Pacific Biosciences of California Inc (PACB) 2010 Q4 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions). And now, I'd like to turn the meeting over to Ms. Trevin Rard. Thank you.

Good afternoon, and welcome to the Pacific Biosciences fourth-quarter 2010 conference call. With me today, we have Hugh Martin, our President and CEO; Susan Barnes, our Chief Financial Officer; Ben Gong, our financial vice president -- our Vice President of Finance and Treasurer.

Before we begin, I'd like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. These statements may include, but are not limited to, statements regarding the plans for the commercial launch of the Company's products, future revenue implied by the Company's backlog, and other statements regarding future events and results.

Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the Company's Securities and Exchange Commission filings, including the Company's most recently filed quarterly report on Form 10-Q. Prospective investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio replay on our website at www.PACB.com under our investors page. In addition, today's press release has been posted on our website.

Today's format will consist of providing you with a business update, including highlights of our fourth-quarter results, followed by a question-and-answer session. Hugh will present our recent business and operational highlights, Susan will provide a review of our fourth-quarter and full 2010 year financial results, then Ben will provide key financial metrics. And finally, we will host a question-and-answer session. With that, I'll turn it over to Hugh.

Thank you, Trevin. Good afternoon and welcome to our earnings conference call.

These are very exciting times at Pacific Biosciences. After seven years in development, we will soon begin shipping the final release version of our first product, the PacBio RS, during the second quarter of 2011.

In addition, we have just come off attending the premier sequencing conference in the world, Advances in Genome Biology and Technology, or AGBT. This was the first time that customers presented data that was produced by our beta version product. It was thrilling to see not only our customers' enthusiasm for the technology, but also to hear how Pacific Biosystems will allow them to do science that was previously not possible.

Today, I would like to share with you some highlights from AGBT, give you an update on our product commercialization efforts, and finally, summarize our recent cholera study.

During the four-day AGBT conference, PacBio was represented by 11 poster presentations, five were from customers, six from PacBio, three technical talks, an hour-long commercial workshop, and the final plenary talk of the entire conference. In addition, we held two concurrent day-long user group meetings on sample preparation and bioinformatics.

Though there were too many topics covered to describe in detail, I'm going to highlight just a few. The Joint Genome Institute presented data based on their hybrid assembly of microbial genomes using PacBio reads to cover gaps left by their short, second-generation reads. They described a final assembly test that currently cost them $30,000 that can now be done -- performed by using just several of our $99 SMRT cells and our automated finishing software.

Gen-Probe presented on the deep sequencing of Hepatitis C mixtures, HCV, allowing sensitive detection of minority species down to a concentration of approximately 1%.

At one of our user group meetings, Washington University presented their work in sequencing C. elegans, which has a genome of approximately 100 Mb. They covered 99% of the genome in 1 million reads, and they reported little or no coverage bias. They stated that longer read length and base neutrality are enabling, for the first time, both covering and aligning to repeat regions of that genome. They also reported average read length from 1,200 to 1,500 bases.

Monsanto was sequencing heavily-methylated arabidopsis to determine if the methylation affected base-calling accuracy. They found that the pulse kinetic differences did not affect the base [caller]. They also sequenced the chloroplast genome and achieved 100% coverage and 100% accuracy.

Finally, the Ontario Institute of Cancer Research reported that they have run 285 SMRT cells across a wide variety of projects, including translocation verification in leukemia, oncolytic virus sequencing, familial pancreatic sequencing, pancreatic SNP validation, and clinical re-sequencing.

Summarizing the results presented by our customers at AGBT, we are excited by several demonstrated conclusions. First, despite the beta state of our chemistry hardware and software, customers are already finding differentiated features that will lead to real applications today.

Second, bioinformatists at our beta sites, the most knowledgeable of our customers, are using the raw data generated today to make meaningful scientific conclusions. And third, by delivering performance enhancement through consumable upgrades, we've shown that we can enable our customers to quickly take advantage of our ongoing product enhancement. As an example, in an industry where a 25-base increase in read length is big news, we delivered 1,000-base increase to our customers with one upgrade.

