Pacific Biosciences of California (PACB) Q2 2020 Earnings Call Transcript

Pacific Biosciences of California (PACB 4.29%)
Q2 2020 Earnings Call
Aug 03, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Pacific Biosciences of California, Inc. second-quarter 2020 conference call. [Operator instructions] I would now like to hand the conference over to Trevin Rard. Thank you.

Please go ahead, Ma'am.

Trevin Rard -- Investor Relations

Thank you. Good afternoon and welcome to the Pacific Biosciences second-quarter 2020 conference call. We hope that you are keeping well during this time. 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 of our website at www.pacb.com, or alternatively, as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.

With me today are Mike Hunkapiller, our chief executive officer; Susan Barnes, our chief financial officer; and Ben Gong, our vice president of finance and treasurer. Before we begin, I would like to remind you that on today's call, we may be making forward-looking statements. Including plans and expectations relating to our financial projections, research efforts, products, and other future events, such as the impact of the COVID-19 pandemic on our business, partners, customers, and employees and the use of our products in COVID-19 research. 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.

In particular, the extent of COVID 19's continued impact on our business will depend on several factors, including the severity, duration, and extend to the pandemic as well as actions taken by government, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings, including our most recently filed reports on Forms 8-K, 10-K, and Form 10-Q. Pacific Biosciences undertakes no obligation to update forward-looking statements. In addition, please note that today's call is being recorded and will be available for audio replay on the Investors 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 Mike.

Mike Hunkapiller -- Chief Executive Officer

Thanks, Trevin. Good afternoon, and thank you for joining us today. On this call, we will review our financial results for the previous quarter, provide an update on how the COVID-19 pandemic has updated -- or impacted our business and provide some ongoing business highlights. I'll start with an overview of our Q2 2020 financial results.

Instrument revenue for the quarter was $8.9 million, down 29% from Q2 2019 but up 122% from Q1 2020. And as we mentioned in our previous earnings call, numerous customers had begun to shut down their operations in March, which caused a sharp decline in our instrument revenue in Q1. Many of those customers reopened during the latter half of Q2, which allowed us to deliver and install some of the systems that were in backlog at the end of Q1. We were able to install 23 Sequel II systems during the second quarter which drove the sequential increase in instrument revenue.

We have ended the quarter with an installed base of 148 Sequel II systems. Consumable revenue for the quarter was $4.8 million, down 44% from Q2 2019 and down 42% sequentially from Q1 2020, driven by lower customer utilization of installed systems due to the pandemic. During the month of April, over half of our customer sites were shut down. Many sites began to reopen in May and June, and by the end of June, approximately 20% remained closed.

Even among the sites that have reopened, many have not yet resumed utilizing their systems at the same rate they were also performing prior to the shutdowns. Our consumables sales were heavily weighted toward the latter part of the quarter, with almost half of the quarter's consumable sales shipped in June. Total revenue for the second quarter was $17.1 million, which was down 31% from Q2 2019 but up 10% sequentially from Q1 2020. Gross margin for the second quarter was 39%, equal with the 39% gross margin recorded in Q2 2019 and down from 48% in Q1 2020.

Operating expense for this quarter was $30.1 million, representing a decrease of 11%, compared with Q2 2019 and a decrease of 25% compared with Q1 2020. We ended the quarter with $120 million in cash and investments on hand. Susan and Ben will provide more details on the financial metrics later in the call. Now I'll provide a few comments regarding the COVID-19 pandemic on our business.

One set of metrics that we track is customer utilization of installed PacBio instruments. Using Q4 2019 system utilization as a base, utilization of Sequel and Sequel II systems during the first quarter of 2020 was now generally robust, with the exception of a dip in utilization in China starting in February. Utilization in China started to pick back up in late March and gradually improved through Q2, though it has not yet recovered all the way back to where it was in Q4 of 2019. In Europe and the U.S., utilization rapidly decreased by over 40% in April, began to recover in May and continued to improve this in June.

By the end of June, utilization of Sequel II systems was somewhat higher than any previous month, although utilization of Sequel I system continued to lag. In total, utilization in June for Sequel I and Sequel II systems combined was roughly 80% of where it had been in Q4 of 2019. We expect utilization on Sequel II systems to continue to have increased in the second half of this year as several of our high-usage customers returned to full operation. Many of these have faced difficulty in collecting samples, such as large-scale plant and animal samples, or enrolling subjects, primarily for large-scale human studies during local shutdowns due to the pandemic.

