tree of Life program. And Berry Genomics in China ordered several systems to expand its sequencing services, including the launch of its thalassemia gene atlas clinical trial program. Instrument revenue grew sequentially across all regions with PacBio's HiFi accuracy driving a competitive tender win in the U.K. for neurological disease research, and we booked a first Sequel II system in Italy at a New University Core Lab.

Moving to consumables. First quarter revenue was $10.4 million, up 3% sequentially from the fourth quarter of 2020, up 25% compared to the first quarter of last year, and well ahead of our expectations. We were somewhat impacted by the Lunar New Year in February. However, the recent growth in system installs and robust utilization among service providers in China more than offset this impact. Further, we saw increased utilization on the Sequel II and IIe systems. In fact, utilization levels on the existing installed instruments were at record highs. In particular, APAC and China contributed to our greater-than-expected consumable quarter as service providers continue to work through a backlog of projects spanning human structural variation projects for rare and neurodegenerative diseases, plant and animal research and metagenomics.

We are proud to support these and other customers like Discovery Life Sciences, who has started sequencing for the Gabriella Miller Kids First Pediatric Research Program, aiming to create a large-scale database of clinical and genetic data from patients with childhood cancers and congenital disabilities. Discovery Life Sciences also expects to start sequencing for the NIH's All of Us Research Program soon with samples already in-house.

As I've said on prior calls, one of our key strategies is to invest in our research and development pipeline to both accelerate our current programs and to develop the ability to take on more projects. During the quarter, we made significant progress in this area. For example, earlier this week, we released our latest HiFi protocol and software update. The newest product update enhances our leading long read chemistry with even more HiFi reads at or above 99.9% accuracy.

Additionally, the new chemistry streamlines the sample prep process allowing labs to scale to sequence hundreds to thousands of human genomes per year. Perhaps most importantly, this opens up HiFi sequencing to more sample types, such as volume limited blood tissue and cell lines as we've been able to reduce the DNA input requirements by threefold. The broader and more flexible sample specifications can drive HiFi sequencing into more projects and more applications.

Turning to our collaboration with Invitae, the first quarter was a solid start to our multiyear development partnership. Work has already commenced developing the ultra-high throughput sequencer that we believe will deliver a highly accurate, long read genome at substantially below $1,000 per genome. I'm pleased to report that the teams are working extremely well together and have made substantial progress on aligning the key development milestones and product requirements.

Meanwhile, utility for PacBio long read sequencing is already demonstrating success with our collaboration with Children's Mercy, Kansas City, one of the nation's top pediatric medical centers, in the first quarter, Children's Mercy added 4 Sequel IIe to its fleet and increased their whole genome sequencing output to help improve solve rates for families and children living with undiagnosed rare diseases. Researchers at the hospital are already finding that HiFi sequencing demonstrates higher sensitivity and specificity than short read whole genome sequencing and can identify more rare variants per genome than other technologies.

As we continue to invest in these clinical collaborations, researchers around the world are using PacBio sequencing to elucidate the genome and its relationship to human health and disease. For example, researchers at the University of Washington and the Mayo Clinic published studies using PacBio sequencing to discover and characterize complex pathogenic variants likely associated with ALS or Lou Gehrig's disease. HiFi sequencing deciphered these variants in highly repetitive regions of the genome, areas that cannot be accurately represented using other sequencing platforms.

Also this month, researchers at Nationwide Children's and the Broad Institute published cases using PacBio sequencing to find pathogenic complex structural variance in childhood cancer and a rare genetic blood disease. In both cases, researchers explained the limitations, short read sequencing had in detecting these variants. Similarly, another recent study published in the Journal of Science used PacBio HiFi sequencing to assemble 64 haplotypes from 32 diverse human genomes and uncovered over 100,000 structural variants in which over 2/3 went undiscovered by short read sequencing. These studies clearly show the potential for HiFi sequencing in human genome applications.

But our technology also remains critical in plant and animal research. Yesterday, Nature magazine released its special issue highlighting research papers from the Vertebrate Genome Project, a consortium targeting to complete reference genomes for all 70,000 known Vertebrates. As the flagship paper outlines, these complete genomes are fundamental in applying genomics in biology disease and biodiversity conservation. Further, the authors confirmed the use of long reads as essential for maximizing genome quality. The Vertebrate Genome Project model is also inspiring other large-scale sequencing initiatives, including the Earth BioGenome Project, which aims to decode the genomes of all eukaryotic species within 10 years.

And we're just beginning to scratch the surface of the potential applications that long reads can address. For example, a preprint study earlier this month showed the incredible performance and potential for PacBio sequencing in single cell genomics. Long reads, once thought to be off limits to single cell genome sequencing because of the throughput and input requirements, could eventually be a differentiated method in understanding complex genetic variation at the single cell level.

Turning to our organizational updates. We made great progress in expanding our team. We added 6 quota-carrying sales reps in the first quarter. In addition, we filled another 6 sales reps positioned with second quarter start dates, including a general manager for EMEA and a country manager in Japan. Both of these leaders have deep experience in our space and will be instrumental in driving our expansion strategies in Europe and APAC.