During the commercial session, PacBio summarized and presented data from the beta sites which showed an average read length achieved of 1,500 bases and an average raw read accuracy of 85%. Both of these metrics are sufficient for full customer release.

Finally, we announced that the first consumable upgrade after commercial launch, [C 2], will be available in Q4 of 2011.

Next, I'd like to update you on our progress toward commercialization. We plan to start commercial shipments during Q2 of this year. The three most important product specifications are read length, accuracy, and throughput.

As mentioned during AGBT, our beta sites have already achieved the specifications for read length and accuracy. Throughput for SMRT cells will range from 35 to 45 mega bases per cell by a production version of the SMRT cell with 150,000 zero-mode waveguides. Beta sites will begin using this new SMRT sell once their hardware upgrades are completed. We have announced that we have begun the hardware upgrade process with our beta sites.

Finally, since our last call, we completed the sequencing of five cholera samples at the request of researchers from Harvard University. This resulted in a paper in the New England Journal of Medicine in early December. This work is one example of an application, microbial sequencing, that is ideally suited for PacBio technology.

Due to the sudden onset of cholera on the island of Haiti, where there has not been a single cholera occurrence in over 100 years, it became critical to rapidly determine whether the now-prevalent strain of cholera was introduced from a foreign source or emerged as a mutation from the local environment. By sequencing two Haitian samples and three controls from around the world, within two days the Harvard researchers and PacBio were able to conclude that the cholera on Haiti was identical to strains of cholera that incurred in other parts of the world, such as southeast Asia. This result has already impacted the vaccination strategy.

The PacBio long read lengths permitted the mapping of the Haitian strain. It had long sections of repeats that could not be resolved with other short-read technologies. Our fast time to result allowed the identification of the strain within two days, and this included sample preparation, sequencing, primary analysis, and preliminary secondary analysis.

Since this study, there has been tremendous interest from a wide variety of potential customers who are anxious to perform similar microbial sequencing, both for research and for real-time infectious disease monitoring.

I'll close by updating you with a couple of other corporate metrics. Our sales organization continues to build our backlog, which measured 38 systems at the end of Q4. In addition, we have added 25 people to the organization during the last quarter, bringing our total team to 431 members at the end of Q4.

That concludes my remarks, and I'd like to turn the call over to Susan.

Thank you, Hugh, and good afternoon, everyone.

In addition to the operating highlights and the progress towards commercial launch Hugh just discussed, we made equal progress during last quarter and last year in strengthening our balance sheet and securing the financial resources to take us through commercial launch and beyond.

We entered 2010 with cash and investments totaling $92.7 million and ended the year with $283.7 million. The strengthening of our cash position reflects the nearly $319 million raised in aggregate during 2010 through our initial public offering, our Series F round of financing, and proceeds from stock option exercises, offset by $128 million of cash used during 2010.

As we discussed during our last call, and are now reporting in our financial statements, during the fourth quarter we completed our IPO, selling approximately 14.4 million shares of our common stock, including the greenshoe, at $16 per share, resulting in net operating proceeds totaling $210.8 million after underwriting and offering expenses.

You will also note that on our balance sheet, for the first time, we are reporting PacBio RS instrument inventory, totaling $6.9 million. This inventory is destined for customer delivery subsequent to the commercial launch that, as Hugh has already discussed, we plan to start during the second quarter of 2011.

In addition to recording inventory, we recorded deferred revenue balances, reflecting monies from our beta customers, resulting in deferred revenue totaling $3.2 million. Under the terms of our beta program, we bill and are entitled to collect 50% of the selling price of the RS instrument upon the customer's acceptance of the beta unit. We expect to recognize the revenue on the full selling price of these instruments after the RS is upgraded to commercial-release specifications and they are accepted by our customers.

During the quarter, we continued to invest in the development of our PacBio RS and SMRT technologies, in addition to ramping manufacturing activities and commercial launch preparations. These investments resulted in a net operating loss for the fourth quarter totaling $36.6 million. This represents a 10% decrease compared to the net operating loss of $40.7 million realized during the third quarter of 2010. As we have highlighted before, the reported revenue of $280,000 for the period reflects revenue related to the research grants and does not reflect sales of our products.

