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Executives

Un Kwon-Casado - VP, Corporate Development

Gajus Worthington – President and CEO

Vikram Jog - CFO

Analysts

Douglas Schenkel - Cowen and Company

Bryan Brokmeier - Maxim Group

Dan Leonard - Leerink Swann

David Clair – Piper Jaffray

Sung Ji Nam – Cantor Fitzgerald & Co.

Matthew Pommer – Oppenheimer & Co. Inc.

Tycho Peterson – J.P. Morgan

Fluidigm Corporation (FLDM) Q4 2013 Earnings Call February 6, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fluidigm Fourth Quarter and Full Year 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Un Kwon-Casado, Vice President of Corporate Development. You may begin.

Un Kwon-Casado

Good afternoon, everyone, and welcome to the Fluidigm fourth quarter 2013 earnings conference call. At the close of market today, Fluidigm issued financial results for the fourth quarter and year ended December 31, 2013. During this call, we will review our results and provide commentary on recent commercial activity and market trends. Following these comments, we will host a Q&A session. Presenting for Fluidigm today will be Gajus Worthington, our President and CEO; and Vikram Jog, our Chief Financial Officer. This call is being recorded and the audio portion will be archived in the Investor section of our website.

During the call and subsequent Q&A session, we will be discussing plans and projections for our business, future financial results and market trends and opportunities, including, among others, guidance regarding expected 2013 total revenue, operating expenses, stock-based compensation expenses, capital spending and product margin expectations for the development of the single-cell and production genomics market, strategies for product development and anticipated new product launches and future market conditions, prospects and growth opportunities. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results. Risks relating to our business and operating results are contained in our quarterly report on Form 10-Q for the quarter ended September 30, 2013 and our other filings with the SEC, including our registration statement on Form 3SASR filed with the SEC on January 19, 2014.

Additional information will also be set forth in our annual report on 10-K for the year ended December 31, 2013 to be filed with the SEC. We advise investors to review these risk factors carefully. Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law.

During the call, we will also present certain financial information on a non-GAAP basis. Reconciliation between GAAP and non-GAAP results are presented in a table accompanying our earnings release, which can be found in the Investor section of our website. And with that, I will now turn the call over to Gajus.

Gajus Worthington

Thank you, Un. Good afternoon everyone. Thank you for joining us today. We capped off 2013 on a strong note. In the fourth quarter we delivered record instruments and consumables revenue, record C1 and single cell BioMark shipments and positive operating cash flow.

Looking back, we believe 2013 will be remembered as a pivotal year in the evolution and validation of the single cell genomics market. The scientific community is increasingly recognizing the experimental bias introduced with analysing heterogeneous bulk samples and migrating towards methods targeted at single cell resolution.

2013 culminated with Nature’s selecting single cell sequencing as the method of the year in December 2013. Finally, last week we announced our transformative acquisition of an emerging company called DVS Sciences to enhance our leadership position in the single cell analysis market. Following the acquisition, Fluidigm will offer a comprehensive portfolio of advanced technologies across single cell genomics and proteomics and cement our position as a technology leader in single-cell biology.

In the fourth quarter, total revenues of $20.9 million grew 33% year over year. Full year total revenue growth was 36% compared with our guidance of 32% to 34% provided on our last earnings call. We were pleased to see strong growth across both the instruments and consumables as instruments grew 26% and consumables grew 48%. By the end of 2013, we had a total installed base of approximately 920 systems of which over 300 combined C1 and BioMarks are designated for single cell research.

We believe we are tracking well towards our goal of approximately 700 Fluidigm single cell systems by the end of 2015. Single cell genomics revenue, which represented approximately half of the Fluidigm product revenues in the full year of 2013, nearly doubled year over year. In 2014, we expect single cell genomics to continue to be a strong growth driver albeit not at the pace of the growth in 2013, given more difficult comps. We forecast the overall single cell genomics market should continue to grow by at a CAGR of 50% beyond 2015 leading to a $415 million market opportunity by 2017.

