Pacific Biosciences of California Inc (PACB) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Firstly, we would like to apologize to you all for the technical difficulties concerning the phone numbers today and then we would like to welcome you to the First Quarter 2012 Pacific Biosciences Inc. Financial Results Conference Call. My name is Regina and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question and answer session. (Operator Instructions) Today's event is being recorded.

I would now like to turn the conference over to your host for today, Ms. Trevin Rard. Please go ahead, ma'am.

Good afternoon, and welcome to the Pacific Biosciences first quarter 2012 conference call. Again, our apologies for any technical difficulties you may have had getting into today's call.

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

Before we begin, I would like to inform you that comments made on today's call may be deemed to contain forward-looking statements. Forward-looking statements may contain words such as believe, may, estimate, anticipate, continue, intend, expect, plan, the negative of these terms or such similar expressions and include the assumptions that underlie such statements. Such statements may include but are not limited to revenue, margin, cost and earnings forecast, future revenue implied by the Company's backlog, expectations of future cash usage and other statements regarding future events and results. Actual results may differ materially from those expressed or implied as the 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 annual report on Form 10-K. The Company undertakes no obligation to update and perspective investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that today's press release, announcing our financial results for the first quarter 2012, is available on the Investors section of the Company's website at www.pacb.com and have been included on a Form 8-K, which is available on the Securities and Exchange Commission's website at www.sec.gov.

In addition, please note that today's call is being recorded and will be available for audio replay on the Investors section of the Company's 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 and that Pacific Biosciences undertakes no obligation to update such forward-looking statements.

At this time, I'd like to turn the call over to Mike.

Thanks, Trevin. Good afternoon, and thank you for joining us today. During the first quarter of 2012, our team at PacBio executed well. Highlights of our first quarter results are as follows. We installed 11 new PacBio RS systems, bringing our install base up to 59 systems in total. We recorded $10 million in total revenue and importantly recurring revenue continued to grow sequentially. We launched our C2 product release and recently finished upgrading all the systems in the field. The C2 release provides our customers with dramatically-improved performance and greater reliability. We had a very successful showing at the Advances in Genome Biology and Technology Conference or AGBT with over 35 customer presentations and posters featuring our products and technology.

During our last earnings call, we were preparing for the AGBT conference and as promised, we would like to share a few of the highlights of the conference on this call. First, we held two user group meetings for our current PacBio customers, one to share research highlights of key applications and another focused on bioinformatics tools and analysis. These user group meetings were very well attended with approximately 90 people, representing more than 30 customers. Both sessions were filled with rich content and attendees remarked that they were impressed with the progress being made across a diversified user base. At the conference itself, we were pleased to see numerous customers and collaborators present their research in conference talks and poster presentations, sharing their use of the PacBio RS system for a variety of applications, including de novo assembly, targeted sequencing, and DNA-based modification detection.

Several presentations were from customers working on de novo genome assemblies, highlighting the importance of a finished genome to fully understand the biology of their organisms of interest. PacBio's long read lengths and low GC bias revealed the sequence in difficult regions, just long repetitive sequences, complex structures and extreme GC content areas. Many took a hybrid assembly approach whereby they combined PacBio's long read data with a second high accuracy data type such as the PacBio circular consensus or CCS reads or Illumina short reads. A few customers have even created an automated assembly approach and achieved a single [content] for one bacterial chromosome without human intervention. This is remarkable given the high expense of labor intensive bioinformatics analysis historically required to finish genomes.

We also saw excellent presentations for targeted sequencing applications, where researchers focus on specific areas of interest within a genome. A few research presentations demonstrated a use of the PacBio platform to sequence what had previously been un-sequencable, short tandem repeats such as CGG that extend on for hundreds or thousands of bases. These repetitive sequences have long been associated with neurological diseases yet researchers have not been able to study them as precisely as they now can with PacBio's long reads and minimal GC bias.

