Pacific Biosciences of California Inc (PACB) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Pacific Biosciences of California Fourth Quarter 2016 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host, Trevin Rard. You may begin.

Good afternoon, and welcome to the Pacific Biosciences fourth 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 www.pacb.com, or alternatively as furnished on the Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.

With me today are Mike Hunkapiller, our chief executive officer; Susan Barnes, our chief financial officer; and Ben Gong, our vice president of finance and treasurer.

Before we begin, I would like to remind you that on today's call we may 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 the 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 8-K and 10-Q. 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 would now like to turn the call over to Mike.

Thanks, Trevin. Good afternoon, and thank you for joining us today. We are pleased with our fourth quarter results and our continued progress in driving growth in our business. Highlights of our Q4 and full-year 2016 financial results are as follows. We booked orders for 30 systems in the fourth quarter, up sequentially from the 20 systems we booked during the third quarter. Q4 bookings included a 5-system order we received from GrandOmics. In January of this year we also received a 10-system order from Novogene, which was not included in the count of 30 systems booked in Q4.

We generated $24.4 million in product and service revenue for the fourth quarter, up 92% from Q4 2015. For the year, our product and service revenue grew 62%, from $48.4 million in 2015 to $78.6 million in 2016. Instrument revenue for the quarter increased by more than 150%, from $5.2 million in Q4 2015 to $13.1 million in Q4 of 2016. And for the year, instrument revenue more than doubled, from $18.7 million in 2015 to $41 million in 2016. We shipped and installed more than 100 Sequel instruments in 2016, ending the year with an installed base of over 110 Sequel Systems.

Consumable revenue for the fourth quarter was $7.5 million, up 64% from $4.6 million reported in Q4 2015. Consumable revenue generated from our install base of Sequel Systems started have a bigger impact toward the end of the year. For the year as a whole, our consumable revenue increased by 26%.

We generated $10 million in gross profit from product and service sales in Q4, more than tripled the roughly $3 million in gross profit from product and service sales in Q4 2015. For the year we generated $32 million in gross profit from product and service sales, again more than tripled the $9 million generated in all of 2015. Gross margin on product and service sales increased from about 20% in 2015 to over 40% in 2016.

Turning now to sales activity, we have seen signs of a pickup in instrument sales starting in Q4, when we released improvements to our sample loading reagents and protocols. These improvements allowed Sequel customers to efficiently load long fragment DNA sequencing libraries key to de novo genome assembly and structural variation analysis. The order from GrandOmics was particularly encouraging as they had purchased one Sequel System earlier in the year, and once we overcame the issue with sample loading, they had enough confidence in a the Sequel performance to purchase five more systems. Novogene is one of the largest sequencing service providers in the world, followed soon afterwards with a 10-system order. These multisystem orders demonstrate the growing demand we are seeing particularly from sequencing service providers.

We are excited to have recently introduced new chemistry and software that we began shipping to customers last week. These enhancements further leverage the strengths of the Sequel System for structural variation detection and targeted sequencing, then enabling N50 polymerase read length in excess of 20,000 bases and generating up 8 gigabases of data on a single SMRT cell, depending on the application, sample type and preparation method used. Furthermore, the system is now capable of loading extra-long genomic libraries of up to 80 kilobases, which can have a dramatic effect on both the quality and efficiency of sequencing experiments.

Looking forward, we are continuing to work on improvements to Sequel performance, and we are targeting to double the throughput of the system by the end of this year. We have also begun work on a new version of the SMRT cell that has eight times the capacity of the existing Sequel SMRT cell. Our target is to make that available to customers by the end of next year.

By increasing the throughput of our systems over the past several years, we have significantly broadened the applications we can add value to and consequently expanded the addressable market for our products. We believe that by creating a pathway to increased throughput by a factor of 8 to 16 times over the next two years, the demand for our products will continue to increase.

