Pacific Biosciences of California Inc (PACB) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to your Pacific Biosciences of California Inc. first quarter 2015 earnings conference call. At this time all participants are in a listen-only mode. Later we'll have a question and answer session and instructions will be given at that time. (Operator Instructions). I would now like to turn the conference over to your host for today, Trevin Rard. You may begin.

Good afternoon and welcome to the Pacific Biosciences first quarter 2015 conference call. Earlier today we issued a press release outlining the financial results we'll 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 Form 8-K available on the Securities and Exchange Commission website at www.SEC.gov.

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

Before we begin, I'd like to remind you that on today's call we'll be making forward-looking statements, including plans and expectations relating to our financial projections and products that are subject to assumptions, risks and uncertainties, and may differ materially from actual results. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings, including our most recently filed current report on Form 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'd now turn the call over to Mike.

Thanks, Trevin. Good afternoon, and thank you for joining us today. We are pleased with our first quarter results and the progress we continue to make in driving our overall business. Highlights of our Q1 financial results are as follows. Total revenue grew to $17.6 million, representing over 50% growth compared with $11.6 million in Q1 of last year. This included an increase in Roche contractual revenue, triggered by recent progress we have made in our development efforts with Roche. I'll describe our progress in more detail shortly and Susan will provide details on the revenue recognition.

Excluding Roche contractual revenue from both years, our total revenue grew by over 40%. Instrument revenue for the first quarter grew to $7 million, up over 30% from Q1 2014. Consumable revenue for the first quarter was $4.3 million, up 69% from Q1 2014. Our average consumable revenue for install system has steadily increased and now exceeds $130,000 per year on a rolling 12-month basis.

Today we announced that we achieved the second development milestone under a development commercialization and license agreement with Roche. As a reminder, we are developing sequencing products for the clinical diagnostics market, which Roche will purchase from us and distribute to their customers. We have now earned half of the milestone revenue set forth in our agreement with Roche and the pathway to the finish line is becoming more definite.

We expect to be able to deliver products to Roche for the second half of next year consistent with the targeted timeline we announced when the Roche agreement was signed about 18 months ago. Both we and Roche are very pleased with the progress we have made and while there's still a lot of work left to do, we're excited to see this development program coming closer to fruition.

Last week we announced multiple new solutions for targeted sequencing applications. We have partnered with Roche NimbleGen to provide a workflow using their sequence capture technology to enrich large DNA fragments of up to 6 kilobase pairs.

When combined with SMRT sequencing, this approach can provide a very comprehensive view of structural variance in haploid type information. In addition, we have introduced new bar code sample prep kits, which enable customers to pool multiple samples onto a single SMRT cell. This can dramatically bring down the cost of sequencing large numbers of samples for applications, such as HLA typing. The bar code product release continues our theme of reducing the cost of SMRT sequencing to expand its use across a broader spectrum of applications.

Today we also announced the co-development and co-marketing agreement with RainDance Technologies to commercialize novel solutions for de novo assembly of complex genomes. These solutions will combine the power of RainDance's proprietary digital droplet technology and single molecule bar coding capabilities with PacBio's proprietary long-range DNA amplification technology. This combination could allow synthetic read lengths exceeding 100 kilobase pairs by the unique barcode labeling of 10 to 30 kilobase pair fragments generated from single very long DNA fragments.

Together with this fragmentation and labeling scheme and a sequence context unbiased amplification method, SMRT sequencing could allow haploid type phase assembly of complex genomes even in genomic regions containing complex repeats or PCR challenge sequences that limit the performance of other synthetic long read approaches based on short read sequencing technologies.

Finally, we were pleased to announced earlier this week that the Beijing Genome Institute, BGI, the world's largest genomics organization, has purchased its first PacBio RS II instrument and agreed to a plan to purchase additional units in order to integrate SMRT sequencing into their global sequencing service business. Their commitment to our technology further validates the distinct advantages we offer over other sequencing technologies for a wide array of applications, including human, plant, animal and microbial sequencing.

BGI has a tremendous amount of resources dedicated to sequencing data analysis and we are excited that they plan to develop some of those resources towards analyzing SMRT sequencing data. We look forward to building a strong relationship with BGI over the coming months.