Going into details for the quarter, research and development expenses for the quarter just ended decreased $6.3 million to $26.5 million, compared to $32.9 million reported during the third quarter of 2010. The capitalization of $6.9 million of inventory during the period contributed to the decrease, as we had previously expensed purchase components and preproduction instruments as research and development expense. Although we are preparing for commercial launch, certain of our manufacturing and operating expenses will continue to be reported as research and development expenses until we achieve normal commercial production levels.

Fourth-quarter research and development expenses included approximately $5.4 million in these operating and manufacturing expenses, and we categorize $1.7 million of these as manufacturing startup costs. Ben will provide additional details regarding this categorization and anticipated impact to future periods in a few moments.

Sales, general, and administrative expenses for the fourth quarter of 2010 increased 28%, or $2.3 million, to $10.3 million. The increase experienced during the fourth quarter of 2010 stems primarily from the continued growth in our sales and customer support organization, as well as increasing public-company costs. During the quarter, compensation increased $1.9 million due to additional headcount, 2010 bonuses and commissions, and increased stock compensation expenses. Professional fees also increased approximately $600,000, due to routine public-company audit, legal, and compliance costs.

And now, I'd like to quickly review our full-year 2010 operating results. Operating losses for the full year ended December 31, 2010, increased 59% to $140.2 million, compared to $88.1 million for the year ended December 31, 2009. Research and development expense during the 2010 year increased $35.9 million, or 47%, to $111.8 million from $75.9 million during 2009. The noted increase stems primarily from increased compensation cost of $15.1 million related to headcount increases in manufacturing- and operations-related functions, combined with a year-over-year increase of $15.7 million related to prototype component purchases and the manufacture of preproduction prototype RS systems and consumable products.

In addition, costs associated with the expansion of our manufacturing facilities increased by approximately $1.6 million for the year ended 2010. SG&A expense for 2010 totaled $30.1 million, representing a $17.8 million increase over the $12.3 million spent during 2009. This increase stemmed primarily from increased compensation costs of $12.4 million, including $3 million of stock-compensation expense relating to headcount increases in our sales, field support, and finance organizations.

Product marketing and sales initiative expenses also increased $2 million during the year, as we publicly introduced PacBio RS for the first time, started our beta program, and began marketing and sales initiatives that are responsible for our growing backlog.

In addition, travel-related expenses increased $1.7 million, reflecting the expansion of our field sales and support organizations and related activities, including support of beta instruments in the United States and Europe during the year.

And with that, I'd like to take -- turn the call over to Ben.

Thank you, Susan. At this time, we are not providing a full financial forecast for the business. After we begin selling our products and we have better visibility into our future revenues and margins, we plan to provide forecasts on these elements.

That said, I will provide some additional analysis on our fourth-quarter financial results and comment on certain items that will impact our future results.

Our $36 million net loss for the fourth quarter was lower by approximately $4 million from our net loss for the third quarter. As a reminder, during the third quarter of 2010, we purchased approximately $7 million in components that we plan and still intend to build into PacBio RS systems for sale during 2011. We recorded those third-quarter purchases as preproduction expenses rather than inventory. Since this material has already been expensed, it will not be reflected as cost of goods sold in our income statement when it is sold. We plan to highlight this again when we begin selling our products so that you can make meaningful comparisons of our gross margins in the future.

Adjusting for those purchases in the third quarter, our net loss would have increased sequentially in the fourth quarter by approximately $3 million.

Research and development expenses for the fourth quarter totaled $26.5 million. As Susan mentioned earlier, approximately $5.4 million of the $26.5 million R&D expense was generated from personnel and support related to manufacturing operations.

When we begin producing our products at planned commercial levels in future periods, we expect such expenses related to manufacturing operations to be capitalized into inventory and ultimately matched to revenues as cost of goods sold. As a result, we expect our reported R&D expense to decrease from 2010 to 2011.