We are well on our way to doubling our number of sales reps in the field this year from the 22 reps that we had at the end of 2020. We also completed a marketing reorganization to better align our team to specific applications and champion the voice of customer into our product development process. We also announced Dr. Hannah Valentine as a Director nominee for election to the Board of Directors at our annual meeting. Dr. Valentine will bring decades of experience as a professor of Medicine at the Stanford University Medical Center and as the NIH Chief Officer for scientific workforce diversity. I look forward to the leadership and expertise she'll bring to our growing organization.

Finally, while Dr. Mike Hunkapiller will not stand for reelection to the Board of Directors, he will continue to be an adviser to the Board and an important partner for me as we continue to push our technology forward. I'd like to thank Mike for his contribution and his leadership over the past decade and his role in transforming long read sequencing technology to where it is today.

Now I'll turn the call over to Susan to discuss the financials. Susan?

Thank you, Christian. As discussed, we achieved record revenue in the first quarter of $29 million, which represented an increase of 7% from $27.1 million in the fourth quarter of 2020 and an increase of 86% from $15.6 million in the first quarter of 2020. Instrument revenue in the first quarter was $14.9 million, an increase of 10% sequentially from $13.6 million in the fourth quarter and more than triple the instrument revenue of $4 million recorded in the prior year quarter. We delivered 41 Sequel II and Sequel IIe Systems during the first quarter, growing the installed base to 244 systems as of March 31. Roughly 3/4 of these shipments were Sequel IIe Systems. We also had over a dozen customers upgrade to Sequel IIe from Sequel II in the first quarter, representing approximately $500,000 in revenue.

Turning to consumables. Revenue of $10.4 million grew 3% sequentially from $10 million in the prior quarter and was up 25% from $8.3 million in the first quarter of last year. The growth in consumable revenue reflects increased utilization and our growing install base of Sequel II and IIe Systems. We also continue to be pleased with the increase in genomic data coming off of our sequencers as this underscores our customers' expansion of PacBio sequencing.

In the first quarter alone, Sequel II and IIe generated over 1.7 petabases, which is more than all the data generated from Sequel I and Sequel II sequencers combined from 2015 through 2019. In particular, APAC and China strength contributed to first quarter consumable revenue exceeding expectations. Service providers in the region continue to work through a backlog of projects, which resulted in record levels of system utilization, helping to offset the traditional softness from the Lunar New Year.

Sequel II and IIe consumables represented approximately 82% of our total consumable shipments in the first quarter with the rest from older systems. We continue to expect the proportion of consumable sales from Sequel II Systems to grow as the installed base for these systems expand and customers migrate to our new risk platform.

Annualized pull-through revenue per system on the Sequel II installed base in the first quarter exceeded $165,000, and there was minimal impact related to COVID-19 delays in the first quarter. Annualized pull-through revenue per system was down sequentially as expected due to consumable stocking orders from customers in Q4.

Finally, service and other revenue grew to $3.7 million in the first quarter compared to $3.5 million in the prior quarter and $3.3 million in the first quarter of 2020. Our service revenue growth reflects the growing installed base in Sequel IIe.

Moving to gross profit. First quarter gross profit of $13 million represented a gross margin of 44.8% compared to gross profit of $11.4 million or 42.0% in the fourth quarter of 2020. The sequential increase in gross margin was primarily due to higher volumes, which improved our factory utilization.

Year-over-year, gross profit grew $5.5 million or 73% driven by the growth in revenue, with gross margin approximately 3.2 points lower, primarily due to a onetime benefit related to inventory reserve releases in Q1 2020, and higher stock-based compensation expense and COGS in the first quarter of this year. Moving on, operating expenses were in line with our expectations. Operating expenses in the first quarter of 2020 totaled $46.7 million, up 32% sequentially compared with $35.4 million in the fourth quarter and 16% higher than $40.2 million in the first quarter of the prior year. The increase in operating expense compared to the previous year and previous quarter was a result of increased R&D expense related to new product development and an increase in SG&A expense from the growth in our commercial team and higher noncash stock-based compensation expense.

As a reminder, the first quarter of 2020 included payment of a $6 million advisory fee incurred in conjunction with the termination of the merger agreement with Illumina. In terms of headcount, we ended the quarter with 435 employees, including 28 quota-carrying sales reps and added headcount across R&D, marketing and service and support functions. Noncash stock based compensation included in operating expenses was $9.2 million in the first quarter compared to $4.8 million in the prior quarter and $3.5 million in the first quarter of 2020. Other income and expense in the first quarter reflects a $52 million expense related to the repayment of continuation advances to Illumina due to our $900 million convertible note financing earlier in the quarter.