We have seen strong initial interest in our single cell targeted DNA sequencing workflow that was launched in the early access mode at the end of 2013. The newly introduced workflow provides us a fully automated solution to isolate, image, stain and perform whole genome amplification of up to 96 individual cells at a time. When used in combination with the Access Array system, researchers can profile up to 480 known mutations or targets across their individual cells. This application should make a big impact in research fields that study somatic mutations in heterogeneous samples such as cancer. We will be showcasing the C1 and our single cell genomic solutions across DNA and RNA next week at the biggest sequencing conference of the year, the AGBT conference in Marco Island, Florida. There will be five high-profile speakers presenting talks related to single cell sequencing, including the open, opening plenary session talk by one of our collaborators at the Broad Institute.

Production genomics continues to provide additional market opportunity and diversification in terms of customer type and product mix. Consumables revenue, driven by production genomics applications represented approximately 60% of our total consumables revenue in the quarter and was up over 60% year over year. We estimate our total addressable revenue opportunity at $285 million across Ag-Bio, Biobanking and clinical labs. While the total number of addressable customers is counted in the 100s versus the 1000s in our target research market, the consumables pull-through per system can be orders of magnitude higher than what we experienced in research markets. In 2014, we will be making investments in additional dedicated sales people to focus on production genomics key accounts versus broad based selling across our product portfolio.

In conclusion, we are extremely pleased with our 2013 performance but very much are looking forward to 2014 given the strong fundamentals within our organic business bolstered by our recently announced proposed acquisition of DVS Sciences. We believe we have a vast opportunity ahead of us given our unique technology profile across genomics and proteomics and intimacy with our customer partners to drive the single cell biology revolution. We’ve built a strong team, a commercial infrastructure to scale with our growth and we are committed to building a great and lasting enterprise.

I will now hand the call over to Vikram for a more detailed view of our financial results.

Vikram Jog

Thanks Gajus. I hope you’ve all had a chance to review our fourth quarter 2013 earnings release. I will walk you through the operating results and highlights. In the fourth quarter of 2013, our product revenue grew 34% to $20.6 million. We had strong quarter for instrument revenue which grew 26% year over year to $12.1 million driven by sales of the C1 and BioMark systems. Single-cell genomics continues to be a strong growth driver for the company and for instrument revenue in particular. Approximately 70% of the BioMark systems sold during Q4 were motivated by single-cell research.

Our total consumables revenue both IFCs and assays was $8.5 million during the fourth quarter, an increase of 48% over the prior year’s quarter. Chip pull-through in the fourth quarter was within our historical range of $40,000 to $50,000 per system per year for our analytical systems and higher than non-historical range of $10,000 to $15,000 per system per year for our preparatory systems. The high utilization on the preparatory systems was driven by high throughput production genomics applications.

Given the trend over the last four quarters and our current visibility into future quarters, we now expect the chip pull-through of our preparatory systems to range from $15,000 to $25,000 per system per year. As mentioned in our investor call on January 29th, annualised pull-through for the [indiscernible] platform, which will become part of Fluidigm following the closing of the DVS transaction, has historically ranged between $50,000 to $70,000 per system per year. The installed base of approximately 920 instruments at the end of 2013 included approximately 530 analytical systems and 390 preparatory systems which include C1 systems.

Geographic revenues as a percentage of total product revenues for the fourth quarter were as follows: United States 44%, Europe 32%, Asia-Pacific 11%, Japan 10% and 3% other. Net loss for the quarter was $3.9 million compared to a net loss of $3.6 million in the prior year fourth quarter. Non-GAAP net loss for the fourth quarter of 2013 was $1.1 million compared to the $2 million non-GAAP net loss for the fourth quarter of 2012. Please refer to the reconciliation of GAAP to non-GAAP information attached to the Fourth Quarter 2013 Earnings Release for details.

Q4 product margins of 72% were in line with the year ago period. For modelling purposes, I would continue to encourage you to think of our business as a high 60% product margin business.

Turning now to OpEx, research and development expenses were $5.5 million in the fourth quarter of 2013 compared to $4.3 million in the fourth quarter of 2012 and $5 million in Q3 2013. The year-over-year increase in research and development expenses were primarily driven by increased headcounts.

SG&A expenses were $13.2 million in the fourth quarter of 2013 compared to $10.6 million in the year ago period and $12.1 million in Q3 2013. The year-over-year increase in SG&A expenses were driven mainly by headcount and expenses related to the pending purchase of DVS. Stock based compensation expense was $1.8 million in the fourth quarter of 2013 compared to $1 million in the fourth quarter of 2012 and $1.7 million in Q3 2013.