Now turning to other highlights. Last month the annual Plant and Animal Genome Conference was held in San Diego, which brings together over 3,000 people from academic, government and industrial institutions to focus on recent developments in this space. PacBio was featured in over 115 podium presentations and posters at the conference. An overriding theme was the SMRT sequencing was essential for de novo assembly of large genomes with more than 60 new genomes presented this year with PacBio data and numerous others in progress. We feel that we have established our technology as an essential element in plant and animal research and development. We continue to see very strong demand for SMRT sequencing from the ag-bio community, and this market appears to be expanding.

On the publications front, we have counted well over 2,000 publications to date referencing SMRT sequencing. It is now common to see five publications on a single day. One recent paper from Stanford University's clinical genomic service reported the results of a study using low coverage SMRT sequencing on our Sequel System to detect genomic structural variants in a translational research sample from an individual with complex and varied symptoms. The author sequenced the genome to an average depth of only nine-fold, and following that being a genome-wide structural variant calling, they identified novel structural variants occurring in six genes listed in the OMIM, the Online Mendelian Inheritance in Man database. One of these genes associated with Carney syndrome, which was a match for the person's physiology, and identification of the gene was validated by other methods. Dr. Euan Ashley, the senior author of the study, stated, "We're not quite ready to make it routine, but we're interested in introducing long-read sequencing into our clinical genomic services lab for cases where we have a strong suspicion that structural variation plays a prominent role in that disease. Although sequencing on a Sequel is still more expensive than short-read sequencing, the real question is, what is the cost of a diagnosis? It doesn't matter how cheap a short-read genome is if it doesn't find the answer."

This study illustrates the power of our SMRT technology used to elucidate structural variants that can contribute to human disease. It was carried out using the version of Sequel chemistry available last fall. Using the new chemistry we released last week, we have been able to demonstrate that 10-fold human genome coverage can be obtained using one-half the number of SMRT cells used in the Stanford study while producing even greater coverage of structural variants. Since three-fourths of the bases that vary from one human genome to another are present as structural variants rather than simple, single nucleotide changes, we believe that structural variant analysis can be an important application of our technology, which can analyze both types of variation in the same experiment. This capability provides both research and clinical opportunities for placement of our sequencing systems. While we now have a well-established footprint in the various research markets, we are beginning to see an increased interest in segments in the clinical market that are starting to recognize the value of SMRT sequencing and analysis in important, complex genetic systems involved in human disease.

That concludes my initial remarks. I'll now turn it over to Susan to provide more details on our financial results.

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with a financial overview of our fourth quarter that ended December 31, 2016. I will then provide details on our operating results for the quarter and the year, with a comparison to Q4 of 2015, and the full year of 2015, respectively. I will conclude my remarks with a brief discussion of our balance sheet.

Starting with our fourth quarter and 2016 financial highlights. During the quarter we recognized revenue of $25.7 million and incurred a net loss of $19 million. This brings our total annual revenue to $90.7 million and our net loss to $74.4 million. We ended the quarter with $72 million in cash and investments.

Turning to revenue. Total revenue for the quarter was $25.7 million, $10.6 million lower than the $36.3 million recognized in Q4 of 2015. Excluding Roche contractual revenue, 2016 Q4 product, service and other revenue was up $11.7 million, 92% higher than in Q4 of 2015.

Total revenue in 2016 was $90.7 million, also lower than the $92.8 million recognized in 2015. Again, comparing only product, service and other revenue and excluding Roche contractual revenue each year, 2016 revenue was $30.2 million higher than 2015, up 62% year-over-year. As a reminder, in 2015 we recognized a total of $30 million in Roche milestone achievements and an additional $14.4 million of noncash amortized revenue related to the initial $35 million payment received from Roche in 2013. This compares to only $12.1 million of noncash amortized revenue recognized in 2016.

Breaking down the revenue, instrument revenue quarter-over-quarter grew substantially with $13.1 million recognized in Q4 2016 compared to $5.2 million recognized in Q4 of 2015. 2016 instrument revenue was $41 million, 119% higher than the $18.7 million recognized in 2015.

