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PacBio Bets on RS II to Drive Future Orders as Q1 Revenues Slide 44 Percent

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This story was originally published on April 25.

Pacific Biosciences is betting on its recently launched PacBio RS II system as well as increased usage by current customers to drive future revenues, officials said last week during a conference call discussing the firm's first-quarter earnings.

The company saw its first-quarter revenues drop 44 percent year over year and 5 percent sequentially to $5.6 million for the three months ended March 31, compared to $10 million for the first quarter of 2012, and $5.9 million for the last quarter of 2012.

Nevertheless, the firm said that the RS II, which was launched in March and doubles throughput over the initial system to around 500 megabases per SMRT cell, will extend the company's market opportunity to researchers wanting to sequence larger genomes, such as mammalian and plant genomes.

During a conference call last week discussing the first quarter 2013 revenues, PacBio CEO Mike Hunkapiller provided some evidence that this assumption may have merit. Already, 31 existing customers, around 40 percent of the installed base, have placed orders for the RS II upgrade, priced at $20,000, he said.

Additionally, while system bookings seem to have stabilized — the company booked four systems in the quarter, comparable with the previous two quarters of five and four systems, respectively — customer utilization of the systems picked up significantly in the quarter as represented by a 46 percent increase in consumable revenue to $1.9 million from $1.3 million the previous quarter.

"We believe our recent launch of RS II, coupled with higher utilization of the installed base, will drive new bookings as new customers see more impressive results coming out of our existing installed base and some high-volume customers need to add to their capacity," Hunkapiller said.

Average consumable revenue per system has also increased each quarter, Hunkapiller said, and this quarter reached an average annualized run rate of $100,000 per system with some customers generating as much as $300,000 per system per year.

However, Ben Gong, vice president of finance and treasurer, said the amount of increase in consumable revenue was "surprising," and "we would not expect to see another sequential jump right away."

The company recognized $1.9 million in instrument revenue from the installation of three systems, compared to $3 million from installing five systems in the previous quarter, and $7.9 million from 11 systems in the first quarter of 2012.

PacBio's system backlog is now six, reflecting the four booked systems and an additional two carried forward from December 2012.

The four booked systems this quarter are "on par with what we've seen in the last two quarters," said Hunkapiller, adding that the goal is to double the total number of booked systems this year over the 12 booked in 2012.

As Hunkapiller has said previously, the company is continuing its strategy of focusing on helping its existing customers make the system reliable, start projects, and use it to its full capabilities. "We feel strongly that improving satisfaction among our initial customer base leads to higher utilization, and in turn, this drives instrument sales," he said.

Currently, PacBio offers the longest sequencing reads, with its latest chemistry generating average reads of around 5,000 bases and the longest reads topping 20,000 bases. However, it may soon face competition from Illumina's Moleculo technology.

The Stanford University spinout, which Illumina acquired in January, promises to deliver reads longer than 10,000 bases by combining short reads into synthetic long reads.

Illumina plans to offer the technology as a service in the second quarter of this year and as a kit by the end of the year. How the introduction of this technology will impact PacBio remains to be seen, but early access customers of Moleculo include some of PacBio's key customers, such as the Joint Genome Institute, which operates two PacBio systems; Monsanto; and the University of California, Davis, with whom PacBio is collaborating on the 100K Genome Project.

Hunkapiller said that it's "hard to know" how PacBio and Moleculo will compete because "no one knows what the performance will be" of Moleculo. He said that because the technology still has a PCR amplification step it will "have a lot of the limitations of sample prep associated with short-read technologies." Additionally, he said, the technology uses long-range PCR, which is even trickier to deal with than standard PCR.

"No one's ever demonstrated that you can do [long-range PCR] uniformly, so you still wind up with a lot of holes," he said, which is not an issue for the PacBio system, since it is single molecule and does not have an amplification step.

Looking ahead, Gong said that the company expects second-quarter revenues to remain flat, but it expects sequential growth for the second half of the year and higher total revenues in 2013 compared to 2012, driven by an increase in instrument sales, higher utilization of the systems, and customers purchasing the RS II upgrade.

PacBio posted a net loss for the quarter of $21.1 million, or $.37 per share, compared to a net loss of $27.5 million, or $.50 per share, in the prior year first quarter.

Product revenue was down year over year to $3.8 million from $8.7 million, while service and other revenue was up at $1.5 million, compared to $1.1 million in the first quarter of 2012. Grant revenue was flat at $270,000.

The firm's R&D expenses totaled $12 million, down slightly from $12.1 million in Q1 2012, while SG&A expenses dropped 37 percent to $9.6 million from $15.3 million year over year.

As of March 31, the firm had cash and investments of $112.3 million.

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