With regard to system sales, while we were successful in installing more systems in Q2 than we did in Q1, there were significant headwinds in sales due to the pandemic. Many customers have delayed capital purchases as their budgets were put on hold during Q2. Conditions are improving, and we have a healthy system sales pipeline. However, it is still difficult to predict when and how quickly instrument sales will fully recover.

Operationally at PacBio, we have been maintaining essential production of our products and providing both remote and on-site support to our customers since the initial wave of shelter-in-place orders have been put into place in mid-March, while adhering to best practice safety protocols to keep our customers, employees and vendors safe. We have secured our sources of supply and have continued to meet the needs of all customers who have continued to operate through essential businesses. Overall, thanks to the incredible efforts of many at PacBio, we continue to run as smoothly as possible. Switching now to business highlights.

We've been making significant progress in driving the adoption of Sequel II system, along with our HiFi sequencing protocol. As a reminder, the HiFi protocol enables users to generate highly accurate long reads. HiFi data outperformed either accurate short read or noisy long read data for a large number of sequencing applications. As a result, HiFi is rapidly becoming the gold standard for these applications.

A recent tweet from the Wuhan GrandOmics medical laboratory in China illustrates this point: PacBio HiFi reads is currently the only mature cornerstone innovation in the world that combines this long read length wave -- and high accuracy. It is the tool that all the developers of the third-generation sequencing dream of. HiFi's performance in de novo genome assembly has been particularly impressive, and it is rapidly replacing noisy long read methods for plant and animal genome sequence assembly projects. It's already been adopted by large-scale biome projects such as the Darwin Tree of Life and the Vertebrates Genome Project.

Species ranging from redwoods, giant trees with a 27 gigabase genome, to the Asian giant hornet recently introduced into the Pacific Northwest of the U.S. to flat worms, animals with only a few hundred cells, have been sequenced with this HiFi protocol. Combined with PacBio's updated sample prep methods, HiFi can now be used for genome assembly on individual organisms and a variety of tiny species. This allows studies of intraspecies variation at the whole genome level that is not possible as sequencing can only be done by pooling many individuals to provide enough DNA for sequencing.

It extends PacBio's capability to support scientists' population genetic studies on a host of organisms important for basic research, health or commercial purposes. HiFi's ability to provide accurate, comprehensive analysis of genetic variation, ranging from single nucleotide differences to large structural variants in a single sequencing experiment, can allow these studies to be performed in a cost-effective manner. Now our HiFi protocol has also become essential to a host of human whole genome programs. The overall goal of these programs is to allow scientists to understand the breadth of genetic variation that may be important to a host of human health issues.

They include projects to understand diversity at ethnic levels in various countries around the world as well as within particular disease cohorts. The NIH pangenome project, for example, is working to create reference-level genomes from 350 individuals of varied backgrounds to supplement the single gold standard reference used today. SOLVE-RD in Europe is analyzing the 500 genomes to elucidate genetics changes responsible for rare diseases. These programs and a host of others are key to establishing the superior value of PacBio's smart sequencing in human translational research studies.

While they're, in general, pilot level programs, they position us to play a much larger role as the cost and throughput of PacBio's sequencing continues to improve to the point where it can be used in much larger human population, genetics research, and clinical studies. Earlier today, we announced the clinical research collaboration with Asuragen, a molecular diagnostics company delivering easy-to-use products for complex testing in genetics and oncology. The collaboration is aimed at developing molecular assays based on PacBio's Single Molecule Real-time Smart Sequencing technology. Its initial focus will also be on research in support of assay development for the carrier screening market.

Several of the most common carrier genes for autosomal recessive and X-linked conditions are either technically challenged -- very challenging or inaccessible to traditional amplification and sequencing, leading to incomplete coverage. In the announcement, Gary J. Latham, PhD, senior vice president of research and development at Asuragen noted that innovative, amplification and sequencing technologies have each been instrumental in discovering and characterizing challenging disease-causing structural variants. We are excited to work with PacBio to combine the best of both technologies to build assays that can uniformly resolve simple and complex forms of genetic variation for research and clinical applications." We noted in our Q1 2020 earnings conference call that RT-PCR, rather than DNA sequencing, would be the main technology for diagnostic testing of the SARS-CoV-2 virus responsible for COVID-19 infection.

Sequencing continues to play a role in tracking viral evolution, but absent widespread pressure from vaccine or pharmaceutical challenge, the virus seems to mutate at a relatively low rate. There is also increasing study of the host genomic sequences to help understand why the response by infected individuals vary so greatly from one person to another. Several of these studies have focused on examining the host immune response to the virus by sequencing the antibody repertoires from patients who have recovered from infection. A few have already provided antibody sequences that are also possible candidates as monoclonal antibodies for prophylactic treatment of the infection, and PacBio's smart sequencing has played a role in such studies.