Other researchers reported their use of PacBio as a standard validation tool, applying PacBio's long reads to invalidate false variant calls that result from mis-mapped short reads. Another researcher used PacBio in a feasibility study to detect SNPs or single nucleotide polymorphisms for actionable gene mutations in a clinical setting. In one of the plenary sessions, Richard Roberts of New England BioLabs highlighted the capability of the PacBio RS to study DNA methylation for several bacterial genomes. Dr. Roberts has been working with Matt Waldor from Harvard University Medical School and Eric Schadt from PacBio in Mount Sinai to determine which methylations are responsible for chemical modifications in the German E. coli outbreak strain from 2011. The separate session that followed, Dr. Waldor said that the possibility to use PacBio to determine not only methylation but other types of DNA modifications would open up a new field of biology. Epigenetic data produced by PacBio sequencing showed base modifications that helped to explain the extremely high virulence of the E. coli strain. The team found a massive signature of chemical modifications occurring all over the E. coli outbreak genome. Roughly 100,000 bases were detected as chemically modified.

Now, I will shift gears and talk about some of the business progress we've made recently. At the outset of the first quarter, I said that we had four top priorities in the Company. These priorities are; one, improve system reliability and performance; two, develop and release product enhancements; three, provide full customer solutions including front-end sample prep and backend bioinformatics; and four, focus on the key applications where we add value to our de novo assembly, targeted sequencing, and base modification analysis.

Let me provide some details on the progress we are making on these priorities. On system reliability and performance, we made significant progress this past quarter. Our C2 upgrade provided customers -- provided numerous quality improvements and we've been working with our customers every day to address issues from customer training to hardware and software bugs. Customers who have had problems with system uptime in the past are reporting substantial improvement. As a result, utilization rates with systems in the field have picked up and we see evidence of this in our consumable shipments.

The area of product enhancements, we launched the C2 release in early February and we finished upgrading all the systems in the field by mid-April. We are pleased that our customers have started taking advantage of the new chemistry and software. Just example, many customers are reporting average read lengths exceeding 3,000 bases, with 5% of the reads at 8,000 bases and some reads as long as 15,000. The amount of data customers are getting on each SMRT cell are significantly greater and importantly, the consistency of the output is much improved. The feedback we've received on the C2 release has been very positive. Our customers at the very early stages are taking advantage of the enhanced system performance with C2 and we believe the number of projects they can address will continue to grow.

Our C2 release represents a dramatic improvement in product performance. We have shared with our customers a pipeline of new products that we plan to release in the coming months. For example, we are working on software tools that enable customers to perform base modification analyses with the system. We came away from this year's AGBT conference with tremendous interest in using the capabilities of the PacBio RS to study these base modifications. We believe there is a whole host of scientific discoveries surrounding them that this untapped. The PacBio RS is a great tool for enabling the study of these epigenetic variations.

Later this quarter, we plan on releasing software tools for analyzing the kinetic data cache rate by the PacBio RS, which is an important step in taking this application forward. Over time, we also plan to provide tools and reagents that enable the study of specific modifications done in both bacteria and higher organisms including humans. As a reminder, base modifications are believed to have important roles in gene expression, post pathogen interactions, DNA damage and DNA repair.

Another exciting product we are developing is an automated magnetic loader that enables preferential loading of longer DNA fragments into our SMRT cells. The advantage of this technique is that it yields a greater number of long reads per SMRT cell leading to higher average read length and enables experiments to be performed with less input sample. In addition, it improves accuracy by removing impurities introduced during sample preparation. We've been testing this technique with a couple of [OEXS] customers and results have been very encouraging. We plan to release this product to all of our customers during Q3.

Turning now to our progress on customer solutions and applications, I will highlight some recent examples. Just two weeks ago, a very exciting targeted sequencing application with the PacBio RS was described in a publication the journal Nature. We collaborated with researchers at UCSF to study -- to aid their study of mutations in patients with acute myeloid leukemia or AML, full of cancer that caused the deaths of over 9,000 people in the US last year. Despite a substantial amount of research that has been performed on the disease, treatment options for patients are few and there have been no new highly-effective therapies approved for years. One reason for this has been the lack of tools available to easily study the gene mutations associated with disease and its resistance to certain drug therapies.