Additionally, it includes a partial quarter interest expense associated with the convertible notes of approximately $1.8 million. First quarter net loss was, therefore, $87.4 million and net loss per share was $0.45 compared to net income of $74.9 million and net income per diluted share of $0.37 in the fourth quarter of 2020 and a net income of $1.3 million in the first quarter of 2020. As a reminder, net income in the fourth quarter of 2020 included a $98 million onetime gain associated with the reverse termination fee we received from Illumina. Net income in the first quarter of 2020 had a $34 million gain associated with the continuation advances received from Illumina. We don't expect to recognize any gains or losses related to the Illumina merger termination in the future.

Now turning to our balance sheet. We ended the first quarter with $1.16 billion in unrestricted cash and investments compared with $319 million at the end of 2020. The increase in cash and investments was primarily a function of the $900 million in gross proceeds from our sale of convertible notes to SoftBank and $22 million in proceeds from the issuance of common stock through our equity compensation plan. Partially offset by the $52 million payment to Illumina and $23 million cash used in operations. Inventory balances increased in the first quarter to $16.3 million, representing a 4.2 inventory turns compared with $14.2 million at the end of the fourth quarter of 2020, which also represented 4.2 inventory turns.

Accounts receivable decreased in the first quarter of $12.9 million, reflecting a DSO of 46 days compared with $16.8 million at the end of the fourth quarter of 2020, reflecting a DSO of 49 days. The decline in accounts receivable and improvement in DSO compared to the fourth quarter were primarily a function of improved revenue linearity.

Moving to guidance. For the second quarter of 2021, we expect revenue to be approximately flat to modestly higher than $29 million reported in the first quarter of 2021. We expect gross margin to be roughly flat compared to the 44.8% reported in the first quarter of 2021. We expect operating expenses to grow sequentially to be in the low $50 million, representing a continued investment in R&D and commercial infrastructure. As a reminder, as part of the terms of our convertible notes, we expect to incur approximately $3.5 million in interest expense every quarter going forward until maturity or conversion of the notes, which represents 1.5% interest per annum and amortization of debt issuance costs.

Finally, our accounting treatment-related to the Invitae collaboration will be recognized as previously communicated, with funding from Invitae recorded as a liability under deferred revenue. The liability may be amortized to revenue in later periods as we sell the developed product to Invitae per our agreement, or release when other performance obligations are delivered or contingencies lapse. In the first quarter, we received approximately $4.1 million for Invitae related to our collaborations. We will record expenses associated with Invitae on our P&L as incurred, which we continue to expect to be between $20 million and $25 million for the full year 2021. Expenses recognized in R&D related to our collaboration in the first quarter were approximately $1.1 million.

With that, I will turn the call back to Christian. Christian?

Thank you, Susan. When I started as CEO back in September, I set forth 3 key strategies that I believe will drive growth at PacBio. The first core strategy is to expand our commercial footprint throughout the globe. This new footprint will help us reach more customers and help drive the benefits of HiFi sequencing into the community. Over the past several months, we've made substantial progress in this area, including the hiring of new commercial leadership and expansion of our sales force. We are well on our way to more than doubling our sales force, which is already helping us reach more customers than ever before.

Second, it's essential that we expand our capabilities in product development, so that we can build a multi-product portfolio that gives our customers flexibility on how they leverage the power of HiFi sequencing. We're making strides in this area as well. We now have several programs in progress, which are designed to improve the throughput of our sequencers, drive the cost of HiFi sequencing down and greatly simplify our end-to-end workflows. These advancements will make HiFi more accessible than ever and will power our growth.

Finally, we believe that whole genome sequencing will be an essential tool that clinical researchers will use to understand and treat disease. We expect that highly accurate, cost-effective HiFi reads will truly enable this market. As a result, our core strategy is to continue partnering with leading institutions such as Children's Mercy of Kansas City and Invitae to develop solutions that demonstrate the power of highly accurate long read sequencing using HiFi to enable this opportunity.

In closing, we're off to a strong start for the year. During the quarter, we achieved record product and services revenue, expanded our gross margin, and I'm encouraged by the progress we've made against our core strategies that I've outlined. I want to thank our customers, employees and partners for their support, and I look forward to updating you on our progress next quarter.

With that, I'd like to open up the call to questions.

(Operator Instructions)

Our first question comes from the line of Kyle Mikson with Cantor Fitzgerald.

And congrats on this nice quarter here. I wanted to start with, I guess, LabCorp. So 50 -- I think I heard this right, 50% of all GISAID submissions in the first quarter. So would that kind of imply that you're taking that the share from PacBio platform sequence, COVID samples was close to that? Or I mean, we just want to understand how to think about the share from PacBio in the last couple of months. Can you help us kind of get to that number, or at least directionally?

Yes. Sure. So right now, LabCorp is using PacBio for all of their COVID surveillance sequencing. So that's indicative of -- what LabCorp is doing is indicative of what we -- our percentage. Of course, on a global basis, we're still a small percentage of the total surveillance that's going on. But our share is increasing because sequencing in the U.S. is accelerating. And in fact, LabCorp plays a significant role in that. So we see the opportunity to continue to be growing for us. But as of March 31, our data suggests half of the GISAID data for U.S. CDC was based on LabCorp, which is essentially ours.