We've been working with Takara Bio to modify and validate their SMARTer immune profiling kit in order to make full-length B-cell receptor sequencing more accessible to customers studying COVID-19 or other areas of immunology. There's also some evidence that the host HLA genes play key roles in immune response to the virus, and smart sequencing is being used for complete gene sequencing of this complex family of a wide variation in sequence across the human population. I will now turn it over to Susan to provide more details on our financial results.

Susan Barnes -- Chief Financial Officer

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with a financial overview of our second quarter that ended June 30, 2020. I will then provide details on our operating results for the quarter and 2020 year to date with a comparison to Q2 2019 and 2019 year to date, respectively. I will conclude my remarks with a brief discussion of our balance sheet.

Starting with our second-quarter 2020 and year-to-date financial highlights. During this quarter, we have recognized revenue of $17.1 million and incurred a net loss of $23.1 million. We ended the quarter with $120 million in cash and investments. Turning to revenue, the $17.1 million of product, service and other revenue in Q2 of 2020 was $7.5 million lower than the $24.6 million of product, service and other revenue we recorded in Q2 of 2019.

Year to date, product, service and other revenue in 2020 was $32.7 million, compared to $41 million year to date in 2019. Breaking down the revenue. Instrument revenue recognized in Q2 2020 was $8.9 million, down from $12.7 million recognized in Q2 of 2019. Year-to-date instrument revenue was $13 million in 2020, compared to $18.3 million recognized during the same period last year.

Consumables revenue for the second quarter of 2020 was $4.8 million, down from $8.6 million reported in the second quarter of 2019. Year to date, consumables revenue was $13 million in 2020, compared to $16.4 million year to date in 2019. Service and our revenue was $3.3 million in Q2 2020, flat to the $3.3 million in Q2 of 2019. Year to date, service and other revenue was $6.7 million in 2020, compared to $6.3 million in 2019.

In Q2 of 2020, we generated gross profit of $6.6 million, compared with a gross profit of $9.6 million in Q2 2019. Meanwhile, gross margin in Q2 of 2020 was 39%, which was flat, compared to 39% recorded in Q2 2019. Year-to-date gross profit in 2020 was $14.1 million, compared to $14.7 million for the similar period in 2019. Meanwhile, year-to-date gross margin in 2020 was 43%, compared to 39% for the similar period in 2019.

Moving to operating expenses, operating expenses in the second quarter of 2020 totaled $30.1 million, compared to $34 million in Q2 of 2019. This decrease was primarily a result of merger-related expenses incurred in Q2 of 2019. Noncash stock-based compensation included in operating expenses was $2.8 million in Q2 of 2020, down from $3.6 million in Q2 of 2019. Year-to-date operating expenses in 2020 were $70.3 million, compared to $69.2 million year to date in 2019.

As a reminder, in 2019, we incurred SG&A expenses associated with the ongoing merger. And in Q1 2020, we incurred a merger-related advisory fee of $6 million. Noncash stock-based compensation included in operating expenses year to date was $6.3 million in 2020, down from $7.5 million year to date in 2019. So breaking down our operating expenses, R&D operating expenses in the quarter were $15 million, compared to $14.9 million incurred in Q2 of 2019.

Year to date, R&D expenses were $30.3 million, compared to $30.4 million in year to date 2019. Sales, general and administration expenses in the quarter were $15.1 million, down $4 million from the $19.1 million in Q2 of 2019. Year to date in 2020, sales, general and administrative expenses were $40 million, compared to $38.8 million in 2019. Turning to our balance sheet, as I mentioned at the beginning of my comments, our balance of unrestricted cash and investments was $120 million at the end of the second quarter, compared to $142.6 million at the end of the first quarter 2020.

The $22.6 million cash burn incurred during this in -- included the cash payment of $6 million advisory fee that I mentioned earlier, which was expensed in Q1 of 2020 and paid in Q2. Inventory balances increased in Q2 to $16.8 million from $16.1 million at the end of Q1 2020. Accounts receivable increased in Q2 to $11.3 million from $7.3 million at the end of the Q1 2020. That concludes my remarks on the financial results for the quarter, I'd like to turn the call over to Ben.

Ben Gong -- Vice President of Finance and Treasurer

Thank you, Susan. In light of the continued uncertainty caused by the COVID-19 pandemic, we will not be providing a revenue forecast. That said, we are continuing to experience the headwind caused by the pandemic. As Mike mentioned earlier, a significant number of PacBio customer sites that had shut down have reopened.

