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PacBio CEO Says Roche Deal Validates Technology, Will Lead to Improvements for Research Customers

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Last week, Pacific Biosciences entered into an agreement with Roche Diagnostics to develop a sequencing system and assays for clinical diagnostics using its single-molecule real-time sequencing technology in a deal worth up to $75 million.

Roche will pay PacBio $35 million up front with an additional $40 million linked to development milestones, and will have exclusive marketing and distribution rights on the clinical sequencing system and assays (CSN 9/25/2013).

While the deal concerns the development of PacBio sequencing technology for diagnostic purposes, it will also impact PacBio's core research customers and provide enough cash for the firm to continue its operations at least into 2016.

PacBio President and CEO Mike Hunkapiller told In Sequence that the deal provides "further validation of the SMRT sequencing technology" from Roche, which "sees it as an ideal solution within one of the more stringent applications, clinical diagnostics."

This vote of confidence from Roche will impact not only PacBio's position in the clinical sequencing space, but also in its core markets in the research space, Hunkapiller said. "There are certain applications in the clinical space that are also used in the research space," he said. "As we work on some of those applications with Roche in the diagnostic space, we can take what we learn there and apply it to the research world."

For instance, Hunkapiller said that while the firm has significant experience in whole-genome sequencing of smaller genomes, it has not yet done a lot of work in targeted sequencing, experience it expects to gain in its deal with Roche that will then benefit its research customers who want to do targeted panels. "We can learn from that and more quickly get it to customers," he said.

This, in turn, will open up the platform to new customers, he said. Currently, customers are adopting the PacBio platform for many uses, including those applications outside of the company's main research applications, Hunkapiller said, but those are customers that are comfortable with adopting the platform for those uses on their own. Gaining experience in applications like targeted panels will "expand the specific applications that we can support robustly," Hunkapiller said.

Mike Schatz, an assistant professor at Cold Spring Harbor Laboratory, whose lab uses the PacBio system extensively, especially in plant sequencing projects, said that the deal would be a benefit to the company and translate well for current customers.

"This is a very big endorsement of PacBio technology from Roche," he told IS. "It will enable PacBio to continue to optimize their instrument and develop and deliver new products over time."

Schatz said that he did not have any concerns that the development of the platform would stall, or that the company would focus solely on creating new products for Roche.

"In terms of read length, PacBio is a dominant, premier technology," he said. "And the deal with Roche will allow them to push that out even more."

Hunkapiller also reaffirmed that the company intends to stick to its development roadmap of delivering improvements to read length, throughput, and bioinformatics. "Our timeline relative to our core markets won't change," he said. "We're not moving away from [the research market] at all. We've got an aggressive program to continue to develop the RS platform for a whole host of research and applied areas."

The deal with Roche also provides PacBio with additional funding that will sustain it at least into 2016, Ben Gong, PacBio's vice president of finance, said during a conference call discussing the deal. PacBio has struggled financially over the past few years and cut 28 percent of its workforce, or 130 employees, in September 2011 due to a slower-than-projected adoption rate of its RS system (IS 9/20/2011).

While the company has reduced its cash burn rate, it still continues to operate at quarterly losses of over $20 million. While Hunkapiller acknowledged that the up-front $35 million in cash from Roche is "certainly important," he told IS that he did not think it was necessary for the company's financial stability.

William Blair analyst Amanda Murphy wrote in a note following the conference call that the agreement is a "positive step" for PacBio and, among other benefits, "provides the company with a lifeline into 2016." Additionally, the funding will "build on the human capital at Pacific Biosciences, specifically in R&D," she said.

Piper Jaffray analyst William Quirk also wrote that the deal was a good sign for the company and represents a "validation of the longer-term potential of PacBio's SMRT sequencing technology."

However, he said that in order to be competitive with other next-generation sequencing systems that offer a lower cost per base, "PacBio will need to improve its throughput (or lower costs)."

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