Consumable revenues continued to be strong, increasing 64% to $7.5 million for the quarter, up from $4.6 million reported during the fourth quarter of 2015. This substantial Q4 revenue increase highlights the Sequel System consumer sales momentum that began in late 2016. For the year, consumable revenue increased 26% to $23.6 million in 2016 compared to $18.8 million in 2015. Service and other revenue increased 31% to $3.8 million in the quarter compared to $2.9 million in Q4 of 2015. 2016 revenue was up 28% to $14 million from $10.9 million in 2015.

And, finally, Q4 2016 revenue included the recognition of $1.3 million, which was the remaining amount of noncash contractual amortization associated with the $35 million upfront payment that we received from Roche in Q3 2013. This amount was substantially lower than the $23.6 million recognized in Q4 of 2015, which included both recognition of a $20 million milestone achievement and $3.6 million quarterly noncash contractual amortization of the initial $35 million Roche payment. In 2016, we recognized $12.1 million of noncash contractual revenue compared with $44.4 million in 2015. With the termination of the Roche agreement, the remaining contractual revenues scheduled to be amortized into future years was completely recognized in Q4 of 2016. All revenue related to the Roche 2013 collaboration agreement has now been recognized.

With regards to gross profit and margins, we generated gross profit of $11.4 million in Q4 of 2016, representing a gross margin of 44%. This was lower than the $26.5 million of gross profit, and 73% gross margin recognized in Q4 of 2015. Excluding the contractual revenue of $1.3 million in Q4 2016, and $23.6 million in Q4 of 2015, product, service and other gross profit in Q4 of 2016 increased $7.2 million from Q4 of 2015. And the product, service gross margin increased to 41% in Q4 2016, up from 22% in 2015. In 2016, gross profit was $44.2 million, representing a gross margin of 49% with gross profit of $53.5 million and a gross margin of 58% in 2015.

Including the contractual revenue of $12.1 million in 2016 and $44.4 million in 2015, product, service and other gross profit increased $23 million, and gross margins increased to 41% in 2016, up from 19% in 2015. This achieved increase in product and service gross profit and margin is primarily a result of higher revenue and margin recognized from sales of the Sequel System.

Moving to operating expenses. Operating expenses in the fourth quarter of 2016 totaled $29.3 million compared with $27.5 million in Q4 of 2015. For the year, operating expenses increased to $115.4 million from $82.6 million in 2015. As a reminder, we recognize a one-time $22 million gain associated with amendments to our facility leases in Q3 of 2015. This gain offset the operating expenses. Excluding this gain in 2015, operating expenses in 2016 were $9.8 million, or 9% higher than those incurred in 2015. Included in this $9.8 million of expense growth was $5 million of growth in noncash stock-based compensation expense. Thus, 2016 operating expenses excluding the one-time gain and the growth of noncash stock compensation expenses were only up $4.8 million, or 5% higher than those incurred in 2015. Noncash stock-based compensation including operating expenses increased $700,000 quarter-over-quarter and $5 million year-over-year, as I highlighted before.

Breaking down our operating expenses. R&D expenses in the quarter were $16.3 million, $1.6 million higher than the $14.7 million of expenses incurred in Q4 of 2015. 2016 total R&D expenses were $67.6 million, a $7.2 million increase over the $60.4 million of expenses in 2015. Expense increases in R&D were primarily related to compensation, noncash stock-based compensation and chip development. R&D expenses in the quarter included $2.1 million of noncash stock-based compensation expense, a $700,000 increase over the $1.4 million expense in Q4 of 2015. For the year, R&D noncash stock-based compensation expense was $8.3 million in 2016, a $3.1 million increase over the $5.2 million expense incurred in 2015.

Sales, general and administrative expenses in the quarter were $13 million compared to $12.8 million in Q4 of 2015. For the year, SG&A expenses increased $2.6 million to $47.8 million in 2016, up from $45.2 million in 2015. SG&A expenses for the fourth quarter of 2016 included $2.2 million of noncash stock-based compensation expense flat to the $2.2 million of noncash stock-based compensation expense recognized in Q4 of 2015. 2016 SG&A noncash stock-based compensation expenses were $9.2 million, up $1.9 million from the $7.3 million recognized in 2015.