Now moving onto the balance sheet. Total cash, cash equivalents and investments were $86.3 million at the end of Q4 2013 compared to $82.8 million at the end of Q3 2013 and $83.7 million at December 31, 2012. We’re very pleased to report that we generated $3.2 million of net cash flow from operating activities in the fourth quarter of 2013. This was driven largely by higher accounts receivable collections and to a lesser extent timing of vendor payments.

Accounts receivable were $10.6 million compared to $12.4 million at the end of Q3 2013. DSO at the end of the fourth quarter of 2013was an all time low of 45 days compared to 74 days in Q4 2012 and eclipsed the 56-day mark set in Q2 2013. For modelling purposes, we continue to use the DSO of 60 to 65 days. Inventory was $8.1 million up slightly from $8 million at the end of Q3 2013.

I would like now turn towards guidance. Please note that our financial guidance excludes the anticipated impacts from the proposed acquisition of DVS Sciences. We’re reiterating our revenue growth guidance for the full year 2014 to be between 23% to 28% over 2013 revenue of $71.2 million.

We would like to remind investors that we’ve historically experienced seasonality in the quarterly pacing up of our product revenue and product revenue in the first quarter has historically trended down sequentially in the fourth quarter of this previous year. Operating expenses excluding litigation settlements and acquisition-related expenses are projected to be between $88 million and $90 million in 2014 compared to $67.2 million in 2013. In order to maintain our strong top line growth and position as well for future success, we have decided to significantly accelerate investments in R&D and strengthen our commercial organization by adding additional field applications, marketing and technical support personnel and targeting additional geographies for direct sales efforts.

Directionally R&D expenses are projected to grow at a faster rate than SG&A expenses in 2014. We’ll provide updated operating guidance including the OpEx impact from DVS Sciences on our next earnings call. Stock based compensation expense is projected to be between $12 million and $13 million compared to $6.4 million in 2013. Substantially, all of our stock based compensation expenses are reflected in operating expense.

And finally, capital spending is projected to be between $7 million to $9 million compared to $3.4 million in 2013. 2014 CapEx projections include expenditures related to the move and expansion of our Singapore manufacturing facility.

And with that I will turn the call over to the operator to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Dan Leonard of Leerink.

Dan Leonard - Leerink Swann

Can you elaborate more on the increase – the planned increase in operating expenses in 2014? Vikram, you gave us some color but it was much higher than we’re looking for. So if you could just offer some additional input.

Gajus Worthington

So Vikram you want to…

Vikram Jog

Yeah sure. So I think given the increase that we have experienced and the substantial momentum that we have generated in single-cell biology over the last 12 months and more, we have decided to capitalize on the opportunities presented by that growth potential and decided to accelerate significantly on investments in R&D and roughly three-fourths to 80% of our expenditure in 2014 is in support of single-cell genomics.

Gajus Worthington

Dan, I’d like to add that this is very much project based, in other words we’re not peanut buttering on additional R&D spending looking for things to do. We identified very specific things that we could execute on that we felt were really going to move the needle. In fact, we did some of these in 2013 and that’s why you saw us raise OpEx guidance during the course of the year and some of the performance in 2013 was a direct result of some of that activity.

Operator

Our next question comes from the line of Bryan Brokmeier of Maxim Group. Your line is now open.

Bryan Brokmeier - Maxim Group

Hi, thanks. Thanks taking the questions. With the introduction of single-cell genomic sequencing with C1 in the Access Array, should we expect to see a gradual decline in the percent of C1 cells that include BioMark HD will be a sharp decline or should we continue to expect it to be around in that 25% to 30% we’ve seen in 2013?

Gajus Worthington

Hi, Brian. It’s Gajus. We haven’t given any forward-looking guidance with respect to that percentage is going forward, but just qualitatively we actually don’t anticipate the utility of the BioMark to abate any in these new opportunities. So what I think this will do is to stimulate more usage of single-cell genomics on the front end of next generation sequencing and that in order to perform work, you’ll still want to complement of the genomic solutions and in other words you’re not just going to be sequencing and doing DNA work and then stopping. It will include DNA work, RNA work and indeed we believe necessity include proteomic work as well down the road. So we don’t expect that the utility of the BioMark has been abated at all. In fact, one of the things that the BioMark does really well was the genotyping and we haven’t launched the targeted DNA, targeted single-cell genotyping solution on the BioMark yet but you could imagine that’s something that we’re certainly thinking about.

