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PacBio Books 7 RS Systems in Q3, Delays Launch of C2 Chemistry, Launches 'Customer Advocacy' Group

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By Bernadette Toner

This story was originally published Oct. 28.

Pacific Biosciences booked seven new RS systems in the third quarter and installed 15, bringing its total installed base to 31 instruments, company officials said last week.

The company reported total third-quarter revenue of $10.5 million, a slight decrease from $10.6 million in the second quarter, but beating analyst consensus estimates of $9.78 million. For the year-ago quarter, the company reported revenues of $220,000, which was entirely from grants.

During a conference call to discuss the quarterly results, PacBio officials outlined several initiatives in line with a broader strategy to ensure that its products meet customer expectations.

For example, the company has pushed the launch date for its C2 chemistry, designed to increase the read length and improve the accuracy of the RS single-molecule sequencer, from the fourth quarter of this year to the first quarter of 2012.

PacBio President and CEO Hugh Martin said during the call that the company has begun the early-access program for the C2 chemistry upgrade, but wants these early adopters to "validate that the release is ready" before making it more broadly available.

In addition, the company has formed a "customer advocacy" group intended to "improve customer satisfaction," Martin said.

Specifically, the new group draws from the firm's field application specialists, field service organization, and technical support team and is "focused on increasing the reliability and reducing the variability" of its systems in the field.

"I am not happy with where we are relative to the reliability and variability that our current customers are experiencing," Martin said during the call. "We need to address that aggressively and … that's why we created the customer advocacy group."

In another customer-focused move, the company has decided to slow its pace of installations in order to make sure that new customers are properly trained and supported before moving on to the next deployment.

Ben Gong, vice president of finance and treasurer, said on the call that PacBio currently has a backlog of 27 systems, representing $18 million in systems revenue.

While the company would need to install 19 or 20 of these systems before the end of the year in order to meet its previous full-year revenue guidance of $35 million, Gong said that the company will likely install fewer than that in order to ensure a "smooth installation" and to be able to "spend more time with customers."

As a result, he said the company's full-year 2011 revenues would likely end up within a range of $30 million to $33 million.

He noted that the RS is a novel technology, so "in the early going, customers require extra support from our teams. We want to make sure each customer is successful before we move onto the next … rather than get as many as we possibly can out in the shortest amount of time."

PacBio has also named Michael Hunkapiller as executive chairman of its board of directors. Hunkapiller — a general partner at PacBio investor Alloy Ventures and former president and GM of Applied Biosystems — brings a "deep understanding of both the technology and the application issues in sequencing," Martin said during the call.

Hunkapiller's guidance "will be a tremendous help as we work to drive adoption beyond innovators and early adopters," he added.

'Generational Shift'

Martin stressed during the call that PacBio is facing a "generational shift" as it tries to move the RS beyond the "early-adopter phase" and into the "longer-term higher-growth phase."

"While we have had tremendous success in driving adoption among innovators and early adopters, many early majority or mainstream customers are waiting on the sidelines," he acknowledged.

"In order for this transition to occur, we must make the product more robust and user friendly, [and] we need to train customers on our sample prep formats and data outputs," he said. In addition, "killer applications that clearly show our differentiation must emerge, and, importantly, the academic community needs to realize and communicate the value of our technology through published papers."

Martin declined to provide an estimate of when this shift might take place, but conceded that the company initially "overestimated the speed at which the transition would occur."

He noted that the layoff of around 28 percent of its workforce in September (IS 9/20/2011) was intended "to buy more time to allow adoption of our technology from innovators and early adopters to the mainstream."

The cuts will reduce the company's cash burn rate to around $20 million per quarter — a 38 percent improvement over the $32 million burn rate the company recorded in the second quarter.

Martin said that the company "had a bias toward cutting deeply [in the restructuring] because we'd rather find ourselves needing to add back in the future rather than cutting again." PacBio's current headcount is 333, and Martin said he expects that to "increase modestly over the next year."

