Pacific Biosciences of California Inc (PACB) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California, Inc., Second Quarter 2015 Earnings Conference Call.

(Operator Instructions) I would now like to introduce your host for today's call, Ms. Trevin Rard.

Ma'am, you may begin.

Thank you.

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

With me today are Mike Hunkapiller, our 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 will 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 on 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 Investor 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 last call.

I'd like to now turn it over to Mike.

Thanks, Trevin.

Good afternoon and thank you for joining us today.

We are pleased with our second quarter results and the progress we continue to make in driving our overall business.

Highlights of our Q2 financial results were as follows -- total revenue grew to approximately $24.9 million, more than doubling our revenue of $11.4 million in Q2 of last year.

Year-to-date revenue was $42.6 million, 85% greater than our revenue of $23.1 million recognized in the first half of 2014.

This included the $10 million revenue milestone we achieved in April related to our contract with Roche, which we described in our call last quarter.

Excluding the milestone revenue and quarterly amortization of Roche contractual revenue from both years, our total revenue grew by 17% quarter-over-quarter and grew 29% year-to-date 2015 over year-to-date 2014.

Consumable revenue for the second quarter was $4.5 million, up 48% from Q2 2014.

Year-to-date consumables revenue has increased 58% to $8.8 million in the current year compared to $5.6 million in the first half of 2014.

System utilization continues to be robust, and our average consumable revenue per installed system continues to exceed $130,000 per year on a rolling 12-month basis.

Instrument revenue in the current quarter was $4.3 million compared to $4.7 million in Q2 of 2014.

Year-to-date instrument revenue increased 13% to $11.3 million in 2015 compared to $10 million over the same period in 2014.

As we move into the fifth year of commercialization of the PacBio smart sequencing systems, I'd like to give a brief overview of where we are positioned in the three genomic application areas on which we focus.

The first of these areas is microbiology, the one in which we first established the utility of our platform.

We are generally recognized as the gold standard for bacterial sequencing.

Smart sequencing is unique in that it provides highly accurate, complete genome assemblies along with detailed base modification profiles for bacterial genomes and associated plasmas.

This has allowed the return to generation of high-quality, reference-grade assemblies that can now be generated at a relatively modest cost.

New species and strain sequences are now deposited into gene databanks on an almost daily basis.

As an example, the Public Health England along with the Singer Center have released PacBio assemblies of over 650 of the 3,000 reference strains in their culture collection, a project they plan to complete over the next year or so.

The capabilities of smart sequencing have proven essentially to tracing the nature and source of complex hospital infection outbreaks, as I have noted in previous conference calls.

In a recent paper in mBio, the online journal of the American Society for Microbiology, the authors examine the development of antiviral drug resistance during treatment of a patient with persistent influenza A virus infection.

The authors noted that they "were able to reveal for the first time the complex interaction between multiple evolutionary processes as they occur within an individual host.

Resistant mutations appeared weeks before they became dominant, evolved independently and replaced in the new combinations by reassortment."

In a recent paper in Nature Communications, scientists examined the phenomenon of phase-variable gene expression in haemophilus influenza, bacteria that are a major cause of middle-ear infections and pneumonia.

This phenomenon is controlled by base modification, or epigenetic switches that affect antibiotic resistance, biofilm formation, and immunoevasion.

The authors noted that understanding the nature of this epigenetic switching by this and other infectious bacteria should aid in efforts to develop effective vaccines against them.

The second area of application focus for a technology is plant and animal genomics, an application, which has accounted for, roughly, half of the consumable usage of our customer systems over the last year.

The recent plant and animal Asia conference illustrated both current activity and future interest in using PacBio sequencing in this space.

This conference provided similar stories to the related conference held in the US during January with numerous presentations featuring smart sequencing of various plants, animals, and their parasites in symbiance.

The tenants at our workshop held around the conference was equal to roughly half of the total conference attendance.

The ability to provide high-quality de novo assemblies of the genomes of these organisms is particularly useful in breeding programs that have high commercial value and national importance.

The analysis of transcript isophones have expressed genes in these organisms is also an important component of efforts to understand their biochemistry.

In a recent paper in PLOS ONE, the authors described the use of our Iso-Seq protocol to examine the expressed gene isoforms in a series of wood-degrading fungi.

Their study showed that more than half of the genes in these organisms produced more than one transcript isoform "suggesting transcript diversity in this phylla has likely been underestimated previously due to lack of deep full-length CDNA data."