And, finally, in Q4, we recorded $1.1 million of net interest and other expense primarily as a result of the incurred interest and derivative expense associated with the debt we took on in Q1 of 2013. Year-to-date our interest and net other expenses have totaled $3.2 million.

Now, turning to our balance sheet. As I mentioned at the beginning of our comments, our balance of cash investments was $72 million at the end of the fourth quarter. This represents a $15.4 million decrease during the quarter. For the year, our balance of cash investments decreased $10.3 million and excluding $58 million of financing proceeds from the issuance of stock under our ATM. This represents cash used of $68.3 million in 2016. Today we announced that we have a filed a supplemental perspective to offer up to an additional [$60] million under our ATM facility.

Inventory balances decreased $900,000 in the quarter to $15.6 million from $16.5 million at the end of Q3. Accounts receivable decreased slightly in Q4 to $11.4 million from $11.8 million at the end of Q3. This concludes my remarks for the financial results for the quarter. I would now like to turn the call over to Ben.

Thank you, Susan. I will be providing forecast of our 2017 national performance. First of all, as Mike mentioned earlier, we booked orders for 30 systems this past quarter, which was in line with our expectations. We also booked a large order for an additional 10 systems in early January.

With regard to reported bookings, this past year we reported bookings to provide better indications of our sales performance since we were limiting our Sequel instrument shipments during the early stages of our product launch. Our instrument backlog has since normalized, so going forward we expect our instrument revenues to be a good indicator of our sales performance. Therefore, we do not plan on reporting our system bookings on future earnings calls.

Now, moving on to the revenue forecast, we were pleased with our fourth quarter revenues, which came in at the high end of our previous forecast. Building on the 62% growth on product and service revenue last year, we are targeting another 40% to 60% growth in product and service revenue this year. As a reminder, contractual revenue from the Roche agreement has been fully amortized. Therefore, we expect to report to zero contractual revenue this year compared with $12.1 million recorded last year. Taking this into account, we are targeting total revenue for the year to grow between 21% and 38% over last year.

In the near term, we expect our Q1 2017 revenue to be a little lower than our Q4 2016 revenue primarily due to the drop-off in contractual revenue. However, we are expecting significant revenue growth in comparison with Q1 of 2016.

Moving on to gross margin. As we saw in Q4, with a reduction in contractual revenue, our gross margin also came down. Our average gross margin over the past year of product and service revenue was approximately 41%. Looking forward, we are likely to start off the year with gross margin percentage in the low 40s. We will have some additional fixed costs absorbed this year, which I will describe in more detail momentarily. But if our revenue increase during the year, as anticipated, we expect our gross margin percentage to gradually increase and get to the mid-40s by the end of the year.

Before providing a forecast of our 2017 operating expenses, I will describe the estimated impact of our building lease. At the beginning of this year we began moving into our new 180,000 square foot multipurpose facility, which will house all of our manufacturing, R&D, marketing and G&A functions. We will begin accounting for the rent and appreciation costs associated with the building this quarter. Roughly speaking, this will add approximately $3 million in cost per quarter to our P&L from an accounting perspective; however, from a cash perspective we estimate only about 30% of this added expense will represent cash usage this year. With that in mind, we are forecasting about a 15% increase in operating expense this year over last year; however, the majority of this increase will be noncash expense. Adding up our revenue, gross margin and operating expense estimates for the year, we are forecasting a higher reported net loss for 2017, but a lower cash burn compared with 2016.

Earlier today we filed a prospectus supplement to raise up to an additional $60 million using the same ATM mechanism we have used in the past. While we have no immediate need to raise capital, we will likely do so during the course of this year. And with that, we will open the call up to your questions.