Got it. And the 41 placements was impressive. And you called out a few lumpy, I guess, wins in the quarter. But could you just kind of speak a little bit more to what LabCorp represented, maybe what Invitae possibly represented, if at all? And then I guess, Sanger completed their installs in the quarter. But just any other like large multi tool orders. You mentioned a few, but was it generally pretty -- was there any like huge orders or just a few there that had some long share there?

Well, I think we highlighted -- yes. Go ahead. Go ahead, Kyle, if you want to add that.

Yes. Just to start with that question. Just trying to think about the sustainability of this 41 number as we go to the second quarter and beyond.

Yes. I think that's a good -- that's exactly the point. I think with respect to COVID, for example, LabCorp took several more systems. And so that revenue would be onetime infrastructure and wouldn't repeat in the second quarter. But we did have several multisystem -- multiunit system orders around the world. We highlighted LabCorp, we highlighted that Sanger, I think there were some in Asia as well. And so I think our business, we definitely have some multiunit orders helping us in Q1, which helped the over performance.

And as we expand our sales force, that should help us cover the ones and twosies but also continue to drive multiunit orders into the future. And so it's kind of a balance from quarter-to-quarter as we grow here, how to think about system placements. But yes, you're right. We were very happy with the number for Q1. I do think it shows that the Sequel IIe was really an important launch for the company. And I think that the growth in Sequel IIe placements is sustainable, and it's something we're shooting for.

Perfect. That's helpful. And the international orders and kind of wins this quarter were solid, and that's an area that PacBio wasn't as strong in the past, right? And so I'm just wondering if the recent expansion of the commercial team has paid any dividends thus far. I know it's pretty early, you've hired a few handfuls of reps, but has that taken shape -- has that benefit kind of taken shape just yet? And what are you kind of expecting a few quarters out from that team internationally speaking?

Yes. I think -- I don't know how much the actual new reps are really contributing, as we've talked about in the past, it takes a few quarters to get people up to speed. But what has happened is, in particularly in Europe, we really have some great folks on the ground there. And now that we're starting to see an acceleration. So we added reps, for example, in Germany, and our sales leaders based in the U.K. and he's really driving business across the region. So I think in the quarter, I was especially pleased with how EMEA really started coming together. And I think it will only improve from there now that we have a very intense focus on the infrastructure and then adding to people.

Asia continued to perform exceptionally well, as I said in my prepared remarks how we're always worried about the Lunar New Year and how that will slow business down, but the APAC team really helped the service providers keep their machines going and driving -- helping to drive demand there. And so we saw nice growth. We hired a country manager who started now in Japan. So that will start building out that Japanese infrastructure, which we basically have none. And so we're at the point where you're just starting to see the low-hanging fruit in the opportunity. And my belief is that as you get into the back half of the year and we get -- we continue to build this team, it will help us drive our growth.

All right. That was great. Just one last question for me, I guess. So regarding the plans for the sub-$1,000 genome and that's 5 years, you mentioned that the plan is, I guess, in the works to kind of get through put up and cost down. But is there any like -- is a range that -- or threshold even at your kind of confident you think that payers will reimburse? And I ask this because a competitor announced about a month ago, committing to reduce cost to the, let's call it, $500 range or so for clinical customers. And obviously, you have competitive price points. I'm curious, your thoughts around that dynamic.

Well, I mean, I do believe that price will be important to payers, but will be more important will be value. And if we can come to market with a solution that provides more value, then I think we have a better chance at sustainability of price whether that's at $500 or something slightly above $500. But I do think, as we've been saying for the last few quarters here, we believe our solution will drive us substantially below $1,000. And we believe that customers are willing to pay somewhat more for a more complete, more accurate genome, particularly when it's in a clinical setting and having a complete view is so critical to managing the outcome of a patient.

And so I'm actually very encouraged about the progress we're making on the R&D side to enable that promise. But I think structurally in the market, when we get these products to market, we will be very competitive, and I think it will be compelling.

Yes, there seems to be a lot of enthusiasm, hearing that this week at the rare disease event, I know you guys are hosting that, and congrats again.

Our next question comes from the line of Doug Schenkel with Cowen.

So combining Q1 revenue with what you talked about directionally for the second quarter, it looks like you're targeting just under $60 million in first half revenue. If we back that out of where consensus is for the year, it looks like you'd have to generate $75 million in the second half or so to get to the street numbers. Does that seem reasonable? I know you -- at the beginning of the year you said you expected things to be more back-end loaded this year. But is that type of ramp acceptable in your mind, does that make sense? And if so, what are the key drivers to kind of bridge that? I mean, some of that's going to be normalization of pull-through for instrument on a growing installed base, but I'm wondering specifically what you're expecting in that construct from things like surveillance testing as well as popgen contributions?