Similar results were recently reported in a publication in the Plant Journal describing a study of a popular Chinese medicinal herb.

The third area of application focus is human genetics, and application that is, in many respects, our newest, fastest-growing and eventually, likely, our largest.

It includes both de novo human genome assembly to elucidate structure copy number and single nucleotide variation.

Transcript isoform analysis, epigenetic analysis, and targeted gene sequencing -- highlights from the recent Festival of Genomics conference organized by Frontline Genomics, a nonprofit organization with the mission of bringing genomics to the front line of health care, included examples of these applications.

The event, with over 1,500 attendees and over 100 speakers addressing topics such as genomic medicine and cancer genomics included a special half-day track dedicated to long range sequencing chaired by our Chief Scientific Officer, Jonas Korlach.

The long-range sequencing track included talks from Chad Nusbaum from the Broad Institute, Mike Snyder from Stanford, Mark Gerstein from Yale, Dick McCombie from Cold Spring Harbor, and Sergei Koren from the National Biodefense Analysis and Countermeasures Center.

There were also talks given by industry representatives from Genentech and Roche.

Speakers detailed the unique value of PacBio long-range sequencing for a wide variety of applications for which smart sequencing is particularly well-suited.

They further described how short-read data does not provide adequate access to some of the most interesting parts of genomes such as repeat pseudo genes, extreme GC regions and homopolymers.

The common theme and takeaway from these presentations is that long-reach sequencing is essential for many types of human genome studies should be adopted more broadly as its value continues to become more widely understood.

Several recent publications have also highlighted the effectiveness of smart sequencing for generating or complete and accurate characterization of human genomes.

Scientists at Mount Sinai, Cold Spring Harbor and other institutions published a paper in Nature Methods describing the assembly of a diploid human genome using smart sequencing and genomaps to create "the most contiguous clone-free genome assembly ever made that is comparable to or better than other human assemblies employ mixtures of fosmid or BAC libraries."

The study also reported calling a comprehensive set of structural variance and tandem repeats and phasing these variants onto maternal and paternal ileals.

Scientists at the Baylor College of Medicine published a paper in BMC Genomics presenting a thorough analysis of the structural variation found in a diploid human genome with just 10X coverage of the genome using PacBio sequencing.

The researchers were able to identify more than three times the number of structural variants detected by other technologies, demonstrating that long-read data is ideally suited to calling these complex genomic elements.

These and other recent studies highlight the significant value of performing whole human genome sequencing with PacBio.

They are illustrative of a growing number of PacBio sequencing projects in several countries.

These types of results were instrumental in recent NIH funding announcements calling for more long-read sequencing to improve the quality of human genome assemblies.

Shifting to some other recent activities, last month we entered into two important property lease agreements.

The industrial park in which our current facilities are located has recently been acquired by a large high-tech company that plans to use the property for its own long-term expansion.

Under one of the new lease agreements, we are scheduled to receive financial incentives from our current landlord to vacate our existing space.

These incentives should offset the cost of moving our operations to a nearby property that is about a quarter of a mile away.

Our new building location will effectively provide us with about 20% more usable space overall, which we are dedicating primarily to the expansion of our manufacturing operations.

The new building positions us well to accommodate anticipated growth as we drive deeper into the resource market as well as expand in the clinical market with our partner, F. Hoffman La Roche.

This brings me to an update on the Roche collaboration.

As I mentioned earlier, we earned $10 million from Roche in Q2 after achieving a second significant development milestone.

We continue to be well on track towards delivering sequencing systems to Roche for the clinical diagnostic market by the second half of next year.

We now expect to be able to achieve another development milestone in Q4 of this year, and we expect to be in position to provide a more detailed update on these product development efforts later this year.

That concludes my remarks, and I will now turn it over to Susan to provide more details on our financial results.

Thank you, Mike, and good afternoon, everyone.

I will begin my remarks today with a financial overview of our second quarter that ended June 30, 2015.

I will then provide details on our operating results for the quarter and year-to-date, the comparison to the second quarter of 2014, and a year-to-date comparison to the first half of 2014, respectively.

I will conclude my remarks with a brief discussion of our balance sheet and our July 24th 8-K filing related to our property leases.

Starting with our second quarter and year-to-date financial highlights.

During the second quarter we recognized revenue of $24.9 million and incurred a net loss of $11.9 million.