Bryan Brokmeier - Maxim Group

Sorry in follow up question earlier, is any of these investments that you’re making in R&D, is it entirely driven by the opportunity you see in the market or is there any of that in response to competitive pressures or new entrants into the market or anything that you see there that you want to try and head-off investments and traction by other companies in the space.

Gajus Worthington

Brian, it’s all the former. It’s all recognizing opportunities that we see by virtue of our intimacy with the scientific community and identifying specific rather invention work that is longer term. Some of these things are not slam-dunk that there are some risk associated with them but [indiscernible], it could be transformative and other things that are more engineering projects like, for example, better software solutions that have a very clear need but it’s a more matter of just getting -- turning the crank so to speak, but really none of it is in response to competitive pressures, and I have been asked the question many times, has competitive landscape really changed much in the last year and to be honest it really hasn’t.

Operator

Thank you. Our next question comes from the line of Doug Schenkel of Cowen and Company.

Douglas Schenkel - Cowen and Company

Good afternoon. So my first question is what percentage of C1s were placed in Q4 with the purpose of using those C1s with sequencers and how has this progressed over the course of the year?

Gajus Worthington

Hi, Doug. It’s Gajus. It increased over the course of the year. We launched – it’s sort of a natural effect. We launched the [RNA seek] [ph] application really at the very tail end of 2012. So it really only started to have an impact at the very, very end of the year and then grew throughout the year. You actually don’t have the specific breakdown of this and it’s actually getting harder and harder to tell because customers that buy C1s on the front end of next generation of sequencing initially with sometimes with no intention, none of them coming round to purchasing a BioMark are in fact doing that and this is one of the reasons why we had such a strong utilization. In the fourth quarter, 70% of the BioMarks that we sold were intended for single-cell use and indeed some of those were customers who bought C1s on the front end of next generation of sequencing but then came back around and bought a BioMark. What that means is that we’ve been getting more and more difficult to tell when the C1s are being used purely for DNA sequencing. So it’s like generally that it has increased during the course of the year just naturally as a result of having those protocols out for the course of the year, but I don’t actually have a percentage for you in the fourth quarter at least.

Douglas Schenkel - Cowen and Company

So I guess with that in mind, a key driver to next-gen sequencing growth over the years has been reducing the [annual local] [ph] cost per sample. So, if you look at Illumina and their recently announced new products and product enhancements, they're taking another step forward towards lowering the cost per sample and cost per data again. I bring this up because if C1's are increasingly feeding sequencers and next-gen sequencing costs continue to go down, intuitively that would mean that the C1 associated sample prep costs would either increasingly account for a higher percentage of total asset costs or you're probably going to have to lower costs commensurately. Can you just talk about this dynamic and whether you agree and how you expect to manage your way through this over time? -

Gajus Worthington

Sure. So there’s a couple of things. One is you’re right that the cost per sample per cell -- sequencing has come down a lot and it’s not only because of the – actually the things that Illumina announced just recently. I think that yet there really be filtered or appreciated in this by the scientific community. To date it’s been more about the fact that the biology – and just a way that single-cell RNAC can particularly works, you need far fewer reads than anybody ever thought but you would. This has been actually a big stimulant to cells and to using single-cell gene expression via sequencing RNAC more broadly because the cost per experiment is far more affordable than I think what people thought a year and half ago.

So that has contributed to the growth of the field. Now I think this biological effect is unlikely to show up as much in DNA sequencing as it is in RNA sequencing. So indeed we are really pleased to see that Illumina’s announcements because frankly without a substantial reduction in cost, single-cell whole genome sequencing, for example, would just to be too expensive to engage in any meaningful way. I think even at a $1000 per sale it’s still a pretty pricey experiment – a very pricey experiment to be sequencing 100 individual cells at a $1000 per genome. The implication of this, as you point out, is that – actually you didn’t point this out. I will get to in a minute. The implication is that targeted DNA sequencing is going to be much much more popular at an individual cell level than whole genome single-cell sequencing and it’s still going to be in the range of -- if we get really lucky with some chemistry that largely will come out of third party vendors and maybe you can do whole axiom sequencing for less than $100.

