By Monica Heger
This story was originally published Feb. 9.
Pacific Biosciences booked six new RS instruments in the fourth quarter of 2011— one fewer than it booked in the third quarter — and installed 17 systems, company officials said last week during a conference call to discuss the company's fourth-quarter and full-year earnings.
The company has a current backlog of 16 systems, representing $11 million in revenue, and has a total of 48 systems installed, officials said.
PacBio also provided revenue guidance for the first half of 2012, saying that it is only assuming instrument revenue from the 16 systems currently in its backlog, so revenues will be down sequentially for the next two quarters.
Additionally, the company recently began upgrading its installed base with its new C2 chemistry and expects the process to take several weeks.
Some early-access users already have the new chemistry. A broader launch was originally planned for the fourth quarter of 2011, but company officials decided to delay the upgrade until the current quarter (IS 11/1/2011).
Going forward, all new shipments of the RS will include the C2 chemistry, which offers a 2-fold increase to read lengths, 99.999 percent consensus accuracy, three- to four-fold more data, and a 50 percent to 80 percent reduction in sample-prep time.
PacBio reported fourth-quarter 2011 revenue of $12.4 million, up 18.1 percent sequentially from its third-quarter revenue of $10.5 million. The company reported $280,000 in revenue in the year-ago quarter, prior to the launch of the RS instrument.
Annual revenues totaled $33.9 million, derived primarily from the delivery of 48 instruments and related consumable products and services. Full-year revenues for 2010 were $1.7 million.
Beyond 'Technology Early Adopters'
During the conference call, new CEO Mike Hunkapiller outlined a conservative strategy that would focus the company's development efforts on improving the system for a small number of niche applications to drive adoption among users who are not "technology early adopters."
Hunkapiller said that the company's early customers are primarily using the machine for targeted sequencing for validation and difficult-to-sequence regions, and de novo whole-genome assembly — either in parallel with short-read, higher-throughput instruments for larger organisms, or alone for bacteria and other small genomes.
Additionally, customers have recently started to use the instrument to analyze base modifications, such as methylation, he said.
"It's the customers that determine where [the system] will add value," Hunkapiller said, so "we're putting emphasis on these applications."
Hunkapiller said that the company analyzed how its early customers were using the system, and determined that there were enough customers beyond those early-access users with similar needs to warrant focusing on those applications.
The next step, he said, is making sure that the early-access users are successful enough that they are able to publish and present results of their projects.
He pointed to several presentations at last month's Plant and Animal Genomes conference that highlighted the use of the PacBio RS. For example, Michael Schatz at Cold Spring Harbor used the system in conjunction with Illumina sequencers to do de novo assembly of complex organisms (IS 1/24/2012).
Additionally, Tim Smith from the US Department of Agriculture used the RS for bacterial sequencing in applications for animal health and food safety, and a research team from the University of California, Davis, used the system to sequence centromeres — "fast evolving regions, that are difficult to sequence because of tandem repeats," he said. The PacBio's long reads was critical to resolving those regions, Hunkapiller said.
These presentations are important for demonstrating the value of the machine to other customers, Hunkapiller noted.
He said the company has focused in the last couple of months on improving workflows, including sample prep and analytical methods, that are "tailored to these specific applications" of de novo whole-genome sequencing for bacteria, hybrid assembly, and targeted sequencing of difficult-to-sequence regions.
It's this "soup-to-nuts set of capabilities" that will help drive adoption of the technology in users "who are not technology adopters, but just want to use [the RS]," he said.
Ben Gong, PacBio's vice president of finance and treasurer, said that the company expects to generate between $7 million and $8 million in revenue for each of the first two quarters of 2012 — 35 percent to 45 percent lower than the $12.4 million in revenue it generated in the fourth quarter of 2011.
Gong explained that the company expects to ship about half of its backlog each of the next two quarters and will also upgrade all systems to the C2 chemistry.
He said the company is anticipating taking new orders, but said that those orders will likely not be shipped until the second half of the year, so are not included in the first-half revenue forecasts. Gong declined to provide an estimate on the number of new orders that could be expected.
Additionally, he said, "consumable revenue will be impacted in the short term because of the transition to C2," and the company "may not see growth in consumable revenue in Q1." He said that after the transition to C2, he expects consumable revenue to increase as the installed base increases and "more of our customers integrate the PacBio RS into their project pipelines."
While service revenue is expected to increase sequentially each quarter, it currently represents a small portion of total revenue — $760,000 in the fourth quarter, or approximately 6 percent of total revenue.
Following a restructuring in September that included laying off 28 percent of its workforce (IS 9/20/2011), PacBio was able to significantly cut its costs in the fourth quarter.
The company reduced its operating expenses for the quarter by 26 percent sequentially to $24.2 million from $32.8 million for the third quarter of 2011. Of those expenses, research and development spending fell 38 percent to $12.4 million from $20.0 million in the third quarter; and selling, general and administrative expenses totaled $11.8 million, representing a 7 percent decrease from $12.8 million in the prior quarter.
Cash and investments at Dec. 31, 2011, totaled $177.4 million compared to $193.7 million at Sept. 30, 2011.
David Ferreiro, an analyst at Oppenheimer, wrote in a research note following the conference call that the reductions in expenses as well as the appointment of Hunkapiller as CEO are potential signals that the company has "corrected its course."
Nevertheless, Oppenheimer remains "concerned" with PacBio's "ability to turn the PacBio RS into a viable option in the competitive sequencing market," particularly given the company's "inability to spur meaningful backlog growth."
Going forward, he said, the C2 chemistry will "need to generate significant interest to drive demand."
As a result, Oppenheimer has lowered its 2012 revenue forecasts to $6.9 million from $11.9 million in the first quarter and to $38 million from $43.1 million for the full year. The firm is projecting that PacBio will place 43 instruments this year.
William Blair also lowered its forecast for the year — to $29 million from $33 million — and projects that the company will ship 36 instruments in 2012.
Amanda Murphy, an analyst with the firm, wrote in a note that while the company's revenue was above Blair's target and that the company shipped two more RS instruments in the quarter than expected, "the PacBio RS remains in the early adoption phase" and there is still "uncertainty of the nearer-term adoption curve, which has remained at the 6 to 7 new instrument level for some time."
Blair maintained a Market Perform rating on the company's stock.
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