This brings our year-to-date total revenue to $42.6 million and our net loss to $32.1 million.

We ended the quarter with $72.7 million in cash and investments, $6.4 million lower than the $79.1 million reported at the end of the quarter and $28.6 million lower than the $101.3 million reported at the end of 2014.

Turning to revenue -- total revenue for the quarter was $24.9 million, a 118% increase over the $11.4 million recognized in Q2 of 2014.

Year-to-date total revenue in 2015 is $42.6 million, up 85% over revenue of $23.1 million recognized in the first half of 2014.

Breaking down the revenue -- instrument revenue quarter-over-quarter was relatively flat with $4.3 million recognized in Q2 2015 compared with $4.7 million recognized in Q2 of 2014.

Year-to-date instrument revenue was $11.3 million, a $1.3 million, or 13% increase over the $10 million recognized during the same period last year.

Consumable revenue continues to be very strong, increasing 48% to $[5] million for the current quarter, up from $3 million reported during the second quarter of 2014.

Year-to-date consumable revenue has increased 58% to $8.8 million in 2015 compared to $5.6 million in the first half of 2014.

Service and other revenue increased 27% to $2.5 million in the quarter compared to $2 million in Q2 of 2014 and was up 30% year-to-date to $5.3 million from $4.1 million in 2014.

And, finally, as described in our Q1 earnings call, we recognized $10 million of revenue in Q2 as a result of achieving a Roche development milestone.

We also recognized $3.6 million of amortized revenue associated with a $35 million up-front payment that we received from Roche in Q3 2013.

Roche-related revenue recognized this quarter was $11.9 million, higher than in Q2 of 2014 and year-to-date was $13.8 million greater than that recognized in the first half of 2014.

The year-over-year incremental increases includes the $10 million milestone received in the current quarter, and a $1.9 million quarterly increase of amortized revenue of the $35 million up-front payment from Roche in 2013.

The revised amortization reflects the increased certainty of the estimated development time.

We generated a gross profit of $14.5 million in Q3 of 2015 representing a gross margin of 58%.

This was up from $3.1 million of gross profit and 27% gross margin recognized in Q2 of 2014.

Year-to-date gross profit was $20.4 million representing a gross margin of 48% compared with a 2014 year-to-date gross profit of $5.8 million with a gross margin of 25%.

Gross profits in 2015 have increased over 2014 levels primarily as a result of the Roche milestone revenue in Q2 and the revision of the quarterly revenue associated with the Roche contract.

It should be noted that product revenue -- product-related gross profit decreased by $1 million quarter-over-quarter primarily as a result of a $900,000 inventory reserve taken in the current quarter.

The reserve was an outcome of our normal quarterly assessment of excess inventory on a 12-month look-forward basis.

Moving to operating expenses.

Total operating expenses in the second quarter of 2015 were $25.9 million, $4.5 million higher than the $21.4 million incurred in Q2 of 2014.

Year-to-date operating expenses increased 21% to $51.1 million from $42.3 million in 2014.

Much of the increase in 2015 resulted from higher compensation expenses related to a 10% increase in headcount year-over-year and an increase in noncash-based stock compensation.

Noncash-based stock compensation increased $900,000 quarter-over-quarter and $1.8 million year-to-date 2015 over 2014.

Breaking down our operating expenses, R&D expenses in the quarter were $15.1 million, $2.7 million higher than the $12.4 million of expenses incurred in Q2 of 2014.

Year-to-date R&D expenses were $29.5 million, a $5.3 million increase over the $24.2 million of expenses in 2014.

The expense increase in 2015 was the result of higher compensation-related expenses including noncash compensation as well as an increase in consulting, product development, and regulatory costs associated with building a product to serve the clinical diagnostic market.

R&D expense this quarter included $1.2 million of noncash stock-based compensation expense, a $400,000 increase over Q2 of 2014.

Sales, general and administration expenses for the quarter were up $1.8 million from a year ago.

In Q2 2015 we incurred $10.8 million in expenses compared to $9 million in Q2 2014.

Year-to-date SG&A expenses increased $3.5 million to $21.6 million in 2015, up from $18.1 million in the first half of 2014.

The increases of expenses in 2015 was related to higher compensation expense and contractual fees associated with receiving payment for our achievement of the second milestone of the Roche agreement.

SG&A expense for this quarter included $1.8 million of noncash stock-based compensation expense up $500,000 from the $1.3 million recognized in Q2 of 2014.