Researchers at UCSF are in search of a way to study long regions of the gene FLT3, a tyrosine kinase whose signaling is often dis-regulated in AML. Mutations of this gene have been difficult to study in the past because it requires an ability to generate long enough read lengths to span the region of interest and the accuracy to detect low frequency mutations. This study, which was performed relatively quickly with the PacBio RS in an earlier version of our chemistry, revealed that patients who stopped responding to treatment with the drug AC220, a tyrosine kinase inhibitor, all of them developed previously unknown mutations associated with resistance to AC220. It's a very important discovery suggests that a next-generation compound targeting these drug-resistant mutations could be effective in treating these patients. Already the team at UCSF was moving forward in identifying candidate compounds that may target these particular drug-resistant mutations.

The AML case study is a wonderful example of how our products can broaden the study of diseases. In this instance, long read lengths, approximately 1,400 on average, enabled researchers to investigate connected mutations on a single strand of DNA that were separated by about 800 bases. In addition, our single molecule resolution permitted them to detect low frequency mutations among the noise of both normal cells and leukemic cells. We believe that researchers are at the very beginning of taking advantage of our technology to address complex problems such as these. With enhancements such as our C2 chemistry, we can broaden the scope of study even further.

One of our most successful customers has been the Joint Genome Institute or JGI, which has two PacBio RS instruments. Since putting their second system into production in Q4 of last year, they have pursued an array of applications with excellent results. JGI continues to use PacBio long reads to improve assemblies for microbial genomes, generated in draft form from short read Illumina data. What used to cost them up to $30,000 to finish these genomes with Sanger sequencing can now be done for a fraction of that using the PacBio RS. Our new C2 chemistry and software upgrade has enabled them to extend this approach into larger-sized genomes, including a [funnel] sequencing program. The AGBT conference, JGI discussed their efforts to use PacBio's long single molecule reads to provide full length transcripts from CDNA libraries as part of their genome annotation programs. The long reads have already enabled them to validate transcript constructs computationally assembled from RNA seek data.

We're especially pleased that JGI now conducts experiments on base modification detection to PacBio RS systems, targeting methyl adenosine detection in pro periodic organisms. Research projects include studying the regulatory role of methylation in bacteria, which is the environmental adaptation in the [shuminela] bacteria. JGI scientists are looking at methylation patterns under a wide array of [procreatic] genomes and microbes related to the environment and energy-related crops.

Now I would like to address our sales activities. During the first quarter, we booked orders for two new instruments. As we have mentioned previously, our primary focus in the field has been and continues to be driving the success of our install base of PacBio RS customers. Inconsistency in the reliability and performance of systems in the field have previously made it challenging for a number of customers to gain confidence in launching research projects with their systems. And quite frankly, it led them to giving less than enthusiastic references to prospective customers. The effects of past reliability issues have lingered. We must continue to deliver improved reliability and performance over time to change some early impressions. This can take some time and we are not expecting to have a large number of new instrument orders in the near term.

While the number of our instrument bookings is lower than we would like it to be, we have confidence that this will improve. First, as I mentioned earlier, we made dramatic improvements in system reliability this past quarter and our customers have given us very positive feedback in this regard. Second, the awareness of the value offered of the PacBio RS is expanding. This is evidenced by the growing number of customer presentations and publications in forums such as the AGBT and the Nature article. Furthermore, with the enhanced capabilities delivered by our C2 product release, a number of projects being addressed by the PacBio RS has significantly grown. Finally, and perhaps most importantly, we are seeing increased utilization across the install base of the PacBio RS instruments. Growth in system utilization is our best indicator that our customers are capturing value from their investment in the PacBio RS. It is those customers that ultimately become our best sales people. We remain confident that the unique value we are bringing to our customers will lead to a stronger bookings performance.

With that, I'll turn the call over to Susan.

