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As PacBio Orders Decline in Q1, Company Bets on Happy Customers for Future Sales

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This article was originally published May 2.

Following a drop in orders for its PacBio RS instrument as a result of issues with the instrument's reliability and performance in customers' hands, Pacific Biosciences has recently been focusing on its installed base, a company representative said last week.

Following a recent upgrade to the C2 chemistry, PacBio plans to release two new products for its platform later this year — software to analyze base modifications and a device to load longer DNA fragments — that it believes will further improve the instrument's utility.

"We're particularly excited about the opportunity we see in base modification analysis, an area that is still developing that has the potential to be very significant going forward," said president and CEO Mike Hunkapiller during a conference call to discuss the firm's first-quarter earnings last week.

PacBio also recently settled patent disputes with Life Technologies and Helicos BioSciences, resulting in increased litigation expenses.

During the first quarter of 2012, PacBio recorded $10 million in total revenues and installed 11 PacBio RS systems, increasing its installed base to 59 sequencers. However, it only booked two new orders during the quarter, bringing its backlog of instruments that have yet to be installed to seven.

During the call, Hunkapiller explained that the drop in orders had to do with "inconsistencies in the reliability and performance of systems in the field" that led existing users to give "less than enthusiastic references" about the platform to prospective customers.

To change this, the company's "primary focus" has been improving the experience of its existing customers, which he said has been successful and has already led to increased consumables revenues, an indicator "that customers are capturing value from their investment in the PacBio RS."

"It's those customers that ultimately become our best sales people," he said, adding that the company is confident that "the unique value we're bringing to customers will lead to a stronger bookings performance."

As evidence of growing acceptance of the platform, he noted that a large number of customers presented applications of the PacBio RS in their research — including de novo assembly, targeted sequencing, and DNA base modification detection — at the Advances in Genome Biology and Technology meeting in February (IS 3/6/2012). He also cited a study published last month in Nature in which researchers from the University of California, San Francisco, demonstrated the use of the platform to detect low-frequency mutations in a type of cancer, a study he said benefitted from the platform's long reads (CSN 4/18/2012).

He cautioned, however, that obtaining new orders will take time and that the company is "not expecting to have a large number of new instrument orders in the near term."

During the first quarter, PacBio started to upgrade its customers to the C2 chemistry, completing the upgrade in April. This resulted in "dramatically improved performance and greater reliability" of the platform, Hunkapiller said.

Customers who previously had problems with their system's uptime are now reporting a "substantial improvement," he said, and many customers are using their instruments more frequently now.

A lot of customers now obtain average read lengths of more than 3,000 bases, with 5 percent of reads reaching 8,000 bases, and "some" reads up to 15,000 bases, he said.

The output per SMRT cell is also "significantly greater" now, though he did not provide numbers, and the consistency of the output has improved.

PacBio is working on new software tools that will enable customers to analyze base modifications, a capability that users have expressed "tremendous interest" in, he said. Later this quarter, the company plans to release software that will be able to analyze kinetic data captured by the platform, which relates to certain base modifications. "Over time," it also plans to launch tools and reagents to study specific types of modifications, both in bacteria and eukaryotes, including humans, he said.

At least one customer, the Joint Genome Institute, already uses the PacBio RS to study base modifications in microbial genomes.

During the third quarter, the company also plans to release an automatic magnetic loader that allows users to load long DNA fragments preferentially into the SMRT cells. This will increase the number of long reads and the average read length, lower the amount of input DNA required, and improve data accuracy by removing impurities that occur during sample preparation. Several early-access customers have already tested the loader, and the results have been "very encouraging," he said.

Longer term, the company is also working on new technology that will reduce the photo damage to the polymerase enzymes. This will increase the proportion of active polymerases and, thus, increase read length. "We've got some pretty exciting projects underway, which we've shared in early terms with the users, that effectively eliminate photo damage as a source of shortening of the read lengths, and demonstrated quite long read lengths," he said.

PacBio does not believe itself to be direct competition with high-throughput sequencing technologies from Illumina or Life Technologies, Hunkapiller said. "We see ourselves more as a companion to those for certain types of applications, certain hybrid assemblies, than a direct competitor," he said. "Customers take advantage of using both technologies."

Asked whether the company is already thinking about a new instrument version, to replace the PacBio RS, Hunkapiller said that it is "a long, long way from getting to that point."

"We have got a series of product enhancements — some are software, some are modest hardware upgrades, a lot are application kits and bioinformatics tools — and we will put [those] onto the existing platform," he said. "We think that extends the performance by a lot over the next few to several quarters."

"We certainly have a feeling for what the lifetime of our current platform is, but we have not reached the end of that at all," he added.

Q1 and Outlook

PacBio reported $10 million in total revenue for the first quarter, up from $270,000 during the first quarter of 2011, when it had not commercially launched its system yet. During the fourth quarter of 2011, it booked $12.4 million in revenue. The firm had originally forecast between $7 million and $8 million in revenue for the first quarter.

Of total revenues, $7.9 million came from the installation of 11 PacBio RS instruments, compared to $10.8 million from 17 platforms during the fourth quarter of 2011. According to Ben Gong, PacBio's vice president of finance and treasurer, the company installed more systems than expected in the first quarter.

Consumables revenue was $900,000 during the quarter, up from $700,000 during the fourth quarter of 2011. According to CFO Susan Barnes, the growth is noteworthy "considering the fact that we were taking down systems in the field to install the C2 release upgrade" starting in February. Despite this interruption, "utilization rates across a number of customers picked up" after the upgrades were completed, and consumables sales were "much stronger" in March than in January and February.

Service revenue increased to $1.1 million, from $800,000 during the fourth quarter, reflecting the growing installed base.

Grant revenue increased to $270,000, from $165,000 during the fourth quarter.

R&D expenses decreased "moderately," to $12.1 million, from $12.4 million during the fourth quarter.

SG&A expenses increased by 30 percent, to $15.3 million, from $11.8 million during the fourth quarter. This increase was mainly due to a $2.6 million rise in litigation costs, including two patent disputes and class action shareholder lawsuits.

Gong said that the company recently reached settlements for two patent lawsuits, with Life Technologies and Helicos BioSciences, which contributed to the increase in litigation costs.

PacBio's net loss totaled $27.6 million, up from $22.8 million during the fourth quarter.

As of March 31, the company had $161.3 million in cash and investments, down $16.1 million from the previous quarter.

For the second quarter, PacBio expects $7 million in total revenue, consisting of $4.7 million in instrument revenue from seven systems it still needs to install, and it expects consumables and service revenue to continue to increase sequentially. If used at full capacity, Gong said, each PacBio RS could use $300,000 worth of consumables per year.

The company expects to burn more than $20 million in cash during the second quarter and continues to forecast a total of $80 million in cash usage for the year.