Also in the area of other income and expense, in Q2 we recorded $600,000 of net other expense primarily related to interest expense associated with debt that we took on in Q1 of 2013.

Year-to-date our net other expenses have totaled $1.4 million.

Then we'll provide further guidance on our ongoing expense rates later in the call.

Now turning to our balance sheet.

As I mentioned at the beginning of my comments, cash and investments decreased to $72.7 million at the end of the second quarter.

This is a $6.4 million decrease during the quarter.

Our cash use primarily reflects our Q2 net loss of $11.9 million, less $4.3 million of noncash-related stock compensation expense and depreciation expense along with the reduction in both the inventory and accounts receivable balances as compared to the end of Q1.

Inventory balances decreased $1.5 million in the quarter to $12 million at the end of Q2.

Accounts receivable decreased $1.3 million in the quarter to $4 million at the end of Q2.

As a final note, on July 24th we filed an 8-K describing our entry into two separate agreements related to the planned relocation of our operations within the city of Menlo Park.

Our plan move includes the entry into an 11-year lease for a new larger facility, which will allow us to expand our workforce and manufacturing capabilities.

The relocation will require a retrofit of an existing building to accommodate our long-term needs.

The agreement with our existing landlord includes provisions for rent abatement through September 2017.

It also includes four separate $5 million payments to PacBio over time in exchange for our opting out of two five-year lease extension options we held on our current property.

We believe that the rent abatement and the $20 million of fees that we collect from our existing landlord should offset the cost we expect to incur in developing and moving into our new facility.

As a final note, both agreements are contingent upon the attainment of use permits for the new facility and both we and the new landlord have reserved the right to terminate the lease agreement should the permits not be obtained by September 30, 2015.

This concludes my remarks on the financial results for the quarter.

I would like to turn the call over to Ben.

Thank you, Susan.

I will be providing an update to our 2015 financial forecast.

Starting with revenue, as we saw this past quarter, our quarterly revenue comparisons have varied due to the timing of revenue we recognize for achieving Roche milestones.

In Q3 of last year, we recognized $10 million in milestone revenue, but we are not expecting to record milestone revenue during this third quarter.

As a result, our Q3 revenue will likely be lower this year compared with last year.

However, as Mike mentioned earlier, we are expecting to achieve an additional Roche milestone before the end of the year.

As a result, we are increasing our revenue forecast for the year, expecting annual revenue growth of at least 40%, which is up from our previous forecast of at least 25% growth.

Moving on to gross margin, as we anticipated and mentioned in last quarter's call, our Q2 gross margin was higher than usual as a result of the $10 million in milestone revenue we recognized.

For Q3 we expect to record a more normalized gross margin that is in the mid-30s.

For the fourth quarter we expect to record higher gross margin again reflecting additional milestone revenue.

Our operating expenses in Q2 were also in line with our expectations.

Our growth and operating expense this year stems primarily from a higher investment in product development and regulatory-related costs as we prepare to provide products to Roche for the clinical market.

We expect our operating expenses to continue at about the current run rate for the remainder of the year leading to approximately a 15% growth in operating expenses over last year.

3% to 4% of that increase is expected to be a result of an increase in noncash stock compensation expense.

As a reminder, our operating expenses include noncash stock compensation expense and depreciation expense that together amounts to approximately $4 million per quarter.

Regarding cash usage as we have mentioned in previous calls, 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.

Thank you.

(Operator Instructions) Tycho Peterson, JP Morgan.

Hey, guys, this is Steve Reiman on for Tycho.

First, just on the Roche milestone.

Can you give us any color on what triggered this expected early recognition?

And then how should we think about the timing of the fourth payment?

This is Ben.

So we're getting closer to the achievement of the next milestone, and with that added certainty that's the reason why we're giving a heads-up, too, at this time.

Again, we're expecting to achieve that milestone in the fourth quarter.

Okay, got it.

And then just on a -- on BGI, you mentioned last quarter that they were contemplating placing additional unit orders, so can you just give some additional color on the conversations that are going on with that customer?

Well, I won't go into any detail or discussions there.

We have placed the first instrument into their labs.

It's relatively early.

It's been there a fairly short period of time.

And as they get themselves trained on the use of it and get a better sense of their anticipated revenue stream from their service business, then we will collectively proceed accordingly.

Got it.