Even at that level, the cost contributor for the C1 is pretty low. It’s the minority of the overall sample preparation cost. So I guess where we stand right now we don’t feel any pressure to reduce the cost on the C1 from a pure economic perspective as the experiments are being done today. Now the reason why I said the change is that the appetite for doing very large experiment is going to change but indeed we have customers already that are embarking on very large projects to the tune of 100,000 cells per sample. So when you get to the level, it isn’t a matter of just reducing cost really in terms of different configurations of chips of different technology in order to substantially reduce the cost of not only of the sequencing but the sample preparation. And we don’t think it’s going to stop at 100,000 cells. So we think that it will – single cell is one of these yields where there is a virtually unlimited appetite with the number of cells that the community would like to be able to handle and it has all kinds of ramifications beyond cost as software ramifications and what have you.

So I guess what I’ve said, to summarize against your question, there will definitely be a requirement for reducing the cost per sample as we move forward. It will really be driven a lot more by the requirement of the science and requirement of the biology than it will be a comparison between the cost of the sample preparation and the cost of the sequencing.

Douglas Schenkel - Cowen and Company

And maybe one more, so BioMark placements are clearly up year-over-year but I think if we go sequentially through the year there is not a ton of growth, it does look like the pace of Biomarks being placed for non-single cell purposes has either plateaued or maybe slowed versus earlier in the year given the offsetting growth associated with placing BioMarks for single cell purposes. So recognizing that most of the focus here -- increasingly is on single cell but also recognizing some of the competitive concerns in areas such as genotyping and digital PCR applications, I am just curious how you are thinking about some of the non-single cell applications on the analytical side, how that’s captured in guidance in that I guess going back to Brian’s first question about mix of C1s driving BiooMark placements, does your guidance continue to assume that there will be continued growth in the number of BioMark placements in 2014 versus 2013?

Gajus Worthington

So the main focus outside of single cell genomics is a production genomics and indeed these are opportunities where there is fewer numbers of aggregate instrument opportunities, but it’s a great business because the full-through per instrument as I mentioned in the prepared remarks can be literally orders of magnitude higher than what we experience in the research setting. So those opportunities are different from single cell in that these are not brand new markets, brand new market that we are enabling, this is either established markets where we are taking market share and it’s been attractive.

Production genomics had a very nice quarter in the fourth quarter and it definitely also contributed to growth in the BioMarks. And it’s a worldwide phenomenon, worldwide I mean in Europe, Asia, North America. So I wouldn’t necessarily infer that we didn't have some sequential growth throughout the year from BioMarks and so I will say that we’ve really only begun to scratch the surface of our opportunity in production genomics, our penetration $25 million opportunity that we have outlined is quite small, it’s a small percentage of that overall opportunity. Now going forward our expectation is that the BioMarks is going to continue to be what it establishes itself as – which is the preferred solution for doing gene expression profiling of single cells. And again this market is in a very early phase of growth. And so indeed we expect that BioMarks are going to continue to enjoy a lot of popularity with this field.

And as they’ve shown a amazing robustness in and around next-generation sequencing as well. So our guidance certainly assumes that we have growth in single cell genomics market, also assumes that we have healthy uptick in production genomics.

Operator

Our next question comes from Peter Haulfman from Miguel Securities [ph]

Unidentified Analyst

Just wondered if you could help us a bit more around kind of SG&A, how it’s going to trend through the year in R&D and then this OpEx guidance includes stock options?

Vikram Jog

Yes, the OpEx guidance does include stock options and we separately gave you the stock option, stock based compensation expense in 2014 to be between $12 million and $13 million. I also mentioned that substantially all of that is reflected in OpEx.

And other thing we said that directionally, compared to – in contrast to our historical growth rates directionally R&D is expected to grow at a much faster clip than SG&A in 2014.

Unidentified Analyst

How much is OpEx –

Vikram Jog

We haven’t broken the dollar amount but we did allude to the fact the rationale for spending the R&D was to capitalize on the momentum and continue to deliver on the momentum on single cell genomics. So roughly between 75% to 80% of the R&D efforts in 2014 will be devoted to single cell genomics

Unidentified Analyst

And just finally around DVS, when can you disclose what happened in Q4?

Vikram Jog

I’m sorry, Peter, could you just repeat your question?