SG&A expenses for the fourth quarter grew to $10.3 million. We expect our SG&A expenses to continue to grow in 2011 as we begin commercializing our products and providing field support to customers.

Our fourth-quarter operating expenses included $3.4 million of non-cash compensation expense, compared with $2.3 million during the third quarter of 2010. These expenses grew as the profile and measurement of employee stock options expense changed when we became public. The expense we record for non-cash stock compensation going forward may fluctuate based on future option grants, employee stock purchase plan activity, and stock prices.

For purposes of calculating earnings per share, we had approximately 52.9 million common shares outstanding as of December 31. We also had outstanding options to purchase approximately 9.8 million shares. During the course of the year, we expect a portion of the option shares to be converted into common shares. For the year, we expect the number of shares per EPS calculations to range from 53 million to 56 million shares.

In terms of cash usage, we began the third quarter with $113 million in cash and investments, and ended with $284 million. During the fourth quarter, we received approximately $211 million in net proceeds from our initial public offering. Therefore, our cash usage for operating activities during the fourth quarter totaled approximately $40 million. This compares with our net loss for the quarter of approximately $36 million. Cash usage was higher than our net loss, as we had been purchasing inventory in preparation for our initial product launch.

Finally, at December 31, our backlog was approximately $24 million, up from approximately $20 million at the end of the third quarter. This increase of $4 million reflects six additional systems added to our backlog, bringing the total to 38 systems. All 38 systems were sold at the list price of $695,000. For calculating backlog, we exclude approximately 10% of the purchase price, which we plan to recognize as service revenue during the 12 months following installation and acceptance of the systems.

And with that, we would like to open the call to your questions.

(Operator Instructions). Bill Quirk, Piper Jaffray.

First question, guys, just thinking a little bit about here, in terms of the change into commercial mode, can you talk a little bit about where we might be in terms of capacity, both at launch and then how should we think about that evolving here over the year and obviously into the future?

I think the first clue is that if you look at the fact that a significant portion of the operations manufacturing group is still recorded as R&D, it's showing you that even our overhead capacity is not being reached at this point in time.

So -- and we -- and in Ben's context, we were talking about the fact that it will take a while to reach that level of volume in which we can recognize all of that into the overhead expenses. So you can see we'll be driving into capacity for quite some time.

Understood. And then, perhaps a comment around AGBT. Hugh, I thought you guys had a really nice showing there, obviously with some early beta feedback, etc.. Can you talk a little bit about the interest level, if you will, from would-be customers? Have you seen any change to that, I guess, pre- versus post-AGBT?

I would say -- I would agree with you. We have gotten, I think, pretty uniform feedback that we did a pretty good job at AGBT.

I would say that in terms of actual pickup in demand, I think we got a far more noticeable pickup in demand around the cholera paper because I think that did a great job of highlighting a very near-term application to this whole area of microbial sequencing.

I think part of our mission was, at AGBT, given the size of the backlog and the fact that we're just ramping is to make sure that the customers that are in the backlog stay in the backlog and to make sure that we've got a nice solid base of interest. So I would say probably not a big pickup because of AGBT, but a fairly big interest pickup because of the New England Journal paper.

Ross Muken, Deutsche Bank.

This is [Reed Jone] for Ross. Hugh, I know that you had the successful cholera paper and AGBT. I'm just curious to hear your thoughts, when you went into AGBT, you saw the internal developments that were happening. What was your big takeaway from the conference and what was the feedback from beta sites, given that they were already achieving read lengths of 1,500 bases versus your commercial [spec] 2,000 bases?

You know, I have been dealing -- or the entire Company has been dealing with the day-to-day, in-the-trenches work of making sure that these beta sites get to the point where they can generate high-quality data.

So in a sense, I was not quite sure how AGBT was going to come out, and so I will tell you honestly, I was very pleasantly surprised with the interest and enthusiasm everyone had for the platform and the data that they were seeing.

I spent most of my time the first day with the user group meeting at the bioinformatics meeting, and I was quite frankly blown away by the reports of applications in areas. Monsanto, for instance, was talking about how, due to the very high GC content near the ends of chromosomes, they have never been able to get a good snapshot of what is going on at chromosome ends. And now, for the first time, they are able to sequence right through it and how excited they were about it.