Now I'd like to provide some highlights from this year's AGBT conference that was held in late February. An overriding theme for us at this year's conference was the emergence of SMRT sequencing for human biomedical research. At the beginning of the conference, the Genome Reference Consortium, which is comprised of the Wellcome Trust Sanger Institute, the Genome Institute at Washington University, the European Bioinformetics Institute, the National Center for Biotechnology Information, hosted a workshop to discuss the latest developments in advancing human reference assemblies. The presentations at the workshop highlighted how PacBio de novo assemblies are being used by the consortium to create what they refer to as platinum genomes that are highly contiguous haploid type resolve representations of structural as well as SNP variants.

With the success that they have achieved so far with PacBio, they decided to sequence additional genomes using SMRT sequencing to better define the scope of global genomic diversity.

The next day at the conference, Dr. Evan Eichler from the University of Washington kicked off the plenary sessions with his talk entitled Resolving the Complexity of Human Genetic Variation by Single Molecule Sequencing. As background, before the end of last year Dr. Eichler had published a paper in Nature describing over 26,000 novel structural variants he had uncovered from sequencing a human cell line with PacBio.

Since that time, Dr. Eichler sequenced a different human cell line and to his surprise, discovered an equally large and different set of structural differences suggesting that the actual genomic structural variability among different individuals is much greater than previously believed. His talk was one of the highlights of the conference and it was referenced often throughout the rest of the week.

PacBio was this year's gold sponsor at the AGBT, which gave us the opportunity to host a two-hour workshop featuring presentations from a group of highly respected scientists. All stressed the importance of de novo assembly of human genomes using PacBio sequencing to decipher the structural variation in the human population. One demonstrated the use of our technology to decipher the complex rearrangements in copy number variations, the breast cancer cell line. Collectively, the scientists reported de novo assembly of several human genomes with contig N50s at the multi megabase pair level using our latest P6 C4 chemistry. Our workshop was attended by approximately 500 people at the conference and another approximately 1,000 on the live video feed for people not at AGBT.

Our technology is also being used increasingly for targeted sequencing of human DNA. As illustrated in the paper that was published in DMC Cancer last month, from researchers at [Oslo] University who are studying chronic myeloid leukemia. In this research study, researchers sequenced samples from six CML patients who experienced poor response to the standard cancer treatment. The team checked for mutations in the [BCR-ABL1] fusion gene using the PacBio RS-2 at the time of diagnosis. And again following treatment with a regimen of tyrosine kinase inhibitor or TKI based therapy. Over 10,000 full length BCR-ABL1 sequences were obtained for all samples studied.

In all six patients, PacBio's sequencing successfully identified all mutations seen by other standard methods. Importantly, the team also identified several mutations that escaped detection by routine clinical analysis, including analysis by short read sequencing methods. All mutations identified have previously been implicated in resistance to one or more TKI therapies. Moreover, the assay development of the [Oslo] team for PacBio sequencing enabled a quick turnaround time allowing samples to be reported upon within two days.

These results are very promising for the development of future treatments of CML patients. The researchers concluded in their paper, and I quote, in summary, the PacBio sequencing assay can be applied to detect BCR-ABL1 resistance mutations in both diagnostic and follow-up CML patient samples using a simple protocol applicable to routine analysis. The method besides its sensitivity gives a complete view of the clonal distribution mutations, which is of importance when making therapy decisions, end quote.

This quarter you will note that we are not providing details on instrument bookings and unit shipments as our sales grow and as our technology becomes more competitive in mainstream sequencing applications, especially those involving human samples. We've reached the point where instrument bookings, placement numbers and pricing are better kept confidential for competitive reasons. Therefore, we've decided to conform to the industry standard of just providing instrument revenues without the unit detail. We continue to be confident in driving growth in our business and we expect our total revenues this year to grow at least 25% over last year.

That concludes my 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 the financial overview of our first quarter that ended March 31st, 2015. I will then provide details on our operating results for the quarter and a year over year comparison to the first quarter of 2014. I will conclude my remarks with a brief discussion of our balance sheet.

Starting with our first quarter financial highlights, during the quarter we recognized revenue of $17.6 million, and incurred a net loss of $20.2 million. The end of the quarter was $79.1 million in cash and investments, $22.2 million lower than the $101.3 million reported at the end of last year.

Turning to revenue, revenue increased substantially year-over-year across all of our products and services. Total revenue for the quarter was $17.6 million, a 52% increase over the $11.6 million recognized in Q1 of 2014. Instrument revenue increased 32% to $7 million in Q1 2015 from $5.3 million during the same period last year.

Consumable revenue was again very strong, increasing 69% to $4.3 million for the current quarter, up from the $2.5 million reported during the first quarter of 2014. Service and other revenue increased 32% to $2.7 million in the quarter, compared to $2.1 million in Q1 of 2014.