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with the financial overview for our first quarter that ended March 31st, 2012, and then provide details on our operating results for the quarter along with a comparison to the fourth quarter of 2011. I will not be providing year-over-year comparisons to our quarter one 2012 results as it was not until the second quarter of 2011 that we transitioned from a development organization to a commercial operating company. Given the difference in how we are operating year over year, detailed comparisons would provide few, if any, additional insights into the progress of our operation. Finally, I will conclude with a brief discussion of our balance sheet.

Starting with our first quarter financial highlights, during the quarter we recognized revenue of $10 million and incurred a net loss of $27.6 million by using $16.1 million in cash. While the revenue for the quarter was $10 million, a decrease of $2.4 million from the $12.4 million of revenue realized in Q4 of 2011.

During the quarter, we recognized instrument revenue of $7.9 million, reflecting the installation of 11 PacBio RS machines compared to the $10.8 million realized on 17 RS instrument installations in Q4.

Our consumable revenue grew 29% to $900,000 in Q1, up from $700,000 in Q4. The increase in quarterly consumable shipments is noteworthy considering the fact that we were taking down systems in the field to install the C2 release upgrade, starting in early February. In spite of this interruption, our customers were able to get back online quickly and the utilization rates across a number of customers picked up after their upgrades were completed. As a result, our consumable sales in March were much stronger than those in January and February.

Service revenue increased 38% to $1.1 million, up in Q1 from $800,000 in Q4, reflecting the growth in our install base to a total of 59 systems.

Finally, research grant income in the quarter was $300,000, up from the $200,000 we had in fourth quarter.

Gross profit for the quarter was a negative $200,000, representing a gross margin of negative 2% down from the gross profit of $1.5 million and a gross margin of 12% realized in Q4. The gross margin decreased quarter over quarter reflects the loss of the margin benefit we had in Q4 from the product inventory that was expensed in accordance with GAAP accounting into R&D during periods prior to our commercial launch. Also, because of product write-offs and (inaudible) costs associated with our switch from C1 to C2 consumables in Q1.

This quarter we incurred $700,000 of inventory obsolescence charges and upgrade costs associated with the transition through our C2 product release.

Moving to operating expenses, operating expenses in the first quarter totaled $27.4 million, including $2 million in non-cash stock-based compensation expense. There is a $3.1 million or 13% increase in the $24.2 million of expenses recorded in Q4.

R&D expenses decreased modestly during the quarter to $12.1 million compared to $12.4 million in Q4. R&D expenses in this quarter include $1.1 million of non-cash stock-based compensation.

SG&A expenses for the quarter increased $3.5 million or 30% to $15.3 million, up from the $11.8 million in Q4. The increase was primarily a result of a $2.6 million of higher litigation expenses including recent settlements of 2 patent disputes. In addition, IT consulting costs increased in the first quarter in connection with the implementation of our new ERP system on January 1st of this year. This quarter SG&A expenses included $900,000 of non-cash stock compensation costs.

Now turning to our balance sheet, cash and investments totaled $161.3 million at the end of the first quarter, down $16.1 million from the previous quarter. Cash used during the quarter reflects our first quarter net loss of $27.6 million, less $3.8 million in non-cash expenses composed of $2.2 million of stock compensation expense and $1.6 million in depreciation. Cash used in operations was also offset by working capital changes of $6.4 million, stemming primarily from strong cash collections and inventory reduction.

Accounts receivable decreased $3.1 million to $1.5 million in Q1 as we continued to experience strong collections from our customers. Cash balances at the end of the quarter were also strengthened by the fact that we have already collected payments on three of our projected Q2 RS installations.

Finally, inventory balances declined this quarter by $3.7 million or 24% to $11.8 million as of March 31st, 2012, compared to $15.5 million at the end of the fourth quarter. This decrease reflects continued improvements in our efforts to match our manufacturing activity through our projected product demand.

This concludes my remarks on the financial results for the quarter and I would like to turn the call over to Ben.