And then, lastly, just are there any updates on the RainDance collaboration in terms of timelines or milestones?

Not that we're giving publicly at this point, no.

Amanda Murphy, William Blair.

So I had a question on -- I know you're not giving backlog metrics, per se, but I think you did have a decline, vis-a-vis, Q1 in terms of instrument revenue.

So I'm wondering if you can just give a perspective on -- you know, I guess, without asking you to quantify the backlog, kind of what that looks like, maybe qualitatively going forward?

And then separately, again, maybe this is a difficult question to answer, but thinking about, kind of, what's going on with Roche.

You know, at a high level what might your -- what might that do to, sort of, instrument revenue over the longer term here?

Okay, I'll take the first part, and maybe Mike has some comments on the second part.

So -- yes, the second quarter revenue was lower than the first quarter, but, you know, we've said in the past that we're subject to some quarterly fluctuations just to the timing of when things get installed.

So that's just, unfortunately, the conditions that we live in.

We're not giving detailed color on the backlog.

Instead what we're doing is continuing to provide guidance on the revenue growth, and what we're trying to do there is at least give you some sort of sense for the trend of the business.

We increased the revenue guidance from 25% growth to 40% growth.

Admittedly, a lot has to do with us expecting to get some more milestone revenue in there, but embedded in there, obviously, is the continued product and service revenues that we're expecting in the balance of the year.

Right, and I would just say, Amanda, sometimes it's better to look at the year versus the quarters.

So if you look at the year-to-date, we're 13% up from last year to date.

So because, again, when we did talk about bookings you saw last year we did a five and then a 16 and they're just too choppy at this small number to really feel that they're giving you the pattern.

Whereas giving you guidance on total revenue, we feel it's a better metric of our business.

Overall, not counting the Roche revenue, we're up almost 30% year-to-date.

So that gives you a better sense of the product run rate is there.

I think relative to Roche and then obviously we and Roche are making a substantial investment in the clinical diagnostic sequencing arena.

So one might expect that we both anticipate a substantial return from that.

As I said, we'll probably give you a little more clarity on where we are with the overall Roche program in our next conference call.

Okay, fair enough.

And then maybe just reminder on the (inaudible), you know, obviously, that's on the clinical side, but do you have leeway support over whatever you may be working on with Roche onto the research side?

Maybe just remind us on this, sort of, structure of the contract from that perspective?

Well, we are developing for them a version of our technology that will go through regulatory approval eventually.

For them to sell into the clinical diagnostic arena, obviously, that's our technology.

They'll be our distributor into that space, and so we have freedom to use whatever we develop from a technology perspective and platform technology into our markets.

As we said, we retain all rights outside of clinical human in vitro diagnostics, so any other markets, that technology are open to us for direct distribution.

Okay, and then I guess this last one, and I'm assuming the answer is no given the guidance.

I think it's basically excluding Roche.

It sounds like you sort of still expect kind of a similar performance but is it the right way to think about it -- that the relocation, it's not going to impact your manufacturing capacity or anything like that in terms of our modeling, going forward?

Two different questions, I think you had in there.

I'll take the latter one first.

So -- relocation, that's not going to happen this year, Amanda, because we have to basically, as Susan mentioned, do some improvements to that building, and we have literally the next two years to execute on that move from our current property to the other property.

The first part of your question had to do with -- I'm going to interpret it as breakdown of the revenues.

And we're not given specifics on the breakdown, but we are, as Mike said, we're seeing growth in the business of 29% year-to-date on the non-Roche business.

So that's a pretty good indicator of our business.

Right, now we just had part of the capacity increases, the power of both the installed base and the amount of penetration into it is just continuing to be very strong numbers for us.

So we're excited that we'll have some more breathing room in the manufacturing facilities, going forward.

As is pointed out in a couple of presentations, one of the main reasons for the relocation, from our perspective, independent of our current landlords, need for the space in the whole industrial park that we're located in is to be able to increase our manufacturing capacity.

Drew Jones, Stephens, Inc.

Hi, this is Garrett, actually, in for Drew.

Just a quick question on kind of a -- just generally speaking -- how you've seen reorder trends been going in the quarter and, kind of, what segments that these trends were coming from?

So this is Ben.

Actually, first of all, I'll start off saying that the consumable revenues, which, in a way is, sort of -- I think of that as reorder, has been very robust.

And that's been growing very well on just, you know, same-store sales perspective is one way to look at that.