Unidentified Analyst

Just around the DVS acquisition, when can you disclose what happened in Q4?

Vikram Jog

Oh, you mean the performance in Q4?

Unidentified Analyst

Yes, exactly.

Vikram Jog

Subsequent to the audit. So when we filed our SEC filings last week, they had been reviewed through the nine months ended September 30, 2013. So once we get them under our belt, we will have the full year end statements audited and I think thereafter we’ll be in a position to disclose the Q4 results.

Unidentified Analyst

But you can’t give us any kind of preannounced number around Q4 numbers?

Vikram Jog

No, we are not planning on doing that on this call.

Unidentified Analyst

Got you. Thank you.

Operator

Thank you. And our next question comes from the line of Bill Quirk of Piper Jaffray. Your line is now open.

David Clair – Piper Jaffray

Hi, good afternoon everybody. Dave Clair in for Bill. I was just curious, in terms of the CyTOF instrument, is there an opportunity for Fluidigm to develop a sample prep instrument to go in front of that?

Gajus Worthington

Absolutely. There is a lot of technological synergy between our microfluidic capability and the analytic proteomic capability of the CyTOF technology. I can’t be very specific about that right now. I mean one of the things that, well I guess I can give you one thing that we have talked about. Fluidigm has done quite a bit of work, we have published on this in doing microfluidic cell culture and cell culture very, very often is upstream cellular analysis of the type that you would do with a CyTOF machine by integrating cell culture together with the analytical modality. There are things – well first off, you could do – you could have much more tightly controlled and potentially much more sophisticated cell culturing which would allow you to do things like stem cell differentiation or test out therapeutics or what have you, followed by single cell analysis. That’s one thing that comes to mind immediately. But generally we are really excited about the technological synergy between our platform and the CyTOF.

David Clair – Piper Jaffray

Okay, thanks for that. And then can you talk about the traction you are seeing in the biobanking and the clinical lab market and how many reps are you planning to add for the production genomics business?

Gajus Worthington

Yeah, well we highlight those areas because we have seen meaningful traction in both of them. In the clinical setting it’s quite buried in by application the Access Array has done quite well, particularly in this past year as a sample preparation engine on the front end of next generation sequencing for a wide range of clinical applications. And we continue to see a lot of opportunity there. The biobanking – maybe when you think about that more broadly is actually sample identification and biobanking is one of several different I guess verticals that – vertical market segments that require sample identification. You can think about any institute that is running lots and lots of samples and needs to keep track of samples coming in the door and data going out and be able to link those two together as a requirement for sample identification. And whether that be a clinical application or be an industrial application, biobanking is certainly one of them.

You want to know — you want to be able to be tag essentially the attributes of the sample that you took in the door. Was it a 30 year old Caucasian with cancer or was it a 45 year old Asian person – person with Asian descent without, that type of thing. There is a lot of information there. That goes together with the sample. In any case, historically this has been done with literally physical labels and bar codes and there is a movement afoot now to shift to molecular barcoding, essentially reading off somewhere between 24 and 96 snips per sample. And given that number of snips, there is an astronomically huge – well, it would take several thousand earths of people before you would have two people that would overlap with the same snip – signature. So it’s a really good way to keep track of samples and we see that opportunity not just for biobanking but really in a lot of different segments where sample ID is necessary.

We are adding people. We haven’t disclosed exactly how many that is but it’s not a huge number. The production genomics business is really characterized by more limited number of opportunities as compared to research that require more B2B type selling, often times there is a very high level. These can be vice presidents or C-level folks that are running operations. But and when they purchase, they turn down a huge number of samples.

David Clair – Piper Jaffray

Okay. Then just one last one here. In terms of the R&D pipeline, it looks you’re obviously ramping up R&D spending quite a bit here. Is there anything that we should be looking for in terms of new products this year, I guess?

Gajus Worthington

Please stay tuned. We are – the innovation engine of Fluidigm is running very strong and we don’t announce new products until they are ready to go. But stay tuned.

David Clair – Piper Jaffray

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Sung Ji Nam of Cantor. Your line is now open.

Sung Ji Nam – Cantor Fitzgerald & Co.

Hi, thanks for the questions. Was wondering if you could provide color around the timing for the single cell whole exome sequencing and whole genome sequencing application?