However, those that have reopened have not necessarily resumed operating at their prior run rates. And as of the end of June, approximately 20% of the sites remained inactive. In addition, instrument sales are likely to remain challenging as many research institutions in the U.S. and around the world are taking a conservative approach to the spending capital due to the economic impacts of the pandemic.

Moving on to gross margin. As expected, lower factory production led to higher period costs in the second quarter, which resulted in sequentially lower gross margin compared with Q1. The impact of under-absorbed overhead is expected to extend into the third quarter so that gross margins in the third quarter will still likely remain at a similar level to what we experienced in Q2. Moving on to operating expenses, our second-quarter operating expense total was in line with our expectations.

We expect our spending level for the remainder of the year to be relatively flat compared with Q2. Below the operating income line, as a reminder, we received a $98 million reverse termination fee from Illumina in Q1 but have not yet recognized this as income. We anticipate recognizing this as nonoperating income later in this year. Finally, regarding our cash.

As Susan mentioned earlier, we ended the quarter with $120 million in cash and investments on hand, compared with $142.6 million at the end of Q1. Cash usage for the second-quarter included a onetime $6 million payment in connection with the termination of our agreement with Illumina. We have no such further payment scheduled or contemplated and therefore, our rate of quarterly cash usage should decline significantly compared with the second quarter. And that concludes our prepared remarks, and we will now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Doug Schenkel with Cowen. Your line is open.

Doug Schenkel -- Cowen and Company -- Analyst

Hi. Good afternoon, and thank you for taking our questions. Before getting into it, I want to make sure that I thank you, Susan, for all your help over the years. I believe this is, unless some things change more recently, I think this is going to be your last conference call before your retirement.

So one way or the other, I just wanted to thank you again and wish you all the best on your next act.

Susan Barnes -- Chief Financial Officer

Thank you, Doug, very much.

Doug Schenkel -- Cowen and Company -- Analyst

You're welcome. You're welcome. All right. Well, so moving into the questions.

Maybe just starting on the commercial side. Subsequent to your official or the official discontinuation with Illumina, many of us expected you to ramp efforts to build out your stand-alone commercial reach to fully take advantage of all the process improvements you made over the trailing 18 months, and then, of course, the pandemic hit. So with that in -- I really have, I guess, a three-part question here. One is recognizing the need to balance the desire to play offense with the uncertainties of the current environment, where are you in your efforts to build out the team? And how does that compare to where you think you would have been if it hadn't been for the pandemic? Two, coming off a stronger-than-expected quarter with some nice momentum in June, are you now thinking it's time to comfortably play offense more aggressively with the commercial build out? And then three, if you have any updated thoughts regarding a potential commercial partnership with other companies that might have complementary or larger commercial reach?

Ben Gong -- Vice President of Finance and Treasurer

So, Mike, do you want to go first, or would you like me to go first?

Mike Hunkapiller -- Chief Executive Officer

Why don't you go in the sales rep and then I'll do the next part.

Ben Gong -- Vice President of Finance and Treasurer

OK. Sure. Yes, Doug. Thanks for the questions.

We continue to remain optimistic about our ability to grow sales. And despite the pandemic, which has put a damper on our sales in the near term, we continue to hire in the sales team, and we actually added several members to that team in recent months.

Mike Hunkapiller -- Chief Executive Officer

Yes, and in terms of looking at partners, so one of the things that we have done is focused much more on regional or individual company partnerships. The Asuragen deal that we -- our collaboration that we announced earlier this morning that I referred to in my script is an example of that. Where, particularly in the U.S., most of the genomics diagnostics is still done at the sequencing level as LDTs, we decided that partnering there was a viable thing for us to do. And then in areas like China, we continue to look for partners.

We have, one, as we've announced also previously with Berry Genomics there. There may be other opportunities there, and we're looking more at regional partnerships like that as opposed to an all-encompassing one in the context of what we had done with Illumina in the case of a merger or in the past with companies that are like Roche.

Doug Schenkel -- Cowen and Company -- Analyst

OK. That's great. Thank you, guys, for that. And then maybe if I could just ask, I guess, a couple of questions.

First is on COVID, you talked about the important role you are playing for research and epidemiological purposes. I'm just wondering if you'd share what the Q2 revenue contribution was specific to COVID. And then the second clean-up is just on ASPs for Sequel II. Some quick math, assuming I'm doing it right, suggests that ASPs were pretty stable with the past couple of quarters.

I just want to make sure that's right. Thank you.

Ben Gong -- Vice President of Finance and Treasurer

Yes, Doug. I mean I'll answer the last question first. Yes, the Sequel II ASPs have been pretty stable. So no significant changes there.