Thank you, Susan. As we have said on previous calls, our intent is to provide transparency on what financial results we can reasonably expect in the near term. To the extent we have visibility, we provide guidance. With that in mind, I will be providing an updated forecast for the second quarter of 2012.

Starting with revenue, as a reminder, last quarter we provided a forecast of between $7 million and $8 million for each of Q1 and Q2 this year. We ended up installing more instruments in Q1 than we anticipated, which drove our revenues up to $10 million for the first quarter. Remaining in our instrument backlog are 7 units, representing approximately $4.7 million in system revenue. Assuming we complete the installation of all 7 units in the second quarter and assuming that any new system orders we receive in Q2 are not installed until the following quarter, we would expect to record approximately $7 million in total revenue for Q2. This estimate includes our consumable and service revenues, which we expect to build sequentially from a combined quarterly revenue base of just under $2 million in Q1.

Moving now to gross margin, as Susan mentioned, we incurred certain expenses amounting to approximately $700,000 during the first quarter in connection with the C2 product release and system upgrades. If not for those charges, we would have recorded positive gross margin in the first quarter on revenues of $10 million. For the second quarter, we expect to be approximately at breakeven gross margin on revenues of $7 million.

Our operating expenses in the first quarter of $27.4 million included legal expenses that were higher than normal stemming from litigation activities associated with Helicos, Life Technologies and class action shareholder lawsuits. We're glad to report that we have reached agreement with both Life Technologies and Helicos to settle the matters, which will bring our litigation activities with them to an end. As a result, we expect our legal expenses to decrease and we estimate our total operating expenses will come in below $26 million per quarter in the near term. A portion of that will be non-cash expense. We estimate our non-cash stock compensation expense will be between $2 million and $3 million per quarter.

Finally, with regard to cash usage, as Susan mentioned, we consumed approximately $16 million during the first quarter compared with a net loss of $27.6 million. Our net loss included approximately $4 million of non-cash expenses and we reduced our inventory and accounts receivable balances during the quarter by roughly $7 million. Cash collections were especially strong during the first quarter and, in fact, we collected advance payments on a few systems we have not yet recognized for revenue. Since these funds were collected in advance, we are expecting less cash inflows during the second quarter and, therefore, cash consumption will likely be greater than $20 million during Q2. For the year, we continue to target approximately $80 million in cash usage.

With that, we will open the call to your questions.

(Operator Instructions) Bill Quirk with Piper Jaffray.

It's actually Dave Clair here for Bill. I guess the first question for me I was just hoping to get some color on the strategy to really kind of improve instrument orders going forward.

This is Mike. So the strategy is kind of what we outlined. It's basically to get our existing customer base to the point where they're just references but enthusiastic references. Our first effort to do that is to get their reliability of their systems up and we think we've made a lot of progress on that. Probably still have some to go. When you get them to the point that they can tell their colleagues that this is ready for prime time, then it's much easier to do selling. So our focus is really on getting them as the proof statement for the technology that we have both in the form of sort of positive references, certainly in terms of publications and presentations at meetings and so forth. We have independent sales efforts independent of them obviously, but that's really the key to our success. So that's been our focus, particularly in this last quarter. Between when you get that sort of reputation rebuilt and when things get converted into orders, but you've got to do that first.

Sorry, I think in the prepared remarks you said kind of in the near term, it'll be likely be modest in terms of instrument placements. I mean how long do you think until kind of the reputation build kind of gets to where you want to be and instruments kind of spike?

Well I think that -- it's always difficult to forecast ahead of time. Part of it's building the reputation back and I think we've made a lot of progress there recognizing that we only started the C2 upgrades and reliability improvements associated with that really in the middle of last quarter and finished them in mid-April across the whole user base. But the wild card is how long it takes once people get that confidence and how long they feel they need to have sort of a positive experience, at least more positive experience before they go out and actively promote the technology to others. But the other for us bigger issue is how long it then takes the people who are perspective customers to go through the grant or funding process, whatever it is, for individual cases to get the money to buy a pretty good chunk of capital equipment. That'll vary from one customer site to the next how long that takes. But it's -- my experience anyway it's a little difficult to kind of predict that based on such a short history of turnaround.