Yes, Doug, thanks for the question, and it's a good one. And I think conceptually, if you do the math, you're exactly right, is my expectation is that the back half is stronger than the front half with respect to the ability to grow. And why do I feel that way? I think, first and foremost, is lead generation activities that are going on now are at all-time records for the company. And so we have put a pretty intense focus and on these earnings calls we talked a lot about the sales reps, but we've also invested a lot in -- since I started back in September on formalizing and improving our processes for lead generation and defining how to reach out and communicate with customers. And so there's so much more to a sale than just the sales rep being out there. And so what's encouraging to me is I see that we're achieving record levels of lead generation or very significant numbers of leads coming in.

And the objective, of course, is to get those through the funnel and out -- and add out and executed on, areas where I think we will see growth. I do think surveillance will continue to be an opportunity for us. And as you heard on my prepared remarks, we're going to develop a kit for COVID, which I think is a really big deal for the company because historically, the company hasn't developed kitted applications. And so as part of our strategic planning and thinking, we have thought carefully about, okay, we believe viral surveillance or pathogen surveillance will be a market for us long into the future. So let's start by getting a COVID kit out there and develop that core competency, so that we can leverage that capability over not just this year but next year and into the future. And so I know that's not exactly on your guidance number, so to speak. But those are all important components of how we drive into the market.

The other piece is, I do think there's significant opportunities in Europe we're just -- I mean, as you heard, we just shipped our first Sequel II system ever into Italy. Just to put it in perspective. Now Italy is not the biggest country in Europe. But it just shows you how early we are in our commercial ramp relative to our peers. And so as we build out and structure these territories and drive the discipline of our commercial operation, that will help us accelerate pushing things across the goal line sooner, and I think will help drive our growth.

Doug, I just wanted to add a couple of comments to relate to what Christian was saying. So I think one of the things that we saw in Q1, which was great for us was the interest of customers in the Sequel IIe, as Christian had mentioned. And then we also had some high-profile multi instrument orders from customers, and I expect to see some of that throughout the rest of the year, the timing of which quarter-to-quarter can vary, but we do have a good pipeline of multi instrument orders from customers. So that's very promising.

The one thing that you have to keep in mind is we are ramping and investing in the commercial organization. It takes -- usually takes up to 2 quarters for our sales reps to become productive. And then there's still the time to close orders as well. Within some of our markets, it can take longer to close an order.

So anywhere from 6 months to even 18 months. And so that also needs to flow through. We're investing, as Christian mentioned, we're investing in marketing. We're generating more leads. And so we're certainly building the infrastructure to accelerate growth over the long term. But quarter-to-quarter, there is some variability and exactly what that looks like within 2021 is still a little bit variable, and it's the reason we didn't give guidance for 2021.

Okay. Understood. Susan, just one very quick follow-up on part of what you described. I know -- I think at least in partial response to the last question. You talked about a few multi order placements in the quarter. Is that why the ASP was a little bit lower for the instruments relative to the second half of last year? And if so, is the expectation that the ASP per instrument normalizes back to second half of the year levels as we look ahead over the balance of the year?

Yes, that's a very good question, Doug. So volume and ASPs are certainly what impacts our gross margins. And as you had noted, sometimes when we have multi instrument orders from customers. The average ASP for that quarter can be slightly below our total average on a run rate basis. But as I had mentioned earlier, we still anticipate that we're going to have more multi instrument orders. So that's going to be probably the highest variability quarter-to-quarter in terms of average ASP.

So do I think that Q1 was all the multi instrument orders in the year? No, we're going to see more in 2021.

Doug at the end of day I do think ASPs will fluctuate a little from quarter-to-quarter. And we're probably somewhere between where we were in Q1 and where we were in the back half of last year. The strategy here, right, is to drive the installed base. And that either that's through multiunit orders or singletons. And the reason why that's so critical, of course, is to get everyone running consumables, but also really pushing HiFi chemistry so that we develop new applications. And so it's part of a broader strategy on how to -- not only to grow the top line, but to grow the application capability and create that snowball effect over the next several years. So that's how to think about it, I think.

Yes, that's totally, and I apologize for stepping on you there a little bit, Christian, but I was going to kind of say the same thing that if you got to make a slight trade-off on ASP in exchange for more multiunit placements and getting more instruments out there, that's more than an acceptable trade-off, I would think. Maybe last one before I hand it off to others. As you mentioned earlier on this call and was kind of a point of emphasis on the last quarterly call, you have well over $1 billion in cash on the balance sheet. A lot of that came in from SoftBank via their $900 million investment. And that was positioned to really accelerate growth initiatives for the company, the investment and of course, having a strong balance sheet, puts you in a good position to be a little bit more nimble and maybe a lot more aggressive. Is there anything more you can share at this point on strategic priorities and time lines -- reasonable time lines with wide error bars, of course, where we may hear more from you on what -- essentially the follow-through on the cash you've raised?