And finally we recognized $3.6 million of revenue associated with a $35 million payment that we received from Roche in Q3 2013. It should be noted that the revenue recognized in this quarter is a $1.9 million increase over related amortized revenue recognized in past quarters. The revised revenue amortization related to this upfront Roche payment reflects our increasing certainty of the estimated development time for this agreement.

Gross profit was $5.9 million in Q1 of 2015, representing a gross margin of 34%. In Q1 of 2014, we recognized $2.7 million of gross profit with a gross margin of 23%. The $3.2 million increase in gross profit year over year was the result of the $1.9 million increase in Roche related revenue as well as higher margins and revenue from both service and consumable sales.

Moving to operating expenses. Operating expenses in the first quarter of 2015 totaled $25.3 million, $4.4 million higher than the $20.9 million incurred in Q1 of 2014. Much of the increase came from higher compensation related expenses that resulted from a 10% increase in headcount year over year and a $900,000 increase in noncash stock based compensation expenses.

Breaking down our operating expenses. R&D expenses for the quarter were $14.5 million, higher than the $11.8 million of expenses in Q1 of 2014. This increase was the result of higher compensation related expense, as well as increases in consulting, product development and the regulatory costs associated with building a product to serve the clinical diagnostic market.

R&D expenses this quarter included $1.3 million of noncash stock-based compensation expense, a $400,000 increase over Q1 of 2014. Sales, general and administrative expenses for the quarter were up $1.7 million from a year ago. In Q1 2015, we incurred $10.8 million in expenses compared to $9.1 million in Q1 of 2014. Much of this increase was related to higher compensation expense, however marketing and commercial expenses were also higher to support the technological advances we are making in the human research sequencing market. SG&A expense for this quarter included $1.7 million of noncash stock based compensation expense, up $500,000 from Q1 of 2014.

Also in the area of other income and expense, in Q1 we recorded $800,000 of net other expense related to the interest expense associated with the debt we took on in Q1 of 2013, as well as FX losses in the quarter. Ben will provide further guidance on our ongoing expense rate later in the call.

Now turning to our balance sheet. As I mentioned at the beginning of my comments, cash and investments decreased to $79.1 million at the end of the first quarter. This is a $22.2 million decrease during the quarter. Our cash use reflects our Q1 net loss of $20.2 million, including $4.2 million of noncash related stock compensation and depreciation expense.

In addition, cash use in Q1 was pushed higher than in previous periods primarily because of an increase in inventory levels and higher accounts receivable, which as we have mentioned in the past, can fluctuate from quarter to quarter as a result of timing differences between orders, installs and collections.

Another contributor to increased cash use this quarter was related to an increase in IT fixed assets associated with the data handling requirement of the more complex sequencing our instruments are performing.

Working through the numbers. Inventory balances increased $2.2 million in the quarter to $13.5 million as of the end of Q1. Accounts receivable increased $1.9 million in the quarter to $5.3 million at the end of Q1.

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

Thank you, Susan. I will be providing an update of our 2015 financial forecast.

Starting with revenue, we are pleased with our first quarter revenue results and we remain on target with our product and service revenue expectations for the year. We're also excited to have reached our second Roche milestone a little earlier than we had anticipated. The milestone achievement this quarter will result in a $10 million increase in contractual revenue for Q2. We also expect to continue recognizing about $3.6 million in contractual revenue each quarter this year related to the amortization of the original upfront payment we received from Roche in 2013.

In summary, we are increasing our revenue growth forecast for the year from 20% previously to at least 25%.

Moving on to gross margin, we saw in Q1 the positive impact of the higher rate of contractual revenue we had under gross margin. With this higher rate of contractual revenue expected to continue, our quarterly gross margin percentage this year should remain in the mid 30s. Except in Q2 our gross margin should be higher as a result of the extra $10 million of gross profit that will be recognized with the milestone revenue.

Our operating expenses in Q1 jumped up due to a combination of planned investments in Q1 and normal quarterly fluctuations. For the remainder of the year, we expect our operating expenses to level off compared with Q1 levels, but will remain higher than our run rate in 2014. For the year, we expect our total operating expense to increase approximately 10% to 15% over last year. 2% to 3% of that increase is expected to be a result of an increase in noncash stock compensation expense.

Our operating expenses include noncash stock compensation expense and depreciation expense that together amounts to approximately $4 million per quarter.

