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Edited Transcript of PACB earnings conference call or presentation 21-Apr-16 8:30pm GMT

Q1 2016 Pacific Biosciences of California Inc Earnings Call

MENLO PARK Apr 22, 2016 (Thomson StreetEvents) -- Edited Transcript of Pacific Biosciences of California Inc earnings conference call or presentation Thursday, April 21, 2016 at 8:30:00pm GMT

TEXT version of Transcript


Corporate Participants


* Trevin Rard

Pacific Biosciences of California, Inc. - IR

* Mike Hunkapiller

Pacific Biosciences of California, Inc. - Chairman, CEO & President

* Susan Barnes

Pacific Biosciences of California, Inc. - EVP & CFO

* Ben Gong

Pacific Biosciences of California, Inc. - VP, Finance & Treasurer


Conference Call Participants


* Amanda Murphy

William Blair - Analyst

* Joe Munda

First Analysis - Analyst

* Bryan Brokmeier

Cantor Fitzgerald - Analyst

* Bill Quirk

Piper Jaffray - Analyst

* Tycho Peterson

JPMorgan Chase - Analyst




Operator [1]


Good day, ladies and gentlemen and welcome to the Pacific Biosciences of California first-quarter 2016 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Trevin Rard. Ma'am, you may begin.


Trevin Rard, Pacific Biosciences of California, Inc. - IR [2]


Thank you. Good afternoon and welcome to Pacific Biosciences' first-quarter 2016 conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the investors section of our website at or alternatively as furnished on Form 10-K available on the Securities and Exchange Commission website at

With me today are Mike Hunkapiller, Chief Executive Officer; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer.

Before we begin, I'd like to remind you that on today's call, we will be making forward-looking statements, including plans and expectations relating to our financial projections, products and other future events. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties and may differ materially from actual results. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings, including our most recently filed report on Form 10-K. Pacific Biosciences undertakes no obligation to update forward-looking statements.

In addition, please note that today's call is being recorded and will be available for audio replay on the investors section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call. I'd now like to turn the call over to Mike.


Mike Hunkapiller, Pacific Biosciences of California, Inc. - Chairman, CEO & President [3]


Thanks, Trevin. Good afternoon and thank you for joining us today. We are pleased with our first-quarter results and our continued progress in driving growth in our business. Highlights of our Q1 financial results are as follows. We received orders for 30 Sequel Systems and three RS II Systems during the first quarter. The Sequel System orders came from a broad range of customers and were well-distributed across the US, Europe and Asia. About half of the new systems ordered represent new PacBio customer sites. We shipped 18 Sequel instruments during the first quarter compared with 10 instruments shipped during Q4.

Total revenue for the first quarter was $19.1 million, up 8% from Q1 2015. We are on target with our revenue forecast for this year. With a significant and growing backlog, we are well-positioned to deliver sequential revenue growth throughout the year.

Consumable revenue for the first quarter was $4.6 million, up 8% from Q1 2015. System utilization among RS II users has remained steady. Instrument revenue for the first quarter was $7.8 million, up 11% compared with Q1 2015. We installed a mixture of both RS II and Sequel instruments this past quarter. Going forward, we expect almost all of our new installs to be Sequel Systems.

Our gross margin improved from approximately 34% during Q1 last year up to 50% this quarter. This largely reflects the higher margin we generate from selling Sequel Systems compared to RS II Systems. We are pleased to see that we are tracking toward profitability with improved product margins.

Now I'd like to provide an update on our recent Sequel product launch. Demand for the new product continues to be robust. We are pleased with the flow of instrument orders coming in and the pipeline for new orders is very strong. We are seeing a good mix of new and existing customers interested in acquiring Sequel Systems.

Beginning with our initial announcement of the Sequel System, we have said that we planned a controlled rampup of instrument system shipments as we deal with the usual issues arising during a complex new product introduction. We've also pointed out that we will be working with a limited supply of the Sequel SMRT cells until we transition from our low-volume prototype production supplier to our long-term high-volume supplier scheduled for this summer.