I know there has been this whole huge controversy, I will call it, around raw read accuracy, and that topic did not even come up once at the bioinformatics conference because people -- these are people that are highly knowledgeable, understand the issues, and were just thrilled, quite frankly, with what they were being able to see with read lengths. So, I'd say that my net take on AGBT was what a great job our customers did of accurately representing both where the state of the system is today and what they think they are going to be able to do with it.

Sure. My next question is on backlog, and you mentioned the cholera paper got significant attention and you had a pickup in demand post the publication. Just given its focus on microbial in the near term, is there any change in focus on the application? I know that you have a number of end markets that you can touch into from cancer to microbial and methylation expression. Is there any change in focus or in -- pertaining to the increase in backlog? What kind of customers were they? Were they commercial or were they all microbial sequencing guys?

A way to think about that is how we break down our sales force. We have a number of salespeople who are focused on what we call key accounts. And they basically are handling the genome centers.

And that, of course, is obviously -- they are very important because not only are they the gatekeepers, in effect, of the technology, but they also help tremendously because they have tremendous R&D resources that could be applied to evaluating and sometimes finishing our products. So they are very, very important.

But the rest of the sales force is focused on smaller applications -- smaller, potential installed-base applications. However, what I -- especially in the microbial world, there are a number of potential areas where -- for instance, food safety, where the number of units and the applications could be quite large, if you think about what the USDA does in terms of monitoring at the point of production. And it is those type of applications that have really come into sharp focus.

There were -- that paper, I think, did a far better job of anyone, for instance, in the government who is in the business of rapid detection of pathogens, now knew for sure that this is something they needed to be looking at, given that result. And so, I'd say it did not particularly change the interest level from our key early-adopter genome centers, but it was both commercial and government applications outside of that.

(Multiple speakers). The only thing I would add to that is the selling cycle is fairly long in nature. It could be up to a year, sometimes even longer.

So, when things come out of the pipeline and into the backlog is sort of a time-related thing. And so, real interest that you see right now is probably going to add to the pipeline, but it's not necessarily what you see in the Q4 change in backlog.

Got it. I guess what I was trying to drive at is, was there any pickup from biopharma customers just given all this talk on the microbial sequencing?

You know, I think -- I'll just give you one example. Checking on the purity of vaccines, I think, is an ever-increasing area of focus, and it effectively is a microbial job. And that's sort of biopharma, but not necessarily in the way that you would think about it.

Tycho Peterson, JPMorgan.

Maybe I just want to -- I want to dial in on some of the technology improvements you have talked about, and in particular as we think about yield a little bit. You have talked about going from 75 to 150 ZMVs. Can you just talk about how you see that transition rolling out? In other words, are there risks at all as you implement the 150 ZMVs?

And then, you've talked, I think, a little bit about new loading methodologies to get the yield up per chip. How do we think about moving beyond the early access chips to what you will be rolling out in final production?

Sure. Let me just step you through the numbers around the zero-mode waveguides.

So, we have been using -- the beta sites have been running with these early access chips. They are really developmental chips. They have 45,000 zero-mode waveguides. And up until a week ago, that is basically where the entire installed base was, outside of the Company.

The new chips have 150 -- the production chips have 150,000 holes, but the system is only capable of imaging 75,000 zero-mode waveguides at a time. So, we have introduced to our customers this concept of -- that we call sets. So this is a two-set chip. So what will happen is you'll start a run, you will image the first 75,000 holes. When you are through with that sequencing run, say, 30 minutes, then the machine just slides over a few nanometers and then reads this second set of 75,000 holes. Same chip, same reagents, same sample.

So, what it does -- though it doesn't dramatically increase the throughput per hour, what it does do is give you quite a bit more sequence for your $99 kit cost, and also allow you to use your sample much more efficiently.