With regard to interest and other expense, we continue to expect to record approximately $1 million of interest in other expense per quarter subject to small fluctuations. Roughly half of that represents cash interest expense from our outstanding debt and about $300,000 of it represents noncash amortization expense.

With regard to cash usage, we consumed more cash than we had forecasted in Q1 due primarily to the timing of the inventory receipts and AR collections. We expect to reduce our cash usage in the coming quarters, particularly in Q2 with the $10 million payment expected from Roche for achieving the second development milestone. We expect to maintain a balance of cash and investments of at least $50 million throughout the rest of this year representing at least a year's worth of cash on hand.

And with that, we'll open the call to your questions.

(Operator Instructions) Bill Quirk, Piper Jaffray.

Very nice quarter. First question from me is I guess just thinking about the BGI deal and I was hoping to maybe have you help us frame that a little bit. I certainly recognize there's some sensitivity around giving us a specific number, but maybe help us think a little bit about I guess is this a deal that could be in at a high single, low double digit? And if there's any specific, I guess triggers that they need to see that may in turn lead to a larger number of orders.

This is Mike. Yes, I think we're not comfortable at this point with giving you a number, as pointed out in the press release. We've received one order from them with a plan to, as they get that integrated into their pipeline, add to it in reasonable numbers.

I know it's taken us a long time to get into that position, but we finally convinced them of the value of the technology. They've been using some of the other service labs that we've -- have RS Systems installed in China and decided that they needed to jump into long re-sequencing more direct to themselves using our technology. And so we have a plan worked out with them to move that level of investment in their part up as they get it integrated into their informatics pipeline. But we're very excited about the possibility and I think they are as well.

And then can you just talk, recognizing that you want to keep some of the details around instrument placements and back order and such confidential for competitive reasons. Can you help us at least think a little bit directionally about order patterns or back log, anything like that?

We're going to continue to give you a guidance on revenue growth and hopefully that gives you at least a sense that there's stability there. But the, as Mike mentioned before, just giving you those details is something that we thought would be better not to do going forward. But given the consistency in the revenue guidance that we put out there, I think you can infer from that that things are fairly consistent.

And then just last one for me and I'll jump back in the queue here. Just thinking a little bit about consumables, guys, can you give us a little extra color here? Obviously the numbers came in well above kind of where you had targeted those to be and I'm just kind of curious kind of how much further can you push that dial?

Well we continue to push it up. The number that we gave you was an increase on a rolling 12-month basis relative to what we've given the last couple of calls. So given that it's on a rolling basis, you can backwards -- you can infer that it's gotten higher than the number we gave you for that one on a quarterly basis anyway.

So we still see continued usage at an increasing number of our sites, particularly as they get into more complicated genome projects which require multiple sample Marcel runs per project. And in the human area and the plant and animal space in particular, it takes a lot more cells to get the finished genomes that people are looking for than it did say through microbial sequence. It might run a lot of microbes, but it's basically one cell most appeased. Whereas some of the other projects may take 50 to 100 cells. So we think we have a ways to go on the per usage, per instrument usage.

And again Bill, it's Susan, we do have customers as high as 300,000 plus on a single system. We have seen increases not just at an 80/20 rule, but across the product line. So we're very excited about its future ability to continue to drive more and more consumer revenue through that install base.

Bryan Brokmeier, Maxim Group.

You indicated that the increase in the Roche revenue amortization reflects the increased certainty to completion, but that it's in line with your expectations. Wouldn't the amortization, if it's in line with your expectations, I guess I'm just trying to understand what accounting wise causes the amortization to change if it's in line with your expectations. Is there a risk adjustment to that?

Yes, I mean management though has great expectations, but accounting has to be very careful about the projections of the amortization period. So as that gets shorter and shorter and more and more certain, more milestones are met, we're more comfortable changing the estimate.

And I understand that you're not providing more color on the specific bookings numbers, but Mike could you provide a little bit of color around the makeup of that? Are you seeing an increasing percent of that backlog coming from the human area? And sort of how that has changed over the last couple of quarters.

Well the answer is yes. I think we've seen an increase, not just in humans, but in ones that are -- customers that are looking at more complicated genomes, larger genomes. And so the plant and animal space is part of that, as well as the human space, which has been the most dramatic in terms of usage increase certainly in the last five to six months.

What is the largest number of systems that any individual customer has? Is that something that you're able to share? And how have you seen the number of customers with multiple systems changing recently?