With respect to your question on revenues generate directly related to COVID-19, I'll reference what Mike said in the script, there's not a lot of our current activities relate very well to all the PCR-type testing and that's going on today. There's certainly a lot of research going on the host immune response, and there have been a couple of opportunities out there that we've taken advantage of. So, by and large, it's still a pretty small portion of our revenues in this near term.

Doug Schenkel -- Cowen and Company -- Analyst

OK. That's good. That makes sense. Thank you, guys.

Appreciate it.

Operator

Thank you. Our next question comes from the line of Kyle Mikson with Cantor Fitzgerald. Your line is open.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

Hey, guys. Thank you for the questions. So just was wondering if you could talk about placement trends in the quarter and your expectations for the rest of the year. So can you just quantify the number of placements that were delayed in the second quarter? And maybe this will, like, to come back in the third quarter or fourth quarter.

And then also, of course, the placements that were delayed from the first quarter that occurred in the second quarter. If you could just provide some more detail there would be helpful.

Ben Gong -- Vice President of Finance and Treasurer

Yes. I'll try to put that into context, Kyle. So there definitely were some placements that were "delayed" in the first quarter when the pandemic hit and people are sheltering in place in March. So that -- we otherwise would have installed more systems in Q1.

That said, typically, what happens is we book a fair number of systems each quarter, and we will install those -- some of those systems, but actually, a lot of the systems that we book in a quarter will be installed in the subsequent quarter. And so in the second quarter, a pretty good amount of what was installed actually came from the backlog that was in Q1. So I don't know that there were a lot of delayed, let's say, installs in the second quarter due to the pandemic. And it wasn't like what happened in the first quarter where literally people are just reacting and shutting down when the shelter-in-place orders went into place.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

Right. That makes sense. It sounds like capacity is near above the group level so that's helpful. I'm sure you guys saw that a few weeks ago, some of the PGI subsidiaries were placed in the U.S.

economic blacklist, which makes it difficult for them to purchase components from U.S. companies. So I'm wondering if you could just talk about any uncertainty that could create for your business in China or is that not really a concern right now? Thanks.

Mike Hunkapiller -- Chief Executive Officer

Well, to be honest, we're still trying to understand the restrictions. We don't sell to the -- and haven't sold to the subsidiaries that were named in that U.S. order and we think that the business that we have with them is still allowed. I think as I understand it, even if it's an associated company, you may have to get some sort of export license or OK, but we don't think it's likely to be a material impact on us relative to our business with them.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

OK. That's very helpful. And congratulations, of course, on the Asuragen agreement but can you update us on the progress or your thoughts on the use of PacBio sequencers for clinical applications outside of the research setting? I know you need regulatory clearance for some IVDs, but can Sequel II currently support diagnostic applications?

Mike Hunkapiller -- Chief Executive Officer

Well, so in our arrangement with Berry, they plan on taking several tests on our system through the Chinese regulatory process, and they're in the middle of that. It takes a while. In the case of the U.S., as I said, we do not have FDA registration of our system. On the other hand, we have several clinical entities who are looking at the technology as our platform for the key LDT-type developments on their own, obviously, with our assistance, but they would be responsible for whatever regulatory clearance within the CLIA sphere that they need to do.

The Asuragen is one of those. We've talked in the past about our sales into the HLA market, which is part of that sphere, but there are others in different kinds of some very targeted, hard to analyze genes and with which our customers are working, and some of that has been made public by them. And as we get to a more formal relationships such as Asuragen, we're likely to do these joint releases on it.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

OK. That's pretty helpful. And then, Mike, you mentioned some of the population sequencing projects in your prepared remarks. So I was wondering if you could just comment on what you're hearing or seeing from some of the larger ones, like I know All of Us is starting to ramp back up but can you just talk about some of that -- some of those projects that come to mind?

Mike Hunkapiller -- Chief Executive Officer

So we announced a while ago, along with Discovery Life Sciences in Alabama associated with HudsonAlpha Group, the participation with them in a structural variant pilot program as part of All of Us. And so as I mentioned in my prepared remarks, these are mostly at the pilot level in the grand scheme of things right now as they start to understand how they begin to do something other than the short read, mostly SNP-defining analysis of all of one -- and All of Us samples. And so we take it seriously that even though it's a pilot, it has the potential for being a much bigger part of the program, particularly as we carry out our programs for getting the cost per sample down and getting the number of samples that can be run in our system in a given period of time up. And we think that combined -- just because we do have a superior position, we think, in terms of looking at structural variant analysis, which is why we were picked for that.