Yes. No, that's a good question, Doug. I think -- so right now, what we've done in the very short term, right, is, number one, we've accelerated even further our commercial initiatives for '21. And that means pulling all of the hiring forward. That means pulling -- starting to really seriously evaluate real infrastructure in Europe. So we don't have any -- we have no facilities. We have no warehouse space or anything like that in Europe right now. And the truth is, if you want to really grow in Europe, you need to look European and you need to be able to have local warehousing and local application labs and things like that where you can get much closer to your customers. And so the first thing is kind of the blocking and tackling associated with some of that expansion. And we'll use some of that capital this year on that. Now those are the reasonably relative to the $1 billion, of course, that's small.

The second is focusing on driving the R&D portfolio. Now we've been fortunate that arrangement we set up with Invitae, they are paying for most of the development on the new platform for them, so -- but we are accelerating spend around the edges, particularly in -- around the workflow. So we're very focused on sample prep and trying to create end-to-end solutions and create the ecosystem that's really going to drive growth over the next 5 years.

So then the last part, of course, which is the part you're probably most interested in is kind of looking at external opportunities and whether that's collaborations or partnerships or acquisitions, and we are evaluating lots of different opportunities. As I've said before, I think they come into 2 different camps. The first camp is kind of horizontal in the sense of thinking about are there assets out there that we can acquire or collaborate or partner with to fundamentally give us competitive advantage or create growth opportunities in the front end. And I think that we're knee-deep in evaluating lots of those different kinds of opportunities. And then also the other side of horizontal, of course, is are there informatic opportunities. In the past, we've been very successful at integrating informatic type opportunities to kind of round out the product portfolio.

And there's adjacencies. And that we're looking very carefully at. Are there -- our objective is to be the world's most advanced solutions company for biology, like that's really where we're going way beyond just long read sequencing. And I think there are opportunities out there in the market. But we also have to be patient, and we have to focus on how do we build our -- how do we make sure that we execute exceptionally well on our core business? How do we -- we finished -- we've basically built out our executive team now, and so now we can start evaluating some of these things. Timing is impossible to predict because you can have a vision, but there's lots of different factors in the way. And so I guess the one thing I'll leave you with, Doug, is that we are looking at a lot of different opportunities, but we're going to be patient, and we're going to make sure that we do the right thing, if that helps.

Our next question comes from the line of Tycho Peterson with JPMorgan.

With surveillance, low single-digit millions in the first quarter, how do you think about the run rate over the next couple of quarters there? And then Christian, you've flagged the $1.7 billion national surveillance funding that Biden set aside, I think they're going to build 6 centers of excellence. How do you feel like you're positioned as that gets up and running?

I think -- Tycho, it's good to talk to you. We -- I think our run rate with respect to surveillance will -- we definitely had some infrastructure build in the first quarter. But I think that can be offset with other infrastructure builds as you get into the year, and we acquire some other customers, et cetera. So my expectation is it is kind of in that low single-digit kind of number right now as we see it. I think that there's no question that our solution is very compelling. And we are getting good traction, particularly with LabCorp, of course. And so as these centers of excellence start to form up, I think we have opportunities to be part of the solution there. There's no -- there's also -- the reality is that we are still the emerging fish in the pond, so to speak. And I think that we have to demonstrate consistently that our solutions are not only better than our competitors but more economically viable. And I think we can do that.

The other thing is, Tycho, we've been building -- we just recently hired, for example, a Vice President focused in government affairs, and we didn't have that capability before. And so now we have much greater access to government entities and areas, and I think that will help us in the dialogue and discussion. So I think we will have a seat at the table, and I do think it's a real opportunity for us.

And then on economically viable, you mentioned surveillance of influenza, HAIs, Food pathogen and some of these other markets. I mean, are we at a price point now where you think you can be cost competitive to PCR?

I believe we can be, yes. I mean, I do think we have to demonstrate end-to-end solutions and protocols. But I think the bones are in place. And as we develop kitted products and show that we can do that, not only can we be cost competitive, but it's also a big revenue opportunity because today, when you think about the COVID opportunity for us without a kitted product, we're really just capturing the sequencing portion of the opportunity, which, as you know, is quite small relative to the total dollars associated with prepping the sample prep and the other pieces.

You also...

Echo is, right now, the sequencing isn't the big value driver. It's the kit. And it's -- there's both the supply constraints right now on the oligos, which we need to overcome by kitting it, but there's also the value that you get in that complete kit. And so I think it can be competitive against those other approaches. Because the sequencing isn't the barrier for us right now or the cost of the sequencing isn't the barrier.

Okay. That's helpful. You mentioned the new HiFi protocol reducing sample input requirements by 3x. How meaningful is that? And do you think that opens up new markets, new opportunities? I mean you find blood, but I'm just curious what you actually think that means in terms of real-world adoption.

Yes. Mark, why don't you take that one?