Thank you. (Operator Instructions) Our first question comes from the line of Amanda Murphy from William Blair. Your line is now open.

Hi. Good afternoon. So, I know, I appreciate that you're not going to be giving orders going forward, but I just had a question around how customers are thinking about the (inaudible) the platform now that has given the meaningful updates that you've outlined and expectations going forward. So, are they -- have you kind of gotten through the early adopters at this point and now people are going to wait and see how the platform evolves sort of longer term to your point around the eight-fold improvement throughput next year? Or are you seeing sort of a continued cadence? Obviously, you talked about the large order, but kind of outside of that?

This is Mike. So, in terms of getting around it, I think the answer general is yes. We've had a couple of user meetings around the world since we introduced the upgrades to the sample loading process back at the beginning of Q4, and that's been generally very well received. And the fact that we've now added to the performance of the sequencing chemistry itself, which they were anticipating because we started the beta sites of that last quarter and started talking about it at those same user meetings. That's been well received as well. So, I think the best indicator of the fact that people are kind of over-waiting was the GrandOmics order, because they had one of our first two installs in Asia, and went through all the birthing pains of the system back early last year. And once we dealt with the one major application that they were still waiting to do, which was being able to do de novo assembly because of the loading issue, they very quickly pulled the trigger on an additional five instruments. And then that was followed very closely by the order of 10 from another large service operation out of a mixture of China and the US. So, I think that those are indications not just that there is acceptance now of the system doing what people want it to do, but it was a message to other people that that was in fact the case, and people were willing to start placing multimillion-dollar orders for the system. So, we're reasonably pleased with the response, particularly over the last three or four months in terms of people getting on track, not just for single unit purchases but for others.

Great. And then I guess there has been, obviously you had the Roche termination. I'm just curious how customers, you know, if you've had any feedback about that? Is there concern going forward at all on that front? And then just curious, also, about the launch from Illumina. Obviously, you are servicing very different markets, but curious just even thinking about capital. There is a lot of new instrument purchase possibilities now, so is that something you expect could either hurt you under the capital front or maybe even help to the extent people are just doing more sequencing particularly of whole human genomes, for example?

Well, on the latter point I would point out that Novagene was I think the largest single purchaser of the new system from Illumina at about the same time that they purchased 10 of our systems. So, do I think that's going to hurt us? No. They are used for different things right now, and so in many cases they are still complementary. So, the more interest there is in sequencing, particularly on bigger projects, the better, I think, for all of us in this space.

Okay, and then just the last one in terms of the consumable usage. So, as you said, it's ramped toward the end of the year. Have you got a sense yet of how people are using the platform? I don't know if you're going to give a more, just a range per year or something like that, just even from a modeling perspective would be helpful to get an idea of how people are leveraging them from a consumable perspective.

Well, what we said in the past on the RS System, we were averaging approximately $130,000 a year of consumables per system. And that given the relative price of reagents for the Sequel System, we would anticipate that it would be a higher usage dollar-wise per instrument. But I think it's still a little early for us to get that. We really had sort of one quarter the start of things ramping up, last quarter. That's not enough to base an actual number on, but I think we're still comfortable that we would expect to ramp up over the year to a higher number per box with all we got with the RS.

I would echo that, but also I want to just repeat something I think we said in the past is. It's not a clean sort of separation between the two because of the shared set of consumables used on both platforms, and we actually have customers that have both platforms. So, in terms of segregating the consumables on one versus the other, there is always going to be some overlap there.

And those that have both, are they still using the legacy platform, the RS?

Yes.

Okay. Okay, thanks very much.

Our next question comes from the line of Bryan Brokmeier from Cantor Fitzgerald. Your line is now open.

Hi. Good afternoon. Have you seen any market disruption from the Roche termination that delayed purchasing decisions by customers? And can you touch a bit on the strength of your pipeline that you've seen since termination?