Gajus Worthington

Yeah, so the single cell whole genome will be towards the end of the year and the single cell whole exome will be more or less in the third quarter, say in the second half.

Sung Ji Nam – Cantor Fitzgerald & Co.

Okay, great. And then going back to the production genomics business, was wondering you talked about the penetration is still very small. How competitive is that market and is it – is your growth in that market largely coming from competitor displacements or is the market itself growing at a fast rate? And then if you could also talk about switching costs and if that’s a hurdle for either your competitors to displace you and vice versa. Thank you.

Gajus Worthington

So it’s a highly competitive market, it’s an established market. These are as I mentioned in the prepared remarks, unlike single cell genomics, this is not a market that we’re creating. It’s an existing market with our existing solutions typically already in place and already in use. So it’s highly competitive. And the overall market is growing but not by very much and if they have to service some things like sample ID that are enjoying growth, but other things that are probably an aggregate like maybe ag bio that are probably actually down a little bit. So our growth isn’t because the market is expanding, it’s because we’re displacing conventional technology. And as you can imagine, that’s not easy. So we have to bring and we do bring a compelling solution to the table in order for an operations to decide it’s going to turn off bank of instruments and switch to something like a biomark.

You have a very, very compelling value proposition and our rule of thumb is that you have to be about an order of magnitude better all things considered in order for somebody to be willing to make a switch like that. We’re fortunate that we have that kind of advantage over the more conventional technologies and those include things from other vendors and more traditional solutions and sometimes solutions that are provided by next generation sequencing providers but are cumbersome and difficult and expensive on a per sample basis. So we win there by having a very strong value proposition versus other solutions and by displacing the current installed base. Now the switching cost is high, so that’s why we have to be so much better in order for it to make sense. So what happens when we get installed is that switching barrier now confers to our benefit. And indeed our observation, we’ve been in this market now for about half a decade is that when people adopt they are with you for a long time.

Operator

Thank you. Our next question comes from the line of Matthew Pommer of Oppenheimer. Your line is now open.

Matthew Pommer – Oppenheimer & Co. Inc.

Good afternoon and thanks for taking the questions. First one is probably best directed at Vikram. For modeling purposes how should we think about the long-term gross margin and operating margin? Do you still expect steady state operating margins in the high 20s to low 30s? And second to that, how does this answer change with the acquisition of DVS?

Vikram Jog

Hey Matt. In terms of those margins, we have consistently said that you should use the high 60s as a modeling assumption for a variety of reasons that we have outlined before in the short run having to do with the impending move in Singapore and secondly that we wanted the flexibility to keep the dry powder to take advantage of price elastic markets. And thirdly, should we decide to get regulatory approval in any of our instruments that may have an impact on margin. So for all of those reasons, we continue to encourage you and ourselves to use the high 60s as operating margin – I’m sorry, as gross margin, product margin. In terms of operating margin, we are not really publicly disclosed that. We have talked about the fact that we have best in class gross margin and there is nothing unusual about our business that should cause us to incur higher than industry average OpEx. So we expect to be able to generate best in class operating margin. But since we are so close to the DVS acquisition, we will have more guidance that would take account of the DVS business, most likely in our Q1 2014 earnings call.

Matthew Pommer – Oppenheimer & Co. Inc.

Okay great. And then on CyTOF, are the probes – the price of the probes, are they significantly different from fluorescence – flow cytometry probe costs?

Gajus Worthington

Yeah, we’re within range of that. There is actually quite a wide range of costs of fluorescently labeled probes to begin with. It depends on how exotic the antibody is and it also depends on how many colors you are trying to do simultaneously. The more colors you are trying to do and the more antibodies you are trying to do, do then get to bind effectively, the more extensive everything gets. So I think if you look at it that way, like the comparison of the metal conjugated antibodies versus the cost of attempting to do say a dozen or so fluorescently tagged antibodies, it compares favorably.

Matthew Pommer – Oppenheimer & Co. Inc.

Thank you.

Operator

Thank you. And our next question comes from the line of Tycho Peterson of J.P. Morgan. Your line is now open.

Tycho Peterson – J.P. Morgan

Hey guys, thanks for taking the question. Can you maybe just give a little bit of color on utilization systems for sequencing versus typing and gene expression?

Gajus Worthington

Yeah. So you mean utilization of C1 systems – I assume you mean utilization of C1 systems for – Tycho, was that the question? Sorry.