There will be, because there is time, the second set has to wait for the first read to occur, there will be a slight drop-off in yield. So if you were getting about 30% yield on the first set, you will probably get about 20% yield on the second set. But we -- in working with our beta sites, I think there is tremendous interest in that. It is that two-set capability and the 75,000 holes for each set that is going to get us to the 35 to 45 MB per SMRT cell.

Regarding the yield related to -- or loading, I would say that the technology that we have -- are working on that would allow us to get beyond the Poisson distribution limit of about 30% to 35%. Those are longer-term technologies, and though we remain very excited about them, we are not giving you any firm commitment as to when those technologies will be rolled out.

Okay, that is helpful. And then, as we think about some of the things that will be coming with the commercial launch here, a couple of posters at AGBT actually, I think, talking about strobe. Can you just talk about how you see adoption of strobe post the commercial launch and into the field?

Sure. So just as background for those that may not be familiar, one of the effects that actually terminates or limits our read lengths, and I say limits, recognizing that it is on average 1,500 bases today, is an effect called photo damage where laser illumination can, over time, cause the enzymes to die off.

So one way that we can dramatically increase the read lengths, effective read lengths, is to image, say, for 500 bases with the lasers on, turn the lasers off, the enzyme continues to run so we get a blank period where we get no read, but it is the same molecule. Then we turn the lasers back on and we can turn them off and turn them on. We call that strobing.

And what it does is it gives you islands of sequence that you know are connected because it is all one molecule. This is especially effective in areas where you may have very long repeats because what it does is it gives you the ability to anchor a sequence context in the middle of this very long repeat. And you can do that multiple times. And so, it allows you to get much more complete assemblies.

That functionality was only rolled out in the beta program to just a few of our customers on a limited basis. It's one of the last technologies to be introduced by us in this release. And so, the actual beta sites -- all of the beta sites won't not see strobe until they complete this upgrade cycle, just because the release of software that includes strobe is bundled there.

So, I don't think we would have yet even begun to see the impact and use of strobe, though I can tell you the two customers that have used strobe so far are very, very enthusiastic about it. You're getting effective reads in the range of 10,000 to 12,000 bases, which is -- can be very, very powerful.

Okay, and then, just one last one on the pipeline. As we think about what you have got in the channel here, are you able to talk at all as to what in the pipeline has been funded and your visibility into grant cycles on the part of your customers?

I would say if you read our S-1, one of the things in the pipeline, it has to have complete terms, [keys] and fees -- approved terms and conditions approved, and it has to be measurable, definable, and collectible. So it has to have the funding with it in order for us to put it in the pipeline numbers.

Susan, the backlog.

I'm sorry, in the backlog.

I'm thinking more not what you're putting in the backlog, but in terms of just leads in the field. I guess just any color to the extent you are being spec'd into grants and your discussions on the general funding environment would be helpful.

Sure. First of all, I just need to -- I need to comment that on a relative basis, our numbers are really small.

And so, this is not -- we're not seeing any effect of either possible flattening or sometimes increase in governmental spending. We just don't see it. Coupled with that is the fact that we are, in large part, enabling new applications, and so, again, though we may be competing for the dollars, we're typically not competing for the same applications or technology.

And then, finally, I'd say that I think as far as long-term outlook and demand, it is becoming a worldwide market -- very rapidly a worldwide market. And we see tremendous interest from countries outside of the United States. So I don't think it's going to be appropriate much longer to just look at United States spending levels as a measure of what total demand is.

Marshall Urist, Morgan Stanley.

So, first one, it would be helpful just to talk about the mechanics of first the beta site upgrades to FCR, and then what are the steps subsequent to that before the commercial installations start? Are there -- what is -- what are you guys looking for in terms of watching the commercial release instruments perform, and then how does that then roll into you guys starting installations?

Sure. So the upgrade process, which is underway, typically our estimation was that it was going to take anywhere from 8 to 10 days to do the hardware portion of the upgrade, get the software reinstalled, and get the customer back on.

And I'd say that we're tracking with that. We haven't had any disasters yet that have changed that. So I think the upgrade cycle itself, as we predicted, it would be -- has borne out, so I think that is good.