Then just one more for me. I was hoping to get an update on the competitive landscape here just given some of the news that's been coming out of Oxford Nanopore?

Well unless you're quite ahead of (inaudible), I haven't seen any news coming out of Oxford Nanopore since AGBT. (multiple speakers) They certainly came out with a splash with, from what our perspective was very little data to back up what their claims were and they have not gone public with any additional information that I've seen either in print or else wise since then. So, it's still stay tuned.

Okay, thank you.

Bryan Brokmeier with Maxim Group.

I guess first what are you telling your customer -- new customers or new potential customers about when they can start taking delivery? So you said that you may be able to install all seven that are currently in your backlog. So I guess they're able to get delivery as soon as they want or is it all up to what their timeline is and when they want to take delivery?

I think it's mostly up to their timeline. But it's modestly complex piece of equipment, so part of the issue with doing installs is getting a site prepped in terms of space and electricity and so forth. I think at this point that's probably the rate limiting step relative to doing installs on new orders.

You talked about the improving the performance of the systems and working on improving those references of your current install base. But also really how important is the -- is seeing the consumable pull through improve and really getting more utilization out of your systems besides just customers being happy but they're just having a longer time of the commercialized products running?

I'm not sure I understood--

Just building your -- on your track record or building on the system performance of the systems besides just the customers being happy but just the potential new customers seeing the system being run?

Well I think it's absolutely the key and that's why we've emphasized our efforts in the last few months to getting people up and running on a routine or around the clock basis as much as they can. It isn't just that they get happy or they are if they get good results. But it's something they can share with their colleagues. What their colleagues are interested in is can you get new and important science done on this platform? So having the usage go up is an indication that people are getting confident about getting that useful science. So it's -- and in this space it's absolutely as I said before, everyone in the scientific world is from Missouri. If you can't show that performance then people are going to wait till you can.

Just lastly, Ben you had provided kind of broad outlook for your total operating expenses. But how should we maybe expect to see that change during the next couple quarters, particularly given that you have some -- you talked about today some new products you plan on coming out with in the back half of the year. So should we expect to see R&D kind of pick up from the $12 million in the first quarter?

That's a good question. I mean on a broad basis, the R&D expenses are going to be relatively stable. We do have those kinds of activities going on all the time. But there's going to be variations quarter to quarter based off of prototype materials and those kinds of things. But, by in large, we see those operating expenses being pretty stable. Then I just mentioned since we had of late some higher litigation expenses that were in that run rate certainly in Q1 and we don't expect to have that run rate going forward, then our total operating expenses are expected to be lower than what we just saw in Q1.

Ramesh Donthamsetty with JP Morgan.

Ramesh in for Tycho Peterson. Thank you for taking the question. I just -- just taking a step back and seeing demand trends with the RS and you also have alluded to some customers with the first run being relatively unhappy. At what point will you think about the strategy? We've gone away from thinking about a V2 instrument or a new form fact for the instrumentation. But at what point do you think that you have to evaluate maybe a stronger shift in strategy for the current offering?

Well I think you do that when you think you've got to the end of the performance envelope of the current platform and we're a long, long way from getting to that point. We've got a series of product enhancements that will put -- some are software, some are modest hardware upgrades, a lot are application kits and bioinformatics tools that we will put onto the existing platform. We think that extends the performance by a lot over the next few to several quarters. So that's our primary focus at this point. Talk about future -- through new instrument developments for obvious reasons. We certainly kind of have a feeling of what the lifetime of our current platform is but we have not reached the end of that at all.

Just in terms of consumable utilization, I'm just wondering amongst the install base today, the range of kit volumes you're seeing from the range today and kind of where you could see that going or your targets maybe in the next few quarters.