But given the ability of the HiFi sequencing protocols that we have to now actually, in many cases, outperform short read sequencing, even in the -- looking for single nucleotide variants, we think that we're working toward a platform that is sort of a one-stop shop for just looking at all the variants in the human genome. We have a lot to do in terms of getting to the point where we can do it at the cost required for that, but we think we're well on the way toward understanding exactly how to do that and expect these pilot programs to pay off is really getting us into a much bigger portion of that really large-scale population genetics market.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

OK. That makes sense. We'll leave it there. Thanks so much, guys, for the questions.

And good luck, Susan.

Susan Barnes -- Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open.

Casey Woodring -- J.P. Morgan -- Analyst

Can you hear me? This is Casey on for Tycho, sorry about that. My first question is about the academic end market. About how many -- the percentage of customers that reopened their facilities in the quarter came from the academic end market? And then maybe just in terms of China, do you see that the revenues in China stabilizing in Q3, given their response to the pandemic?

Mike Hunkapiller -- Chief Executive Officer

I mean, Ben, may -- sorry. But I think in general, we saw kind of a broad-based shutdown, maybe a little less so in some of the government labs in the U.S. who obviously had to stay operating. But between both commercial and academic, we saw a pretty good hit initially with companies being able to -- were being forced to shut down either because if these -- they were a university, they were just closed or even if they were a company, they at least had to retool to get their safety protocols upgraded a little bit.

And I think they both have come back at probably the same rate. In China, I think our business, to some degree, has stabilized. I think it may evolve a little bit because they're putting now much more effort, we think, into programs that have really related to human health, maybe more directly than really big focus in the plant and animal in the commercial segment. And it's with the same customers, but they're -- it's not that they're expecting a decrease in business, it may be changing a little bit the character of the kind of samples that get run, particularly with some of the big service providers there.

But to be honest, China came back before the U.S. and Europe came back. They had the initial hit on but they got the control of the situation to a much greater extent than, certainly, the U.S. did.

So they were able to get back into reasonable operations pretty quickly.

Ben Gong -- Vice President of Finance and Treasurer

[Inaudible]

Mike Hunkapiller -- Chief Executive Officer

And the last quarter was far more weighted to the U.S. and Europe.

Ben Gong -- Vice President of Finance and Treasurer

Yes. And it's been pretty stable throughout the second quarter and even here in the third quarter in China. The -- even though there have been occasional flare-ups here and there of COVID-19, they seem to be able to just continue to -- from our perspective, continue business as usual.

Casey Woodring -- J.P. Morgan -- Analyst

Gotcha. OK. You guys alluded to it before with PacBio's capabilities for research in COVID immune response. Could that serve as a meaningful tailwind maybe in the back half of the year or heading in to 2021 sort of when things get back to normal, if they do?

Mike Hunkapiller -- Chief Executive Officer

Well, it all depends on what happens with the development of vaccines, the development of therapeutics, development of prophylactics and what happens with the virus in response to those? So I don't know that we would expect this in the short term a huge impact one way or the other in terms of ability to increase business totally related to COVID-19, other than on the negative impact of people being shut down. And hopefully, that continues to abate. And it's improved even since the end of June in that regard in terms of the number of sites that were just out and out shut down but we'll see. It's fairly driven by companies who are looking at the ability of the immune response to be augmented or to provide leads into therapeutics, and we don't control the pace of that to some degree.

So it's more of an opportunistic ability of us to go in and make sure that we can provide them with the very best tool to study those issues. There are things that some of our customers have already done, it may be that they do it at a slightly higher level, it's not -- and those aren't really new applications for us.

Casey Woodring -- J.P. Morgan -- Analyst

OK. That's helpful. Sorry.

Ben Gong -- Vice President of Finance and Treasurer

Yes. And the only other thing I would add is that even though there's uncertainty certainly with the pandemic and how long it's going to persist. As Mike mentioned earlier, there are quite a few significant programs that have sort of been put on hold during this time period that involve PacBio sequencing, the Darwin Tree of Life program, that portion of the All of Us program that we're participating in. And as we get into the second half of this year and then also into 2021, we're pretty optimistic about how when those initiatives get back going that our business can resume growth.

And I'll just kind of repeat what I said earlier, we're optimistic that -- and that's why we've added to our sales force.

Mike Hunkapiller -- Chief Executive Officer

Yes. I'd add one more thing, too, just to reiterate something I said a little earlier. So as we've seen in China, where people have -- the governments have recognized a lot more the importance of doing human biomedical research, particularly as it relates to infectious disease. We would expect long-term and as the funding for that becomes more available, that people will switch over to things like that.