We have one site right now that is -- the upgrade is completed and they are running, and so far, their response has been tremendous in terms of the improved reliability, stability, the variability on throughput has gone down tremendously, and of course, the overall throughput has gone up a lot. So as I -- my -- one of my barometers of how this is all going to be going is how these sites are doing, and so far everything looks really good.

Once those sites are upgraded, they will -- obviously, they have their own work that they are going to be running. But we also have an intensive validation and verification phase underway, which will take several months. And in that period of time, what we are going to be doing is going through over 1,000 different sequencing-run examples where we take a look at every possible [corner] case, running 24 SMRT cells in a row and the power fails halfway through it, etc., etc., etc., to try and really bang on the product.

So we're doing that -- right now, we have FCR units completed on the manufacturing floor. We are running them for validation and verification. We have internal units in R&D that are doing that. And some of our customers will be running runs for us for this validation and verification cycle.

Once that is completed, we will probably have some bug fixes and software mods, and so we will then roll a version of the software, and then we will see where we are at that point.

Okay, perfect. And then, just one -- just to clarify, the FCR upgrades that are happening in beta sites right now, are they all getting the new base calling software as well, or is that going to be a subsequent upgrade?

That is a subsequent upgrade.

Okay, great. And then, maybe if you could take a step back, and I know there have been questions asked around parts of this, but as you have seen both read-length throughput and accuracy develop, maybe it would be helpful to get your thoughts on each of those and your level of confidence in the path forward for developing on each of them and how you're thinking about that now over the next couple of years?

Okay. You know, I think up and to the right on all of them. I think read lengths is going to be the low-hanging fruit for us because we now are understanding -- we have a deep understanding of what terminates reads, and so once you understand the problem, you can go after it. So I'm very excited about read lengths.

Accuracy is going to be a lot of work, but we've got a number of areas that we are going after. The other thing, too, we can trade off read lengths and accuracy just as a simplification. A way to think about it, we can turn up the laser power, which, of course, is going to increase photo damage which would tend to lower your read length, but at higher laser power, the die signals are much brighter and so the accuracy goes up.

So, it is possible that in the future, we may offer a read-length mode and accuracy mode. So I am confident -- you know, our customers -- right now, today, we can do pretty much any re-sequencing application with the raw read accuracy at around 85% that we have. And our customers are telling us they'd really like to see us for de novo sequencing, especially de novo mammalian, they'd like to see it at 90% or greater. And I am confident that with time, we are absolutely going to be able to get there.

As far as throughput, I think the best way to think about throughput is throughput is going to be directly related to read lengths. So you have got so many holes. That is going to be relatively fixed, at least for a while. But as the read lengths goes up, you double the read length, you double the throughput. So, I think you're going to see some attended increases in throughput as our read length goes up.

Okay, perfect, and then, just a couple of other quick ones. Any kind of updates on the -- related to your last comments there on the accuracy front? I know Steve had highlighted a few things on going beyond the Poisson distribution. So kind of where those projects stand and any kind of progress there recently?

You know, all I can say is that we're continuing to work on it.

We have a number of initiatives. I would say we have by far and away the most advanced enzymology group in the world because we have the ability to, in real time, monitor any mutations or changes -- the effect of any mutations and changes to the direct kinetic enzyme behavior. So we know a ton about our enzyme system, and we also know, obviously, a ton about the optics and the dies and so on and so forth. But we have any number of programs that would lead to improvements in accuracy, and we are going to continue to work on all of them.

And then, just one last one from me, which is if someone walked in the front door today and wanted to purchase a system, what are they being told about delivery time?

Roughly Q4.

(Operator Instructions). Sung Ji Nam, Gleacher & Company.

So going back to the performance specs a little bit, in terms of read length, you were able to achieve almost threefold improvement in a very short period of time. And going forward, how should we think about what the magnitude could be in terms of the next upgrade or the next improvement cycle?

Again, up and to the right. We're working hard on it. We know a number of things that we can go do. When we get to the point that we're going to introduce it, I think then we'll start talking about it.