While we have ramped up Sequel shipments modestly during Q1 compared to the previous quarter, we have held to our original controlled release plan, limiting both instrument and SMRT cell shipments. Many of the customers in our backlog would like to get their systems installed earlier and those with installed units would prefer a less restricted supply of SMRT cells, but in general they are understanding of the process we are employing.

In summary, the Sequel product launch is moving along as we had planned. We have a major software upgrade release for mid to late-May and we are on schedule for the summer SMRT cell supplier transition. The first half of this year is a transition period, as we have said before, and we believe we are on track to substantially step up the rate of Sequel instrument and consumable shipments in the second half of the year.

Now turning to some other recent highlights, we were very pleased with the turnout and interest level of customers at the AGBT conference in February in Florida. More than 40 talks and posters at the conference showcased PacBio sequencing data. We cohosted a workshop with Roche that was attended by over 500 people at the conference. The theme of the workshop was revealing the unknowns in medical research with long-read SMRT sequencing. Speakers from Stanford University, UC San Diego, Uppsala University and the School of Medicine at Mount Sinai all presented on how they are using PacBio data to further their research toward improving human health.

In the hospitality suites, PacBio had a Sequel demonstration system on display and Roche had a demo unit with a Sequel-based sequencer they expect to launch later this year.

The plenary sessions were capped off by a presentation by our CSO, Jonas Korlach, who presented early data generated from the Sequel System, demonstrating the power of the platform to produce similar long-read lengths and high accuracy achieved of the PacBio RS II while generating significantly more data.

On the publications front, we have seen a couple of high-profile papers published in recent issues of Science and Nature that highlight the value of PacBio SMRT sequencing. The Nature article entitled DNA Methylation on N6-Adenine in Mammalian Embryonic Stem Cells with lead authors from the Yale School of Medicine describes how this research group used SMRT sequencing to identify the sites of N6 methyladenine in these cells.

Numerous studies employing SMRT sequencing have shown that, in bacteria, the [SeBAGeNetiC] modification is important both in regulation of gene expression, resistance to phage infection and changes in bacterial virulence. Until recently, it had not been widely believed to be important in higher organisms. Last year, three studies confirmed its existence in an insect, nematode and green algae genome respectively with hints that it was involved in gene activation in these species. The most definitive of these studies employed SMRT sequencing. The confirmation in this new Nature paper that this methylation pattern also appears in mammalian stem cells and appears to promote gene silencing may have significant implications in the fields of epigenetics, stem cell research and developmental biology.

The second publication I will highlight entitled Long-Read Sequence Assembly of the Gorilla Genome made the cover of the April 1 issue of Science magazine. Scientists from the University of Washington, the McDonnell Genome Institute at Washington University in St. Louis and other institutions used SMRT sequencing to generate a very high quality assembly of the gorilla genome, an important reference since the gorilla is one of our closest relatives.

Previous assemblies of the gorilla genome created with a combination of short read and Sanger sequencing still contained over 400,000 gaps with large stretches of missing sequence. The team was able to reduce the fragmentation by over 96% using PacBio long reads and PacBio software tools that have been designed for the assembly of large, complex genomes.

They also looked at structural variation between gorilla and human genomes finding that 86% of the indels and inversion variance detected with PacBio had never been seen before. Such dramatic results from this study led the authors to conclude, quote, the genome assembly that results from using the long-read data provides a more complete picture of gene content, structural variation and repeat biology, improving population genetic and evolutionary inferences. Long-read sequencing now makes it practical for individual laboratories to generate high-quality reference genomes for complex mammalian genomes, unquote.

I will conclude my opening remarks with a brief update on our Roche relationship. In addition to coordinating marketing activities with us at AGBT, Roche continues to develop assays in preparation for their Sequel-based product launch scheduled for later this year. Meanwhile, we are working on enhancing our manufacturing and service processes to meet the requirements of the Roche launch. That concludes my initial remarks. I will turn it over to Susan to provide more details on our financial results.


Susan Barnes, Pacific Biosciences of California, Inc. - EVP & CFO [4]


Thank you, Mike and good afternoon, everyone. I will begin my remarks today with a financial overview of our first quarter that ended March 31, 2016. I will then provide details on our operating results for the quarter with a comparison to the same period last year. I will conclude my remarks with a brief discussion of our balance sheet.