Then in terms of existing sites, ordering additional systems, we continue to engage in or engage with, I should say, existing customers to buy additional systems without being too specific on that.

And I think, as we said, we have microbial, we have plant and animal, and we have human.

Some of those are through service providers and as their volume increases and we do see demand for more capacity on that unit.

So those two result in future purchase dialog going on.

Okay, thanks.

And then also just -- I know it's still early days with BGI, but given the recent leadership change at the company, is there going to be any impact felt that you see, going forward, with the relationship?

We don't see any change in our relationship due to that.

(Operator Instructions) Bill Quirk, Piper Jaffray.

I guess the first question is instrument ASPs.

Ben, if you mentioned something or Susan mentioned something in your prepared comments, I'm afraid I missed it.

Were they up, down, year-over-year?

They're within the normal fluctuation, I would say.

So they're, you know, again, built into the fluctuation in the revenues is both the quantities, I guess, and normal geographic sort of mix.

So geography by geography, I think it was probably not too different than anything we've seen in the past.

But you're always going to see some fluctuations in ASP just because of the geographic mix.

Right, and we do see a little bit, obviously, as everyone else does, that when you do anticipate or get a unit from Europe, you're not making quite as much because most of our European, other than the UK, are denominated in euros.

So those elements are sometimes at play in a quarter, but it's really, Ben said, are you going through an Asian distributor or are you doing direct to the United States or direct in Europe?

And Europe, the [policy] widens but unfavorable over the last 12 months.

Yes.

Sure, no, no, understood.

So it's safe to say, then, from a geographic standpoint they had, I guess, more placements outside the US this quarter?

Is that reasonable to say?

I don't know.

I mean, it's -- I don't know that there is a materially different sort of mix but, again, these are -- the numbers are small, so even single changes on the mix of how many in each could to make a difference.

I'm not sure that it's -- we're struggling with it probably I don't even think I've calculated it.

Right, yes.

And you could look at it more the other way, which is if you had more Europe at a higher euro last year than you have this year, that could shift it without a large geographic mix change but just some of the dynamics.

Because you're in a lot of [not-large] giant numbers.

Understood, okay.

And then maybe one more Roche question.

So just thinking about, I guess, into 2016, do they have any minimum commitments once you complete this project in terms of instrument purchases?

And, if so, would you expect to see any of those in 2016?

Well, to the latter, the answer is yes because anything we ship to them they pay for, or we don't ship them to them, obviously.

And we've said we plan on being -- providing the systems for the diagnostic market by the middle of next year.

So I'm not going into too much detail in terms of the agreement, but I think some of it's been filed in the past, but they will give us a binding commitment over a period of time through a forecast system that they will put in place.

And if there's not sufficient working towards that forecast, then there are issues associated with what our rights are with that.

So the answer in one sense is yes, but it will vary from year to year as to what that number is.

Jonathan Abodeely, XLCR Capital.

Just one question on the long-term throughput [bulls] for the -- your system.

Can you just provide some current thinking around some of the current throughput objectives and maybe the levers that you have at your disposal?

Do the chemistry software, hardware, increase the throughput?

Thank you.

Well, the answer is all of those and a few other things are included in the levers.

So our stated goal, which we've had each of the last three years, going into this one, the fourth, has been to increase our throughput by a factor of 4 every year.

And that remains our goal and will be our goal again next year, I suspect.

The levers are chemistry in terms of readlink per piece of DNA that's being analyzed.

A lot of it is in sample prep that allows one to generate longer pieces of DNA to start with.

A lot of it is in software in terms of cutting down on the amount of coverage that one has to have in order to get a certain level of accuracy.

Others can come and being able to load a larger number of DNA fragments into one smart cell.

All those things have leverage in terms of the system throughput, and we are working on all of them simultaneously.

I am showing no further questions at this time.

I will now turn the call over to Mr. Mike Hunkapiller for closing remarks.

So in closing, we remain steadfast in our commitment to bring in the unique advantages of our smart technology and products to our customers and the scientific community, in general.

We believe that smart sequencing provides the industry's most complete and accurate picture of genomes due to its superior performance in sequencing accuracy, uniformative coverage, extremely long readlinks and ability to characterize DNA base modifications.

We are still very early in the adoption cycle for smart sequencing but it is 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, thank you for participating in today's conference.

This concludes today's program, you may all disconnect.

Everyone have a great day.