Yes. I don't know how much attention it's received, Tycho, but I'm glad you pointed it. So first off, I will say that the team is focused on delivering advancements now across all of the portfolio from sample prep through downstream analysis and this HiFi sequencing and software releases is, I think, just a great example of the focus. The reduction in input was from 15 micrograms down to 5 micrograms. At 5 micrograms, I do see us getting into more sample types now. So beyond blood, but getting the tissue biopsies and cell lines. And so accessibility and lower input applications have been a challenge for us. But I think it's also the speed of it of this new preliminary does help with accuracy. And so again, it further pushes the number of HiFi reads that are at or above that 99.9% accuracy for whole genome sequencing.

The workflow, I think, is going to help us get this into more hands. It's much simpler workflow, and we work with Children's Mercy to make sure it was automation friendly as well. And some of the other things that you don't even really think through is some of the adaptive loading opportunities we've built in this. And so now you can reduce overloading on the SMRT cells just actively monitoring the polymerase that are binding to the bottom of the ZMWs. So we can really help customers load and get the most out of their chip. So again, I think it's a great example of what we can do and being down to 5 micrograms will enable more of these tissue types or sample types to be used.

Okay. That's helpful. POPSEQ, and I think Doug had mentioned in one of his questions. We did hear from Illumina the other day about some newer programs, Egypt and Japan that are kind of coming in the circus. Can you just talk a little bit about whether you're in the mix on some of these newer POPSEQ programs and how you think about the long read component to the extent their newer initiatives getting off the ground?

Yes. I think as you know, some of our team has a lot of experience in POPSEQ, and it's helping us kind of position the company such that we can get portions of these projects. Now the reality is, is that our platform to get majority share of a project is probably not reasonable at this point in time, but getting a small percentage of the samples, kind of like with the All of Us Program, for example, right? We're sequencing a small fraction of the total, but it's meaningful for us as the long read, and it's meaningful because it also puts HiFi front and center in terms of being the highest performing chemistry for sequencing, and it sets us up as we launch new platforms. And so we are seeing most of the same opportunities as our friends but our expectation is we capture smaller portions of those types of programs.

And the one in Japan, you talk about -- I mean, the reality is we didn't have any infrastructure over there, and we're just starting that build out. So I don't know how much access we will add to that particular program specifically.

Okay. And then last one for Susan. Just I want to go back to kind of the 2Q guidance for a minute. If I go back to last quarter, you'd obviously guided for the first quarter to be down slightly, and you were up 7%. So you had the kind of benefit of the multisystem orders. Just so we're clear, the reason why the 2Q guidance would be flat is because just the timing of some of the system orders? Or is there another kind of component that's kind of weighing on the outlook?

Well, I think there was a lot of strength in Q1. And so we talked about the multi instrument order. But also, I will reiterate from our call, we also benefited from backlog of projects that have been slowed down because of COVID in 2020 and it started to ramp in Q4, and it was even stronger in Q1, such that we had the highest utilization on our installed base. So consumable revenue also helped us in Q1 as well. So looking forward, that's the largest reason for the flat to modestly higher in Q2.

Our next question comes from the line of Tejas Savant with Morgan Stanley.

So first, on the quarter, Christian, just a couple of quick cleanup questions here. Can you quantify what the impact was on consumables from the Lunar New Year? Just to give us a sense for what the true underlying consumable spend was here? And then, Susan, to the remarks you just made on the consumable side on backlog projects and catch up. Is that a catch up element that you saw in the first quarter as some of these labs opened up and travel restrictions eased up, and you could just install those units which essentially committed to in 4Q itself?

So I'll start. Tejas, I don't have the exact numbers, like it's very difficult to quantify exactly a Lunar New Year effect because it's really just a couple of weeks, and you start to question whether or not they make it back up during the quarter. I think what we were trying to emphasize is Lunar New Year was typical, but the demand from our service providers swing through some of their backlog and also basic expansion is -- more than offset that. And actually, looking forward, some of the same service providers have very substantial backlog still. And so my expectation is they're going to be running pretty significantly for most of the year probably.

Got it. Okay. And then one on the consumables line, should we -- is it fair to essentially assume $165,000 as the new floor and the pull-through on the Sequel. I mean it sounds like even in 3Q last year, you were around $160,000. So it should only sort of increase from that level in the quarters and perhaps even the years to come.

I think it's going to bounce around, to be honest with you. And the reason why I think it's going to bounce around is, we expect to place a lot of systems. And you saw we had 41 in the quarter. So that will go into the denominator as we do the calculations for this quarter. And we -- it takes time. The multisystem units to existing customers those will probably ramp up reasonably quickly. But for new customers, we said we have a lot of new customers in the quarter. It might take 3 or 4 months for them to start ramping up to whatever normalized utilization that we can expect from them. And so I think my -- at least from my perspective, I think the number is going to bounce around a little bit. But kind of in that $160,000 to $200,000 range isn't -- it seems like a pretty reasonable way to be thinking about it. But it will be dependent every quarter on the denominator as much as the numerator.