Tycho Peterson – J.P. Morgan

For sequencing versus typing expression.

Gajus Worthington

Yeah, so the utilization for gene expression on the front of the biomark is probably highest of all. Now the simpler reason for that is that cost per sample is lowest. And the – well there is a couple of other effects too which is the time to result is much, much lower than it is to go through a sequencer and then finally the data analysis is the simplest. So we see the highest overall C1 utilization in terms of number of samples you plough through the machine in that model. Now on a revenue basis though, it’s a little bit more complicated because the value per sample that we confer is actually higher as you start doing sequencing with it. So even though the number of samples that go through the C1 in order – to prep in order to do next generation sequencing; in this case I’m talking about RNA seq because we really haven’t seen any effect yet of DNA sequencing even though the number of samples might be lower than for cells that is, the value per cell is higher. So in kind of broad strokes, it tends to be a wash.

Tycho Peterson – J.P. Morgan

Okay. And then on the UK grant, 206 million, how much of that do you think gets split between single celled and other categories and do the DVS capabilities increase your chances of bigger grants going forward?

Gajus Worthington

MRC didn’t break out what the ratio would be between the three things that were funded. The other two things were – one of them is medical imaging and then the other was dementia. They’ve made some qualitative remarks that the most of the three, the largest funding would be to one of those other twos. So it’s probably – given that it’s probably less than a third of that. Having said that, unlike kind of the NIH single cell analysis comments on they really specifically called out that they meant this funding could be used in large part for capital expenditures as opposed to technology development. So it probably represents a richer opportunity for vendors of the Fluidigm in particular as a result of that qualification. There is no question that CyTOF could play in very nicely to these proposals is not why we acted on this opportunity. We acted on the CyTOF because of the science that has enabled what we are seeing from the customer base, the growth that they were experiencing and how synergistic their people and culture and the technology whether it’s ours, but there is no question that we expect both from the UK and be putting in grant applications to acquire CyTOF.

Tycho Peterson – J.P. Morgan

Last one, just on pipeline, anything you can say on single cell high processing, I believe you obviously have seen publications on it, but how are you thinking about that opportunity?

Gajus Worthington

You can do some of that already actually. CyTOF [ph] generally is understanding if the SNFs that occur, do they occur on the same wheel or not, that’s something very difficult to tell, what you can do – you can try with software but it’s a really difficult to do – which you are actually leading SNFs off of the same molecule. And we can do some of that right now actually with the Access Array, it depends on how close the SNFs are to one another and they need to be within a few hundred base pairs maximum in order to get that hypo type information but it’s something that we can start to do right now. And as we move to whole genome, whole sequencing, we will be able to do even more of it. Now this is best done with long read technologies. So it’s something that has a 1000 base pair read or even longer than that, would make this application even more attractable, so for that reason we are interested in some of these new techonologies that show some promise, not a lot of data yet, that could have really long read mice.

Operator

Our next question comes from the line of Bryan Brokmeier of Maxim Group.

Bryan Brokmeier - Maxim Group

Just to follow up on the accelerated R&D investments, are those – are any of those due to better position your technology for the high costs such as sample prep instruments, -- you sort of mentioned there is a potential opportunity and will we see a similar ramp up in R&D by DVS in 2014?

Gajus Worthington

So we made our R&D plan and budgeted, we were planning as a standalone enterprise which really was a only – just Fluidigm, there was really one assumption that we could make because you really can’t ever count on an acquisition happening unless you actually sign the document. So all of that R&D activity was directed at our own platform. It turns out that some of the things that we have prioritized like I mentioned cell culture few times could indeed be synergistic but it won’t be immediate, it will be something that will require some additional work to integrate with the CyTOF platform. And I have to defer – I will just repeat what Vikram said a moment ago, will be more folks on about the combined OpEx and about DVS’ OpEx for 2014 probably at our next earnings call, Q1 earnings call.

Operator

I am showing no further questions. I would like to hand the call back over to Un Kwon-Casado for any final remarks.

Un Kwon-Casado

Thank you. We'd like to thank everyone for attending our call today. A replay will be available on the Investor section of our website. This concludes the call, and we look forward to the next update following the close of the first quarter of 2014. Have a good evening everyone.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today’s program, you may all disconnect. Have a great day everyone.

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