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Unstable Reagents Hinder Helicos’ Q2 Sales as Loss Widens, Cash Declines

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Helicos BioSciences said last week that its ability to obtain more orders for its Helicos Genetic Analysis System during the second quarter was hampered by a problem with unstable reagents that it says it has now resolved.
 
Since February, when it booked its first order for the platform, Helicos secured one additional order for its instrument, from an undisclosed US academic medical center.  The company reported a net loss of $11.9 million, no product revenue, and a shrinking balance sheet for the three months ended June 30.
 
During a conference call last week to discuss the company’s earnings, Helicos President and Chief Operating Officer Steve Lombardi disclosed that the company had experienced a problem with the stability of some its reagents that “impacted sequencing performance” and “limited our ability to generate data to secure orders.”
 
Lombardi said that early in the year, as the company was testing instruments internally as part of a “verification and validation” phase, it noticed that performance varied between instruments. As it began to test more instruments early in the second quarter, the company identified unstable reagents as the root of the problem.
 
He said Helicos scientists were able to “quickly resolve the instability issue” and have verified the performance of an “improved set of reagents” on commercial HeliScope instruments. “Our plans are to validate these results in product tests and to release these improvements to customers during the fourth quarter of this year,” Lombardi said. He mentioned that the reagents in question were manufactured by Helicos and not by a third party.
 
The reagent problem prevented the company from generating sequence data to convince potential customers of the performance of the single-molecule sequencing platform. However, Lombardi said he thinks the company will still be able to achieve “best-in-class performance in throughput, cost per megabase, or applications flexibility.”
 
Interest in Helicos’ platform has not waned, he said, but the firm’s “ability to convert these prospects to revenue-generating sales is tied to our ability to deliver HeliScope data.
 
“The data is different, and [potential customers] want to see what’s going on,” he said. “And the issue in Q2 limited our ability to generate that data.”
 
’Lumpy’ Uptake
 
Helicos also gave an update on its first customer, Expression Analysis, which received a Helicos Genetic Analysis System in March (see In Sequence 3/11/2008).
 
That instrument “has finished its testing phase and is scheduled to run its first customer samples in the coming weeks,” according to Lombardi. In March, Expression Analysis CEO Steve McPhail told In Sequence that the company would start offering limited services in the third quarter, and was planning to offer three types of services this year: digital gene expression, candidate gene sequencing, and genomic signature sequencing.
 
However, based on feedback from its customers, EA will initially only offer digital gene-expression analysis on the instrument, Lombardi said, and has been trained by Helicos to use the instrument for this application.

“Our ability to convert these prospects to revenue-generating sales is tied to our ability to deliver HeliScope data.”

Last week, Helicos said it received a second order for an instrument, from an undisclosed US academic medical center, which will use the platform in a research program that involves cancer stem-cell biology, Lombardi said.
 
He did not mention when the company expects to post revenue from these orders, or how many additional orders Helicos hopes to obtain this year. “We will focus on early adopters, build competitive advantage around specific applications, and work hard to keep the performance trajectory on course while we keep our customers satisfied,” he said. “As such, we anticipate the pace of orders and shipments to be lumpy.”
 
Internally, he said, Helicos has used its technology for digital gene expression analysis and bacterial genome sequencing projects, and plans to present results from those studies at a conference on next-generation sequencing in September.
 
Helicos has recently submitted results from its gene expression-analysis study for publication, he said. This assay, Lombardi claimed, has high sensitivity, precision, and accuracy, and outperforms other technologies.
 
He did not elaborate on the results but said they helped the company forge its recent scientific collaboration with the Children’s Oncology Group, a pediatric cancer research cooperative that “has spearheaded many novel gene expression technologies,” according to Lombardi (see In Sequence 6/24/2008).
 
Helicos has also sequenced three bacterial genomes on its platform, the same three species that the large genome centers have analyzed to test the performance of other new sequencing technologies. The company has obtained “high levels of accuracy” and “even coverage across the complete sequences of these genomes,” Lombardi claimed.
 
Helicos has also achieved “a firm proof of concept” for paired-end sequencing on one of its research platforms, Lombardi said, showing that it can attach DNA fragments larger than 10 kilobases to its flow cell. “What we need to do is get this onto a HeliScope and do the development of it,” he said.
 
Looming Cash Crunch
 
Lombardi made his remarks during the company’s second-quarter earnings conference call, in which it reported zero sales revenue, a widened net loss, and a dwindling cash balance despite a smaller cash burn.
 
During the second quarter, Helicos booked $251,000 in revenue from its three-year, $2 million grant that it obtained from the National Institutes of Health in 2006.
 
The company had $7.1 million in research and development costs for the quarter, up from $5.3 million during the year-ago quarter. Included in the expenses are $2.8 million in labor and overhead cost “associated with the underutilization of the manufacturing facility,” according to Chief Financial Officer and Senior Vice President Steve Hall.
 
He explained that during the second quarter, Helicos realized that its manufacturing facilities were not going to operate at the capacity it had earlier projected. Usually, these costs would be part of cost of sales, he said, but because Helicos is at an early commercialization stage, they are included in R&D costs.
 
SG&A costs for the quarter amounted to $4.8 million, up from $3.3 million during the second quarter in 2007.
 
Helicos’ net loss for the quarter totaled $11.9 million, up from $8.1 million during the year-ago quarter.
 
The company’s cash burn during the second quarter decreased to $13.6 million, compared to $14.8 million during the first quarter of 2008, Hall pointed out. This decrease was “primarily due to a slow-down on the inventory ramp and a reduction” in capital expenditures, he said.
 
He said the company expects to have a “core cash burn” from recurring SG&A and R&D of $18.6 million for the remainder of the year, less than the $21.6 million it had projected earlier this year. Another chunk of the balance sheet might go to “focused investments [in capital expenditures] … in proportion to the anticipated ramp of the business,” he added.
 
As of June 30, Helicos had $24.4 million in cash and $10.5 million in restricted cash.
 
Hall said that Helicos has “carefully modeled both the level of expense and the category of expense to ensure that they are consistent with the needs of the business” and “will consider additional financing on an opportunistic basis and pursuing alternatives.”

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