The one thing I would point out that Susan pointed out in her remarks was we had record utilization of systems, and I want to be very clear when we calculate pull-through that's just a number of revenue and systems installed. When we talk about utilization, we have software and capability to monitor the vast majority of our installed base and see how often they're running smart cells and how they're actually -- and so we look at that very carefully because it's an early warning system to figure out, hey, we should make sure we call that customer to place a reorder or wow, they're really -- something is changing, must be doing a new project or something. And what we had in the quarter was records across the board, and that's actually really exciting. It means people are using their systems, they're getting great data, and I think it bodes well for the future.

Got it. And then one on the Invitae collaboration, Christian, now it has been a couple of months. I mean -- and you mentioned sort of the teams working closely together. What are your incremental learnings, particularly in terms of the technical feasibility challenges that you need to address here? And then as you work towards that sort of sub $1,000 price point that you mentioned, right? And then also, in terms of the milestones that we should be really sort of hanging our hats on to track progress before Invitae gets access to that first unit in-house. Is there anything that you sort of intend to share along the way that will help us kind of like just measure progress there?

I'm going to ask Mark to talk about the progress of Invitae because he is this project sponsor internally, and he's very close to it. But with respect to milestones, as we reach reasonable technical milestones. So for example, probably early sequencing data, things like that, I suspect we will want to share some of that. But we haven't defined explicitly for investors what those milestones are. We're very focused on serving our customer Invitae. But Mark, why don't you give a little color on the project -- the progress of the project.

Yes, happy to, Christian. So obviously, we just announced this in the middle of January, but I was happy to see how quickly we jumped on this together. And so the teams did start working together right away. And as a reminder, a lot of this -- or almost all of this is leveraging the core technologies and HiFi sequencing that are already in market or were already in development.

So I don't see this as major miracles required. It's scaling and hardening the development of this. We have been meeting with Invitae regularly across a number of work streams, and this is an entire workflow to meet production whole genome sequencing needs.

And so while we're building and scaling the sequencing technology, we're learning a lot about their front end, how they do their DNA extraction, how they do their library of automation. Now to ensure that together, we're going to go and build a front-end that's going to get the DNA and great DNA under the new sequence we're building.

I would say we've also learned a whole bunch about the overall software informatics that a production lab needs and what Invitae is using to make sure we have seamless integration into their lab, and their interpretation engine and future reporting capabilities.

So I'd say the work streams across all of these different fronts are really going well, and I don't expect us just to deliver a great product to Invitae with this, but this is going to harden the complete whole genome workflow for us to take and broadly commercialize. In terms of milestones, Chris and I will have to noodle on what we want to share along the way. But just to remind, this is leveraging core technologies and it's a multiyear project.

Our final question comes from the line of Steven Mah with Piper Sandler.

Congrats on the quarter. So 2 quick ones on the -- on clinical. Could you update us on the partnership with Berry Genomics to get China FDA approval for Sequel II?

Berry continues to work diligently, and we're working with them. And from my perspective, the project is still on track. And so that will be our first foray in the clinical anywhere in the world. And the team at Berry's is doing a great job of getting our system ready. We have an internal team that's helping -- assisting with the project as well. So I think it's going pretty well.

Okay, great. And then the second part was, I know you said that you would continue to partner on the clinical side, but given that early on, based on some of your comments, it looks like long read HiFi sequencing seems to be unlocking new clinical applications. So given that, any plans to develop your own clinical programs, given the balance sheet cash flexibility?

At this point, as part of our core strategy, we're -- we really believe we need to work with others and really enable our customers and be the preferred partner. We think that's a strategy that will endear us to many more customers than otherwise. And so right now, no, our real focus is on how do we do these partnerships and collaborations. That being said, we may have to develop some deeper capabilities, for example, with cleared instruments and potentially cleared kits because our customers may demand that. But at this point in our strategy, that's not a core focus. The core focus really is collaborating, leveraging others core competencies, while we build out our core competencies in executing on the core business, if that makes sense.

That makes sense. And the last one from me.

We've obviously...

Go ahead, Mark.

We've obviously spoken a lot now about Invitae and also Berry Genomics, but I would just also still just highlight groups like Children's Mercy for rare disease and how we can partner there to improve our clinical abilities. But even a surgeon, I think what they're doing with carrier screening and long reads is also another great example of a clinical partnership approach to getting some long read products in the market.

Yes. Good point.

Yes. I appreciate the color. And last one to me. I know we're way over time. So speaking about Children's Mercy, Kansas City, it looks like that the new HiFi software release was developed in collaboration with them. Did you guys leverage Children's Mercy's existing database of rare variants or other expertise there? And if so, is there any shared IP with Children's Mercy?

Yes. It's not -- it's really more of the core technology. So it's not -- it's more how the software actually runs, and it's not so much trying to create shared IP on variants, for example, it's really more leveraging their expertise to make sure we create the best product we can for all of our customers.

This concludes today's question-and-answer session. I will now turn the call over to Todd Friedman for closing remarks.

Thank you all. As a reminder, a replay of this call will be available on our website in the Investor Relations section, as well as through the dial-in instructions contained in today's earnings release. Thank you for joining the call today. This concludes our call, and we look forward to updating you on our progress in the second quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.