Starting with our first-quarter 2016 financial highlights, during the first quarter, we recognized revenue of $19.1 million and incurred a net loss of $19.4 million. Q1 revenue of $19.1 million was up $1.5 million from $17.6 million recognized in Q1 of 2015.

Instrument revenue in the quarter was up $800,000 from last year with $7.8 million recognized in Q1 2016 compared with $7 million recognized in Q1 of 2015. As Mike mentioned, most of the instrument revenue recognized in the first quarter stemmed from Sequel installations and going forward, we expect almost all of our new installations to be Sequel Systems.

Consumable revenue remained steady and increased to $4.6 million in Q1, up from $4.3 million reported in the first quarter of 2015. Service and other revenue increased 15% to $3.1 million in the quarter compared to $2.7 million in Q1 of 2015. Contractual revenue recognized in the quarter was $3.6 million, consistent with last year.

Moving to gross profit and margin, we generated a gross profit of $9.5 million in Q1 2016, representing a gross margin of 50%. This was up from $5.9 million of gross profit and 34% gross margin recognized in Q1 of 2015. The increase in margin year-over-year was primarily a result of the introduction of the higher-margin Sequel instrument revenue into the product mix.

Moving to operating expenses, operating expenses in the first quarter of 2016 totaled $28.1 million, an increase of $2.8 million from the $25.3 million incurred in Q1 of 2015. $1.1 million of the $2.8 million increase was due to increased non-cash stock-based compensation expense.

Further breaking down our operating expenses, R&D expenses in the quarter were $16.4 million, $1.9 million higher than the $14.5 million of R&D expenses incurred in Q1 of 2015. The year-over-year increase in Q1 R&D expenses was largely due to higher compensation expenses in 2016. This expense increase resulted from a growth in R&D headcount required to continue the product development and enhancement of the Sequel productline. R&D expenses this quarter included $1.9 million of non-cash stock-based compensation expense, a $600,000 increase over Q1 of 2015.

Sales, general and administrative expenses for the quarter were up $900,000 from a year ago. In Q1 2016, we incurred $11.7 million of expenses compared to $10.8 million in Q1 of 2015. The SG&A expense increase in Q1 2016 was also largely a result of year-over-year increase in compensation-related expenses, including non-cash stock-based compensation expense. The increase in compensation was driven by a growth in the number of sales, marketing, field and office staff required to successfully support the growth of the Sequel product. SG&A expense in the quarter included $2.2 million of non-cash stock-based compensation, up $500,000 from the $1.7 million recognized in Q1 of 2015.

In the area of other income and expense, in Q1, we recorded $800,000 of net interest and other expense. This is primarily related to interest on the debt we took on in Q1 of 2013. Ben will provide further guidance on our ongoing expense rates later in the call.

Now turning to our balance sheet, in Q1, our cash and investments increased by $9.2 million to a balance of $91.5 million from $82.3 million at 2015 year-end. The increase was primarily the result of $26.5 million of proceeds from our ATM in the quarter and offset by our net loss in the quarter of $19.4 million.

This quarter, accounts receivable increased $2.7 million to $8 million, up from $5.3 million at the end of 2015. This increase reflects higher product revenues in Q1 compared to Q4 and timing of collections. In Q1 of 2016, inventory balances increased $1.2 million to $22.2 million -- I'm sorry, to $12.2 million -- from $11 million at the end of 2015. This concludes my remarks on the financial results for the quarter and I'd like to turn the call over to Ben.


Ben Gong, Pacific Biosciences of California, Inc. - VP, Finance & Treasurer [5]


Thank you, Susan. I will be providing an updated forecast of our 2016 financial performance. First of all, as Mike mentioned earlier, we booked orders for 30 Sequel Systems this past quarter. As a reminder, we do not provide a forecast for future instrument bookings. We reported our actual instrument bookings for Q1 because this differs materially from our instrument installs and revenues. Our plan is to continue reporting bookings numbers during this transition period. Therefore, we expect to also report our Q2 instrument bookings next quarter.

Now moving onto revenue, our Q1 revenues were a little above our previous forecasts and therefore, we continue to expect our total revenue for the year to be at least $93 million. Excluding Roche...