Okay, great. And then, in terms of potential consumable pullthrough, could you give us more color now that the early access users have had more experience in terms of how you may be thinking about it in initial commercialization?

I think we are going to be kind of careful about making too many forecasts on that.

I think there certainly are going to be some customers, like current ones, that are going to have pretty high pullthrough because some of these customers are really heavy users. But part of what we're selling is the [hive] flexible system. We have service providers that might use them in a different way.

So, we gave a model out there that says if you went through 12 chips a day, you can get through $300,000 of throughput in a year. That is certainly feasible, but how are different customers going to be using our systems? I think we just have to probably get some data points before we give you some more definitive forecasts on that.

Okay, great. And then, I guess, as you talk to your potential customers, what are some of the key factors holding them back, maybe, from placing an order at this point? Specifically in terms of your current throughput, is that an issue that comes up in your conversations for the type of customers that you are currently targeting?

No, it doesn't. I think they -- the biggest issue that comes up in our conversation is when they can actually get the system. By far and away, delivery time is the conversation.

Given -- if you -- for instance, if you decide that the 23S region of a bacteria is the area that you want to sequence, you can't get through that with any technology in any way unless you have a 3,000-base read length. And already, we have 3,000-base reads -- a portion of the tail of our average read length is over 3,000 bases. So, it doesn't really matter effectively what your throughput is, if you can deliver the needed performance point.

So, again, we're focusing on those differentiated areas where read length, whether you use strobed or whether you just use long linear reads. Another area that we are focused on is circular consensus sequencing, where you can get unprecedented accuracy on an individual molecule or where you care about fast timely results, either with very rapid sample prep or how long it takes us to do an individual run. And those are the areas that we focus on.

If you care about throughput, you should call some of our worthy competitors.

Okay, great. And then, one last one from me. I guess it is a clarification question. In terms of your collaboration with Gen-Probe, is that the development -- the product that you are developing, is it on the current platform that you have or is there a new system that you are developing?

So, the Gen-Probe agreement is a collaboration to examine the possibility of developing a platform. And so, there is not a committed platform technology, other than it would be a product that would integrate both sample preparation and sequencing into one box.

I will say I think that when we initiated the collaboration, they were thinking about downstream products, and they've become so enthused about what they can do with the system that exists today that they may, outside of the intended collaboration, want to do something with the technology.

Zrak Khurshid, Wedbush Securities.

This is Eric at Wedbush Securities. I was wondering if you could describe in detail the nature of the chemistry, be it protein die related, software, or the optical issues that have allowed this significant improvement in average read length for your customers?

I'm struggling to deal with the first sentence, which is describe in detail on an earnings call.

Here is what I'd say is that really the software did not play much of a role in the increase in read length, and it was much more about much brighter dies, an enzyme that was more photo damage-resistant, and the resultant decrease in laser power. All of those things contributed to the increase in read length.

Operator, I think we have time for one last question.

Ross Muken, Deutsche Bank.

[Vijay] again. Thanks for the question. Just a quick housekeeping question. You mentioned a 25 headcount add-on in the quarter. Do we know -- do you have a breakout as in do we know how many were added on to the sales and marketing?

Yes. Of those 25 that we added, six of them were in the field.

And I'll just remind you that -- starting off a field organization, it is a combination of sales folks, as well as field service engineers and field application people. And roughly speaking, we have twice as many support people in the field as we do salespeople. And that is probably the mix that we want to have right now where it is not so critical at the moment to be adding more systems to the backlog, but just making sure that when we do launch that all of the systems that we place out there are brought up and those customers are successful.

Okay, that was the last question. I'd just like to close with a few comments.

For the last few years, we here at PacBio have experienced the excitement of witnessing the power of looking at single molecules in real time. But I have to tell you, it was far more thrilling to see top researchers from around the world present data taken from their own PacBio beta systems. Equally satisfying was to see the strong view among those beta sites presenting that this technology will enable real applications that were not possible even six months ago.

None of this, however, would be possible without your belief in us and your support. Thank you for being part of our revolution.

Thank you for your participation in today's call. The call has concluded. You may disconnect at this time. Thank you.