Yes. I apologize to Amanda, who asked that first part of the question. The response that we've seen from the clinical labs that we knew were interested in Sequel technology has actually been positive. And we've re-engaged with all of those, I think, who have come to us in the past that we've directed over to Roche, while the contract with Roche was in place, and begun to see not just interest, but trying to run samples and in some cases actually placing orders there. So, I don't think that that has hurt us in that space at this point, and it's early in the process, but we've gotten positive responses, I think, almost universally, if not universally from that group. And as we tried to say, we're still seeing a ramp-up in interest and in the order pipeline, particularly in the middle to end of Q4 and continued into this quarter in both the sort of basic biological research arena as well as in the ag-bio space, where we've traditionally done very well.

And do you have the capacity in place for installing the systems and getting customers up and running? And then, also, you have the -- I believe that the high throughput manufacturer for the consumables is up and running. Are they producing capacities that customers are desiring?

Yes, we have no limitations relative to the order bookings that we have relative to producing either consumables or instruments. The timing of instrument installs is almost universally related to customers' lab renovations or whatever they need to do to get ready to receive the instrument.

And we have the fill capacity to install them when they want them.

Okay, great. And you've announced a couple of large multisystem orders that you've talked about on this call already, and you never had anything of the magnitude anywhere close to those. Are there more opportunities like these out there that we could hear about in the near term or is there now a lot of capacity in the market, so any additional service providers may not place similar orders for a while?

Well, yes, there are lots of opportunities out there. These are two service providers that each serves part of China, predominantly, which is hardly the entire world, but there are other large service providers even in the Chinese market and clearly elsewhere. They are a large order. We have had reasonable size orders for RS Systems actually from another service provider in China was our largest RS Service provider. And then our largest supplier of RS Systems, our largest customer of RS Systems was HistoGenetics in the US, which has still by far the largest installed base of that.

And I think, Bryan, as Mike said earlier, what you use long read for is somewhat complementary to Illumina in cases, and in other cases very different. We are not anywhere near long-read capacity out there, where we think there is a canalization either in the RS line or our ability to continue to grow and penetrate in a large way. And that's why we can do the 40% to 60% growth rate that you see in the guidance.

Okay. And are you still shipping RS IIs?

Not so much. I would say from this point on, there is a recurring revenue stream certainly with the RS II, but we have not been manufacturing the RS II lately.

Okay, thanks a lot.

Our next question comes from the line of Bill Quirk from Piper Jaffray. Your line is now open.

Good afternoon, everyone. This is actually Alex Nowak filling in for Bill today. So, the first one is just on the clinical side. Now that we're a couple weeks after the Roche termination, do you have any updated thoughts on how you plan to address the clinical market? And have you begun to hire any additional clinical sales or regulatory people?

The answer to the latter is yes, we've looked at staffing up both from a marketing perspective as well as from the sales perspective. And we tried to emphasize before, counting on a large number of Roche sales in the coming year and since predominantly those would have come from customers that we were already familiar with, we think that we're well positioned, other than just simple numbers, of having the distribution to meet that. Longer term we will look at it a little more aggressively. From a regulatory perspective, we were already moving along the pathway that we needed to anyway in order to support Roche, and we'll continue on that pathway.

So, as I said, we sold into that clinical testing market in the past, particularly in areas where companies had kind of a mix of clinical testing or clinical sequencing and research developing sequencing. So, we know that marketplace, a good part of it pretty well and have re-engaged with a large number of those customers already since the Roche announcement, some at the instigation of those customers. So, we feel reasonably well positioned certainly for this year to do that, and as we go forward, I think we mentioned before, that we may look at somewhat more regional partners to distribute in various areas where it's essential -- not essential, but useful in certain countries to have a local partner. And some of those discussions we've already started.

Okay, that's helpful. And then just going off of that and recognizing there could be some incremental spend on the clinical side and there could be some puts-and-takes, but what's the revenue level needed to hit break-even, cash flow break-even?

Yes, Alex, this is Ben. So, we're modeling a break-even when the run rate of revenues is at $200 million a year or let's say $50 million a quarter. At that point in time we think that on a cash basis we'd be at break-even.