The largest single sites that we've announced before is four. And we have seen, I would say relatively steady increase in the number of customers that are either purchasing two or certainly more than one, or are purchasing additional systems. So that has steadily increased.

As their usage gets up to sort of when they maxed out the machine and they realize that they have more samples to run then we tend to get in discussions with customers about additional instruments. And we've seen that happening.

Could you talk a little bit about your pipeline and any changes that you've seen there in terms of the bigger funnel beyond your backlog?

Hard to be that specific about that, Brian. I mean the pipeline is good and if it wasn't then we wouldn't be able to price sustain the sort of guidance that we've put out there.

(Operator Instructions) Anthony [Sistilli], William Blair.

Just to let you know, I'm actually on behalf of Amanda, so she's still around. Congratulations on a great quarter. And first question, in regard to the RainDance agreement, would you be able to provide a little bit of more insight as to how the timing or the type of impact that could have on 2015?

Well, the timing depends upon how quickly and successfully our joint development program takes place. I mean they have a system, as you're probably aware, a couple of systems that make use of droplet technology for a variety of applications, some of which are in targeted sequencing. They have as part of that some interesting bar coding technologies for doing it. And we have some technology which we've been developing here that provides for very long range amplification without using PCR.

And our goal is to combine those two technologies and have them in the end sell a version of their platform that will carry out the fragmentation and labeling of very large pieces of DNA in their micro droplets and use that as a way to generate bar code labels, large fragments from the very large pieces of DNA that are compatible with our sequence read lengths on the RS. And by virtue of that, have a system that provides for extending the read length effectively in a synthetic read format from our technology. And do so because we're not having to break things in the end down to 200 or 300 base payer fragments for sequencing that don't leave gaps due to PCR bias or such.

And so we think that we can take advantage of the synthetic read capabilities generated by that technology that go even beyond where we do now, but we have the industry leading ability to do contiguous assemblies. And importantly to also carry that forward to haploid typing and phasing of haploid types over very, very long stretches of DNA. So we're exciting about it, it's in the early stages of development obviously, but a lot of the hardware associated with it already exists. And so it's really an application and chemistry development program.

And then kind of piggybacking off an earlier question. In regard to adjustable markets and how the machine reads more demand and use for complex genomes related to -- for human. Could you provide any insight into maybe the amount that that will contribute to 2015 guidance? Or has that been baked in to the 2015 guidance?

Well, has it been baked in, I mean obviously partly. But longer term, our goal is a way to get into an even larger percentage of the human market is to get the cost per human sample down much below where it is right now. Right now it's predominantly being used to do an expansion of looking at reference genomes. And what's been realized recently with some of our early studies from customers for the RS is that there's far more structural diversity out there in the general population, particularly worldwide, than was realized with technologies that mostly looked at SNP variation.

And given that, there's a large number of projects underway in various geographies now to look at that and our hope is that that lays the groundwork for how much variation is out there and the need to do that analysis more broadly on a very, very large number of samples.

And as we get our cost per sample down to where it's much more competitive with the short read technologies, we would expect to get a much larger chunk of that market. We've announced that we expect to be able to get an increase of at least fourfold in the throughput per dollar this year, which gets us down into a better range. As we get even below that amount we should have an even more competitive position.

And lastly, and I know I'm kind of just kind of repeating what everyone's already discussed, but in terms of instrument or consumable revenue, can you provide or explain if you expect in 2015 just for either segment just to have revenue? Are we expecting to see both increase year over year?

This is Ben. Products and service revenues are certainly going to grow 2015 over 2014. And then the Roche contractual revenue just due to the additional [utilization] rate is also going to grow. So the 25% growth forecast that we've given is just a combination of both of those things.

We have no further questions in the queue and I'd like to turn the call back to Mike Hunkapiller for closing remarks.

In closing we remain steadfast in our commitment to bring in the unique advantages of our SMRT technology and products to our customers in the scientific community in general. We believe this SMRT sequencing provides the industry's most complete and accurate picture of genomes due to its superior performance and sequencing accuracy, informative coverage, extremely long read lengths and ability to characterize DNA based modifications.

The expanded use of our technology and products, particularly in human genetic analysis, affirms our growing position in the marketplace. We are still very early in the adoption cycle for SMRT sequencing, but it's becoming even more clear that we have a very large potential for building PacBio's business.

Thank you for joining us and we look forward to talking again in three months' time.

Ladies and gentlemen, this does conclude the conference for today. You may now disconnect. Everyone have a wonderful day.