This is Ben. I'll take a shot. I mean it's -- it is quite varied. You have people who are just barely getting their instruments online and so very, very little utilization yet on those guys who are just getting up and running. Then you have some of our higher volume guys. Mike mentioned he highlighted some activities that JGI is working on. Those guys have two systems. So they're going to be one of the higher volume guys. So you see quite a bit of volume from users like that where, by in large, they're trying to use their systems let's say all the time.

Just I guess a quick one. The burn rate was a little bit lower than the $20 million I think number that had come out maybe last quarter, maybe the quarter before that. Is that maybe one quarter or are we trying track at $20 million or less per quarter for at least the short term?

I think -- it's Susan. I think we or what we wanted to highlight to you is the $16.1 million of this quarter is benefiting from some prepay units that we would normally have projected into the next quarter as well as the fact that we have settled from litigation on it. So you will see the burn rate go -- aim at $80 million for the year, but you have to think about, if you had a low first, you're going to have to make that up in the second.

(Operator Instructions) Amanda Murphy with William Blair.

Actually it's Sylvia here for Amanda today. I dialed in kind of late and so if someone has asked this question before I apologize for this. Just a quick question for Mike. You have some players in new market talk about the benefit of combining long read technology with short read technology. So, just curious on your thoughts here as to just how much would (inaudible) benefit by [file] by combining those two technologies? I guess we know that most of your customers here use high read technology in their own labs. From a buyer's perspective, would you consider expanding your product line to have to other type of genetic analysis tools?

Yes, we certainly encourage our customers, particularly during de novo assembly, to do frequently hybrid approaches as I highlighted in some of my prepared comments where we've got customers that frequently use, as JGI does, short read Illumina data combined with the PacBio long reads to do finished assemblies. We provide a form of that ourselves in a sense of doing relatively shorter insert CCS sequencing, which can give you very high accuracy single molecule reads with the longer read data that generates scaffolds that together you can do the finished assemblies. So I think one of the things that we have to do increasingly effective job on is giving people the right kind of guidance on which bioinformatics tools to use to be able to do that. I think that's probably our primary focus in that area right now to help people. So which type of short read data to combine with long read data to do the best kind of assembly work?

Okay and from the Company's perspective, you wouldn't think having maybe microarrays or PCRs be useful to the product offerings?

Well not in terms of us taking on that kind of technology per say. I think we're more focused on enabling people in the sequencing space directly to be able to merge data sets appropriately and give the right kind of results.

Daniel Brennan with Morgan Stanley.

Just a couple of questions. Maybe to start off with the publication from AGBT. So Mike just how long should we expect those types of publications? What is the typical kind of timeframe for when a researcher would get the ability to read them, take a look them, maybe talk to the authors and do a thorough evaluation? Cause there seemed -- certainly be a lot of excitement over the 35 publications and certainly didn't translate into any orders this quarter. I'm just trying to get a sense of what these start -- what the typical lead lag would be?

Well it's a process, right. So at a scientific meeting like that, which is one that's was better attended ones, particularly in the sequence technology space, you have -- posters you have scientific talks and a lot of those eventually translate into publications and peer review journals, which is the next stage. That can take from a few months to several months in order for a lot of that to get out in print, because you have to go through both the review process and the publication process. But it varies all over the place in terms of the time.

Then you have the process of that along with what people see at the presentations at the meeting, what they hear from their colleagues outside of that meeting in terms of getting funding requests into whatever source they're going to use to get the money. The government process is, NIH for example, can take nine months. Other sources are faster than that but there's a set of process and it -- individual customers will go through from a few months to a year in that process. So, it's kind of hard to kind of put a blanket answer to that one. It isn't overnight.

Then maybe a follow-up question would be in terms of the C2, is the C2 chemistry kind of what it offers in terms of the improvements certainly versus the initial commercial launch? Is it enough in the current environment do you think with the pressure on funding and the improvements that Life and Illumina are making longer reads faster, turnaround cheaper instruments? Can you maybe give us a window and I know you focus on improving reliability in the C2, but can you give us a sense on maybe C3 or whatever might be behind it? Any insights towards kind of things you're working on in the user group meetings, maybe that are being shared on dramatically longer read lengths or throughput or anything of that nature?