So COVID-19 is -- as a pandemic, but the virus that's associated with it is not likely to be the last one to cause problems. In fact, it's the third or fourth one of its class in the last 16 years or so that's caused problems. This one because it's such an infectious agent has become the worldwide pandemic that it is. But I think governments are attuned to the fact that this is -- this problem, not just COVID-19, is likely to be with us now for a long time.

And so I think governments are beginning to maybe pay more attention to that, hopefully, as to how they're going to do funding. So in the long term, understanding how, as humans, we respond to challenges like that and have the tools that are ready to -- and quickly and be able to understand what it is you need to look for to solve the problem is likely to be an upside for anyone in the biology business, including us.

Casey Woodring -- J.P. Morgan -- Analyst

Gotcha. That's helpful. Maybe just one last quick one on margins. How are you guys able to sustain gross margins in the quarter? And what gives you confidence that you'll see the same level that you saw in 2Q and 3Q? Thanks.

Ben Gong -- Vice President of Finance and Treasurer

Yes. So gross margin, quite frankly, was significantly lower in Q2 than it was in Q1. Q1 was 48% and Q2 was 39%. As I mentioned, the main reason for the decrease is we had fixed overhead that was recognized as period costs in the quarter.

And the way that works is that overhead is sort of continuing to be on that balance sheet. And that's why in the third quarter, I mentioned this that we expect gross margin to be in a similar sort of level. As revenues increase and our production increases, we would expect the gross margin to increase. So 39% represents a sort of lower level of gross margin, all other things being equal.

Susan Barnes -- Chief Financial Officer

Prices are holding.

Casey Woodring -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Steven Mah with Piper Sandler. Your line is open.

Steven Mah -- Piper Sandler -- Analyst

Great. Thank you, and thanks for taking the questions. So a follow-up question on the Asuragen announcement. You mentioned that you're going to be doing joint releases -- some press releases with Asuragen.

Maybe you can give us a little bit more color on the collaboration. Is this a joint venture or R&D share or co-development? Maybe if you can give us a little bit more color?

Mike Hunkapiller -- Chief Executive Officer

Well, maybe I misspoke. What I thought I said was that we plan on perhaps doing other kinds of releases as we announce collaborations with other companies like Asuragen. I'll let you look at the press release to see the details of what they were comfortable about saying that they were working on in this.

Steven Mah -- Piper Sandler -- Analyst

OK. Got it. OK. Understood.

And can you give us a sense of timing with Asuragen collaboration? I know they -- and these guys have been selling these excellent genetic tests for some time and are considered experts there. And would you be able to give some timing on when you'd be able to release some of the tests on Sequel?

Mike Hunkapiller -- Chief Executive Officer

Well, again, that's up to them and what they take. It's their regulatory approval process and so forth. I'll really let them decide into saying -- I just don't want to really announce their time line on that.

Steven Mah -- Piper Sandler -- Analyst

Yes, I know. OK.

Mike Hunkapiller -- Chief Executive Officer

And it's a research collaboration. It's not a joint venture.

Steven Mah -- Piper Sandler -- Analyst

Research collaboration. OK. Perfect. OK.

And then another question on a different topic on consumables. So -- and I know the consumables have -- were light in Q2 and just a question more on -- relating to the shelf life of the reagents that people have in their labs right now? So, should we expect a consumables jump in Q3 as reagents start to hit the end of their shelf life or maybe can you give us a sense of what you guys are thinking?

Ben Gong -- Vice President of Finance and Treasurer

Yes, Steve, this is Ben. The shelf life isn't too much of an issue. People don't tend to keep that much inventory on hand, they keep a little bit. And what's going to drive the consumables growth is the utilization.

And as Mike mentioned, utilization on the Sequel II, in particular, returned to a level in June as were -- similar to where it was before the pandemic, so we're optimistic about that. It's not 100% in terms of where the Sequel I is, that's actually are still lower. But overall, the growth in utilization driven by the Sequel II should really drive the sequential growth in consumables revenues in Q3.

Steven Mah -- Piper Sandler -- Analyst

OK. Great. That's helpful. And then a final question.

It's a question about lab budgets. Do you think there's going to be a deferral of the 2020 lab budgets into 2021 or you think labs will still have to spend their dollars by December 31?

Mike Hunkapiller -- Chief Executive Officer

That's obviously going to vary all over the place. I think that certainly, there were sort of two factors that have been in play. One is that the people were shut down, and that means their purchasing departments were shutdown. And so that sort of delayed the orders in progress.

And hopefully, as they get open, as long as they've got the money already committed and available, that will work itself out. I think there are certain places where priorities have shifted. And so people are having to rethink what they're going to do with just, say, capital equipment that they want to purchase or even big consumables projects. And that varies.