Okay, great. And then just last question from me. I believe during the commentary you stated that plan to double throughput on the existing 1 million ZMW chip. I was just curious, is that from increasing the number of active wells on the chip or from increasing the well movie length from 6 hours?

Well, it's a variety of factors. Some of it -- it's not increasing the number of wells because 1 million ZMW chip is kind of fixed. But it may involve increasing the number of those that would be productively loaded in a single run. It will come from increasing the effective read length per ZMW, and the sort of normal things that we've done with the RS over the years that in themselves resulted in approximately 100-fold increase in throughput on the same chip. So, those sort of things we know how to do. The real jump is when you can actually increase the number of ZMWs to start with, and that's a simple multiplicative number the minute you do it. We're targeting that for the latter half of next year.

Okay, great, thank you.

If you add sort of a two-fold by eight-fold and get up to 16, then you start to get to quite reasonable throughputs on a single cell.

Great. Thank you very much.

Our next question comes from the line of Joe Munda from First Analysis. Your line is now open.

Mike, I was wondering if you could give us a number on the install base of the RS II. I know you're not shipping it anymore, but if you could give us a number there, that would be great, for our model.

Yes, Joe, this is Ben. By the way, you're not coming through very clearly, but I could make out the question. Yes, the install base of the RS II has been pretty stable at something a little over 160 systems. It's been that way for pretty much the past year.

Okay. As far as the size of sales force, could you give us a number there as well?

Sure. Over the past year we have added people to the field organization. Roughly speaking, there is about 70 people in the field, and that's a mixture of people that are sales, service, and what we call field application scientists.

Okay. And then, Mike, flipping gears here, I was wondering if you had any updates or a timeline with the patent issues with Oxford Nanopore on 2D and 1D? If you can give us any color there without -- I know it's a legal issue, but if you could give us a timeline or anything along those lines, that would be great.

Well, I can't give you anything beyond what we said before. The ITC action in the US typically has a timeline of between 12 months and a year and a half from decision to action, and that's underway. But I can't add anything to what the process is at this point.

Okay. Okay. And then, Susan, a couple of housekeeping items. Can you give us depreciation and amortization for the quarter and total stock-based comps for the quarter?

Okay. So, total stock-based -- well, what we broke out for you was the stock-based compensation number at noncash for the operating expenses. Yes, go ahead.

Yes, Joe, this is Ben. So, roughly speaking, the noncash stock-based comp for the quarter was about $5 million. It was pretty similar to what it was in Q3. It could be off by about $100,000 on that. The depreciation, I'm glad you asked that question. So, on a quarterly basis now, the depreciation has been something less than $1 million, but on a go-forward basis it's actually going to increase for those reasons that I talked about before because of the new building that we just moved into. And when it comes out on the balance sheet, you're going to see things to have to do with build-to-suit lease accounting, where we also kind of capitalize some of the improvements that the landlord put in there. So, that's why I tried to give some indications in terms of the noncash expense on a go-forward basis, it's just going to be much higher. And just to repeat, we think operating expenses are going to increase roughly 15% this year, but more than half of that increase is going to be noncash expenses.

Okay. And then just piggybacking off of that comment, I mean, as far as OpEx, is there a bias more toward SG&A or is it going to be R&D due to the better performance that you guys are advocating for for this year and next year, or the end of the year, if you will?

Yes. So, the building-related depreciation stuff, that's going to kind of get split almost ratably, I would say, between those two things. So, if you see some increases in both, it has to do with, again, think of it is as building depreciation or building rent. In terms of where we're going to be growing more this year versus the other, it's probably going to be more geared toward the SG&A side of things, as Mike had mentioned, that we are definitely continuing to invest in the field organization. To go after those opportunities and to actually support the large install base.

We have a base of people that worked on the million hole chip, so that base will continue that knowledge in our R&D organization on the 8 million hole chip.

Okay, thank you. I'll hope back in the queue.