One "good sign" for the firm was that the Department of Energy's Joint Genome Institute purchased a second RS during the quarter.

JGI has been using the system for microbial sequencing and has decided to standardize on the RS as its long-read platform for this purpose, Martin said. JGI will still use short-read sequencers for applications that don't require long reads, he noted.

The institute will use its first RS system "to explore new applications" for the technology, Martin said, noting that microbial sequencing is one of two key application areas that the company is focusing on, in addition to targeted gene resequencing.

Martin highlighted a project at the Ontario Institute of Cancer Research that is exploring the RS for targeted sequencing of cancer patients as a good example of the system's utility for that application (CSN 8/3/2011).

In addition, he noted that researchers at the Broad Institute are using the RS for rare variant detection and have modified the Broad's Genome Analysis Toolkit to work with PacBio data.

PacBio also expanded geographically during the quarter, with RS installations at Germany's GATC Biotech and the Max Delbrück Center for Molecular Medicine. In addition, the company has secured distributors for the system in China and Japan.

C2 Update

Martin said that PacBio's upcoming C2 chemistry and software enhancements will enable average read lengths of between 2,500 and 3,000 bases, depending on the protocol used by the customer, with read lengths at the 95th percentile in the range of 6,000 to 8,500 bases.

The company expects the C2 raw read accuracy to be around 87 percent for inserts between 2,500 and 10,000 bases and around 99 percent for insert sizes of 500 bases.

Consensus accuracy, meantime, will be 99.999 percent, or Q50, at 30x coverage, Martin said.

Some early-access customers for the chemistry have confirmed these specifications. Expression Analysis last month said that it has seen average read lengths of around 2,700 base pairs with the chemistry, with single-pass accuracy of around 85 percent and consensus accuracy at around 99.997 percent (IS 9/27/2011).

Despite these promising results, however, Martin said that the company has decided to delay the launch of the upgrade from the fourth quarter of this year to the first quarter of 2012.

"We believe that spending more time on validation will yield large benefits when it comes to reliability and consistency in the field," he said.

"In the meantime, we will be getting feedback from early-access customers in order to make the product more user-friendly to our broader customer base."

Financials

Of PacBio's total revenues of $10.5 million for the quarter, $9.4 million came from instrument revenue and $400,000 came from consumables. The remainder came from services and grants.

The company reported a net loss of $29.3 million, which included workforce reduction charges of $4.9 million related to the layoffs in September. The firm recorded a net loss of $22.5 million in the second quarter of 2011 and a net loss of $40.7 million for the year-ago quarter.

R&D spending was $20 million, compared to $32.9 million for the year-ago period and $19.5 million for Q2 2011.

SG&A expenses were $12.8 million, compared to $8 million for the third quarter of 2010 and $11 million for the second quarter of 2011.

The company has forecast a net loss of between $112 million and $114 million for the year, an improvement over a previous net loss estimate of $121 million.

Analysts lowered their revenue estimates for PacBio for 2011 and 2012, noting that instrument sales have been flat over the last several quarters.

"Given the company has added six to seven instruments a quarter to its backlog for almost two years, we see no signs of acceleration," wrote William Blair analyst Amanda Murphy in a research note following the call.

Murphy forecast "flat instrument sales until 2013," when she predicted "a slight ramp-up in instrument sales and per machine consumable usage."

Murphy estimated 2011 revenue of $31.5 million and 2012 revenue of $33.0 million — a reduction of $22 million over her previous estimate.

Likewise, David Ferreiro of Oppenheimer lowered his 2011 revenue estimate to $31 million and his 2012 revenue estimate to $43 million.

Both analysts anticipate that the company will need to raise capital by late 2012 or early 2013.

PacBio ended the quarter with $193.7 million in cash and investments.


Have topics you'd like to see covered in In Sequence? Contact the editor at btoner [at] genomeweb [.] com.

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