Some sites wind up getting more money. I mean there are proposals for some of the budgets for next year that have big increases for places like the NIH and the CDC. Some of that will be spent in sequencing research. And then there are other places where if people were a little nervous because of their overall institute or institution finances that they may have to postpone things.

And it's just really hard to figure that out in terms of its short-term impact versus its longer-term impact right now. And so I meant what it translates, there's pluses and minuses in there. And what the balance is, is still a little unknown as governments are responding to the budget priorities in different ways and at different rates.

Steven Mah -- Piper Sandler -- Analyst

OK. That makes sense. Thank you so much.

Mike Hunkapiller -- Chief Executive Officer

And what I meant what it translates, there's pluses and minuses in there. And what the balance is, is still a little unknown as governments are responding to the budget priorities in different ways and at different rates.

Steven Mah -- Piper Sandler -- Analyst

OK. That makes sense. Thank you.

Ben Gong -- Vice President of Finance and Treasurer

Operator, I think we have time for one last question.

Operator

All right. Our next question is going to come from the line of Doug Schenkel with Cowen. Your line is open.

Doug Schenkel -- Cowen and Company -- Analyst

Hey, guys. Thanks for taking my follow-ups. So just a couple keeping in mind that we know you're not providing guidance, but I want to talk for a couple of quick observations from the model just to make sure we're thinking about things right moving forward. So starting on instruments, I believe you placed I think you said 23 instruments in the quarter.

It sounds like you didn't view this as a catch-up quarter. So if anything, that Sequel II placements were still a bit under pressure, even though June got a lot better than where you were entering the quarter. Assuming there isn't a material resurgence in COVID-19 over the balance of the year. Is it fair to assume that instrument revenue should increase from here Q to Q? And then on the consumables side, it sounds like you did about $2.4 million in consumables revenue in June.

Based on what you saw June into July, keeping in mind that in your prepared remarks on pacing, again, assuming there isn't a reversal in lab opening trends, using that monthly exit rate for June for the full third quarter as good a guess as many as we update our models? Thank you.

Ben Gong -- Vice President of Finance and Treasurer

Yes, Doug. I'll try to take it in reverse order there. So on the consumables, yes, as I just mentioned previously, we should see sequential growth from Q2 to Q3 on consumables. As we mentioned, June represented almost half of the total for the quarter.

And there have been a few more openings in July since the end of June. So hopefully, and that's going to translate into more growth, we'll see about that. With regard to the instrument revenues, that was a harder one to call. We mentioned that there's still headwinds certainly out there.

The pipeline is healthy. But the comments we're making before about some customers being conservative about capital dollars has them either postponing to later or to a time that's not yet even determined when they're going to spend that capital. So I think that still has to play out for just a while longer before that -- we can actually call very well what's going to happen with capital sales.

Doug Schenkel -- Cowen and Company -- Analyst

OK. Thank you again.

Operator

Thank you. And I'll now turn the call back over to Mike Hunkapiller for closing remarks.

Mike Hunkapiller -- Chief Executive Officer

OK. Well, somebody earlier sort of kind of blew my thunder here, but as noted that now we've announced some time ago, Susan is retiring. This is actually her last week at the company. Personally, since I've been at the company CEO, Susan has absolutely been as important an employee as we have.

She not only is the chief financial officer has been, but she's been in charge of several other groups from manufacturing and IT and so forth. And during that time, and I've always considered her as sort of the unofficial chief operating officer of the company in that regard. So I want to add my thanks to her for the stellar work that she's done throughout her whole 10, 11-year career, 12-year career at PacBio and wish her very well as she spends -- just to spend more time in Carmel. In the meantime, just to make it official.

So Ben, while we're working for recruiting a permanent CFO, is being appointed by the board as interim chief financial officer, and he maybe want to make a comment about that from his perspective but we're looking forward to being able to take advantage of his experience with the company as well. And so stay tuned for an announcement on a permanent replacement. But in the meantime, he will be serving in the role that Susan has played such a big part of.

Ben Gong -- Vice President of Finance and Treasurer

Great. Thanks, Mike. I don't have anything else to add.

Mike Hunkapiller -- Chief Executive Officer

So with that, thank you for joining us, and we look forward to talking again in three months' time.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Trevin Rard -- Investor Relations

Mike Hunkapiller -- Chief Executive Officer

Susan Barnes -- Chief Financial Officer

Ben Gong -- Vice President of Finance and Treasurer

Doug Schenkel -- Cowen and Company -- Analyst

Kyle Mikson -- Cantor Fitzgerald -- Analyst

Casey Woodring -- J.P. Morgan -- Analyst

Steven Mah -- Piper Sandler -- Analyst

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