(Operator Instructions) Our next question comes from the line of Tycho Peterson from JPMorgan. Your line is now open.

Hey, guys. It's [Tegis] on for Tycho. Just one quick question here on the clinical market. Ben, can you share some color on what you're hearing in terms of shipments or perhaps revenues for the clinical market and just in the context of your 2017 guidance? And can you mention how that has changed sort of pre- versus post-Roche? Is it sort of about the same? Is it 50% of what you thought it was before?

So, this is Mike. Rather than trying to give individual numbers because it's a little early in that, but I think that one thing to keep in mind is that even if we -- I'm not saying we would try to do this. If we were selling fewer units than what we anticipated from Roche next year -- and remember, we weren't planning on them doing anything until the latter part of this year -- that that doesn't have as big an impact on us as you might think given that the revenue-sharing thing that we had with Roche would really translate the fact that we can sell fewer instruments and actually make more money because our margins would be higher on our direct sales. And so I don't think that we planned on it having a particularly big impact one way or another versus what we plan to do. We were going to ramp up our sales force to some degree just for the fact that we expect to sell more instruments in the research market. We will, as I pointed out, maybe add a little bit to specifically focus on the clinical arena, mostly just because we need more expertise there than we have within the sales force. But the models that we've given you since last December were relatively neutral once Roche made a decision not to do it, because we expected them to have good growth. In terms of units, it may make a difference, it may not, but in terms of our ability to make money on the sales, it should have a completely neutral input.

Got it. That's actually helpful color, Mike. One quick follow-up. I mean, after the termination, I mean, you've had this question a few times, but are you hearing anything from your customers or just contacts in the industry in terms of a potential Sequence or launch from Roche based on the Genia technology? Is that sort of something you're factoring into your expectation, or do you think whatever comes out is not really going to be a direct competitor at least in the near term?

I don't know that we're hearing anything from customers relative to Genia, and we have no particular inside knowledge on where they are or aren't in their development program.

Got it. And a couple of quick follow-ups here. Any impact in terms of academic spending trends after the election? Is there any sort of change in the tenor of your conversation with your customers there?

I don't know that we have had any input to our sales force that I'm aware of in that regard. I think people have no clue what's going to happen. Other than that, there doesn't seem to be a particular attack on funding of agencies like NIH, which are involved in human health, from Congress, but your guess is as good as mine what's going to happen in the broader sense. I don't think that's a particular threat, and most of the spending that we would see this year has already been allocated, in a sense, into NIH. They would have to really cut it back to cause a problem. And right at the end of last year the Republican Congress passed a substantial increase for NIH, so who knows.

Got it. Makes sense. And, finally, Mike, anything you'd like to highlight as heading into AGBT in a couple weeks?

Well, I mean, we will be there, obviously, and we have a reasonably good, I think, workshop that will highlight some of the uses of the Sequel System and show what it can do. We're not planning to introduce a new instrument at AGBT, so it's not from that sense, but we will certainly highlight the results of the latest chemistry release that we've done and some of the software improvements that go along with that. And looking at the agenda for the meeting as a whole, I'd be a little surprised if there is a lot of new stuff there, but you never know.

Got it. Thanks so much, guys.

I am showing no further questions. I would now like to turn the call back to Mike Hunkapiller for any further remarks.

Thanks. In closing, I'd like to reiterate our enthusiasm around our latest product improvements and the increasing demand we're seeing for the Sequel System. It is encouraging to see an increasing number of multi-unit system orders as customers are adopting the Sequel System for high-volume applications. As always, we remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers and the scientific community in general. We believe the SMRT sequencing provides the industry's most complete and accurate picture of genomes due to its superior performance and sequencing accuracy, uniformity of coverage, extremely long read lengths, and ability to characterize DNA-based modifications. Furthermore, by providing scientists with an ability to obtain a comprehensive set of sequence information for a single experiment, SMRT sequencing is often the lowest cost and only research tool available to meet their needs. Thank you for joining us and we look forward to talking again in three months' time.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.