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PacBio Ships First Two Commercial Systems; Order Backlog Grows to 44

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By Julia Karow

Pacific Biosciences said last week that it has shipped its first two commercial PacBio RS single-molecule sequencers, following an early-access program at 11 customer sites.

The company booked six additional orders during the first quarter, for a total of 44 systems. It expects to fill these orders by the end of the year and to book $35 million total revenue for 2011.

"Now, we are definitely open for business; we are prospecting and going after new orders," said PacBio president and CEO Hugh Martin in a conference call to discuss the company's first-quarter earnings.

The first two commercial customers are the National Biodefense Analysis and Countermeasures Center, which is operated by the Battelle National Biodefense Institute for the US Department of Homeland Security; and Cold Spring Harbor Laboratory, which is also an early-access customer. Both sites have received their instruments, which are currently being installed.

NBACC plans to use its system to characterize microbial pathogens, making use of the system's long reads and flexible throughput, said Nick Bergman, the center's genomics group leader, in a statement. Martin said in the call that NBACC ordered the instrument in late 2009 and that "given the importance of this application, we prioritized this unit for shipment."

Cold Spring Harbor Lab received one of five PacBio systems that were ordered by the Howard Hughes Medical Institute last year (IS 6/29/2010). These instruments will be hosted by five institutions across the country for use by HHMI investigators. CSHL already has a PacBio RS beta system in house, as it is also an early-access customer, and is thus the first customer with two PacBio RS systems. CSHL professor Dick McCombie said in a statement that he and his colleagues plan to use the system to better understand structural variation in the human genome that contributes to disease and for de novo sequencing of plant genomes.

Other customers waiting to receive commercial PacBio RS machines — including the 11 beta sites — will receive their instruments or upgrades between now and the end of the year. "We plan to ship and install systems in our backlog in a very controlled manner. Our goal is to ensure that each customer is brought up successfully," Martin said.

Taking a swipe at Helicos BioSciences, which commercialized the first single-molecule DNA sequencer but did not attract many customers, Martin said PacBio is "mindful that no other company has ever introduced a single-molecule technology successfully… and do not want to underestimate the complexity of getting new customers up to speed with their systems."

Customers ordering a system today can expect to receive their instrument in the fourth quarter, according to Ben Gong, PacBio's vice president of finance.

To expand its customer support, PacBio added 10 members to its field organization during the first quarter, bringing the total to 43. Of those, 16 work in sales, and 27 in customer support. The firm also hired a vice president of sales for Asia-Pacific (see Paired Ends), whose task is to build the company's business in Asia.

Customers receiving the first commercial systems include biotechnology companies, commercial service providers, governmental institutions, and academic laboratories in North America and Europe. Several have previously disclosed that they have a PacBio RS on order, including Cornell University, Monsanto, Expression Analysis, and GATC Biotech.

Currently, PacBio's manufacturing facility can produce up to 500 instruments per year, "which we think is sufficient for the next several years," said CFO Susan Barnes. The company has largely outsourced the production of its SMRT cells and is "working with several vendors to keep ramping up their production." It is also still working on reducing the cost of manufacturing consumables, she said.

Later this quarter, PacBio plans to start providing beta customers with final-release software, which will improve the per-read accuracy to between 86 and 88 percent. Upgrading all the sites to commercial PacBio RS systems will probably take several months, Martin said, to "ensure that we can successfully transition each site from being a beta test site to a traditional customer site."

The order in which the beta customers are upgraded will be "largely determined by their own internal work plans," he said, to prevent ongoing work from being disrupted.

During the first quarter, beta customers were already outfitted with larger SMRT cells, which have 150,000 wells, or zero-mode waveguides, instead of the prototype's 45,000. This "more than tripled" the throughput of the cells — instead of 10 megabases per run, the new cells produce 35 to 45 megabases per run. That hardware upgrade was "the most complex of the entire beta program," Martin said.

Read length and accuracy were not affected by the upgrade — beta customers still obtain reads of more than 1,000 bases on average, with a read accuracy of between 85 and 86 percent.

Several beta customers are currently using "strobe sequencing," an application in which the PacBio RS sequences snippets of a long DNA molecule with unread stretches in between. Since strobe sequencing requires "a bit of training and orientation," not all early-access sites are using it yet, Martin said, but for those who are, "it works quite well."

Martin acknowledged that working with 11 beta customers at once has not always been easy, but because interest in the PacBio technology has been so great, the firm felt compelled to include a large number of customers in its early-access program.

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"I'm not sure I would do 11 simultaneously again," he said. "When you've got 11 systems of this complexity out there in the hands of brand-new customers — and they are beta systems, they are not final, completely de-bugged, done systems — it's a support opportunity."

However, he said that beta customers were "surprised" at how quickly the company was able to increase the system's performance over the course of the early-access program.

Sometime in the fourth quarter, the company plans to increase the system's read length, according to Gong, but is not yet saying by how much.

Internally, Martin said, the company is working on applications of its system in cancer research, pathogen identification, and targeted resequencing. It is also working with "a number" of sample-prep firms to "deliver integrated solutions," including methods to extract long DNA fragments from formalin-fixed paraffin-embedded samples.

In addition, PacBio is still developing a "software product" that will enable methylation sequencing, though he did not provide a timeline for when this will be available to customers.

Q1 and Beyond

PacBio recorded $270,000 in revenue during the first quarter, down from $545,000 during the year-ago period. As in previous quarters, revenue derived entirely from government grants.

The firm has so far recorded $4.4 million in deferred revenue from beta customers. Under the early-access program, customers paid 50 percent of the approximately $700,000 selling price of the instrument after accepting the beta unit. Once that instrument has been upgraded to commercial specifications, and the company has shown it works as expected, customers have to pay the remaining balance, and PacBio will formally recognize revenue for the instrument at that time.

R&D expenses dipped 5 percent to $24.1 million from $25.3 million during the same period last year. The decrease was due to a $3.6 million reduction in spending on development materials and prototypes, offset by $1.6 million in compensation for additional employees in manufacturing, and $800,000 for expanded manufacturing facilities.

SG&A expenses for the quarter doubled to $11.1 million, from $5.5 million during the prior-year quarter. About $3 million of that increase resulted from a larger headcount in sales, services, and accounting; $900,000 from operating as a public company; $800,000 from higher travel expenses; and $400,000 from the beta program and preparations for the commercial launch.

The company's net loss widened by 15 percent, to $34.8 million from $30.3 million during Q1 of 2010.

Starting in the second quarter, PacBio expects to record product revenue. For all of 2011, the firm anticipates $35 million in total revenue. It is not providing quarterly revenue guidance, since the timing of each customer installation is expected to vary, according to Gong.

As of March 31, the firm had $28 million in anticipated revenue from 44 ordered systems, which it expects to recognize by the end of the year. The remainder of the $35 million in forecast revenue will come from additional system orders as well as consumables, he said, though instrument revenues will make up the "vast majority" of total revenue. PacBio will also recognize part of the payment for each system as service revenue over a 12-month period.

R&D expenses will likely be lower in 2011 than in 2010 and may fluctuate from quarter to quarter. SG&A expenses, on the other hand, will grow throughout 2011 as the company adds resources to its sales and support team.

As of March 31, PacBio had $248.5 million in cash and investments. The company's cash burn rate will be in the range of $35 million to $40 million per quarter for the remainder of the year, Gong said.


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

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