Well, so let me step back a little bit (inaudible) competition issue. I don't think we see ourselves competing head to head with the short read technologies from Illumina or Life. Their concept of getting longer reads is still in the hundreds and we're now, customer average is roughly in the 2,500 to 3,000 sometimes more average read length. So we're substantially different from a long read perspective than the short read technologies, which have yet to catch up with the older Sanger methodologies. So I think we see ourselves more as a companion to those in the certain types of applications, particularly hybrid assemblies than a direct competitor. We take advantage -- our customers take advantage of using both technologies.

I think what changes is that you want to get longer and longer read lengths, which open up or new avenues of how to use the system. We did share with our users at AGBT some early work that we've done on really, really long read lengths that come about by mitigating the -- one of the primary factors that limits read length in our system now, which is photo damage when you're basically interrogating the polymerization process by introducing a fluorescent dye along with the nucleotide into the active site of the polymerase, you have a finite chance each time there's a contact there of the dye was excited by a laser doing sufficient damage to the polymerase to kill it. That kind of results in this steady [diminution] of active polymerase molecules and has read length. We've got some pretty exciting projects under way, which we as I said, shared in the early terms with the users that effectively eliminate photo damage as a source of shortening of the read lengths and have demonstrated quite long read lengths. So that's clearly something that is of great interest to our customer base and for those potential customer base. We're working pretty steadily on that.

The other thing is just getting more data per cell that gets loaded. A lot of that right now has to do with issues with particular samples related to sample prep. Historically, we required a fair amount of DNA in order to get best results. As we've been steadily decreasing the amount of DNA that's required, people can get more experiments. If they want to use the long read capability to actually work because they've now got enough DNA to feed into the system. The program with the magnetic bead loader is another big step forward in that regard. It also, in addition to cutting down on the amount of DNA that's required, emphasizes the loading of long DNA fragments as opposed to short fragments, which invariably contaminate sample preps. So it has the added advantage of giving you more useful information out of the sequences that are being run.

So, just a lot of things that we're doing to improve the throughput, the ease and applicability of the sample prep, the bioinformatics tools that allow you to interpret certain aspect of the sequence, not just the HEC, HECTs but the base modifications that are present as well. So it's the singularly complex process, but as I said, we're a long way from reaching the end stage of the capability of the system.

Right and then I would also mention that you saw some of the AGBT work where customers were using their own bioinformatics for methylation detection. That is a product line that we are very excited about. We have an early stage this quarter on the software tools for that and those are the -- that opens a whole new area of science that other technologies we have not seen be able to approach.

David Ferriero with Oppenheimer.

This is Josh, sitting in for Dave. Just one quick question. I was wondering if you have all the machines running kind of at full capacity, do you have any idea what kind of consumable pull through that could represent in the quarter?

If we had that -- well it's obviously a much bigger number than where we are now.

I think we've -- in the past, we -- you do a little bit of math and you can certainly see people doing $300,000 worth of consumables on a system. That's something that on a run rate basis we've seen. So, that number might be one of the ones you could sort of start your high end model with.

There are no further questions in the queue at this time. So we'll go ahead and close out our question and answer session. I'll turn the call back over the management for some closing remarks.

Okay, since that was the last question of the day, in closing we do remain steadfast on our commitment to bring the unique advantages of our SMRT technology and products to our customers in the scientific community in general. We continue to focus on helping our customers leverage the value of their PacBio RS systems. We're particularly excited about the opportunity we see in base modification analysis, an area that is still developing but it has the potential to be very significant going forward. The work we have to do will take time, but we are confident that the value of our products brings to biological research and applications will have a significant impact. Thank you for listening in and we will talk again in three months time. For those interested, we will be hosting our annual stockholders' meeting on June 13th, in Palo Alto, California.

Ladies and gentlemen, thank you so much for your participation in today's event. This does conclude the presentation. You may now disconnect. Have a great day.