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Pacific Biosciences of California (NASDAQ:PACB)

Q1 2014 Earnings Call

April 30, 2014 4:30 pm ET

Executives

Trevin Rard

Michael W. Hunkapiller - Executive Chairman, Chief Executive Officer, President and Member of Compensation Committee

Susan K. Barnes - Chief Financial Officer and Executive Vice President

Ben Gong

Analysts

Bryan Brokmeier - Maxim Group LLC, Research Division

William R. Quirk - Piper Jaffray Companies, Research Division

Tejas Savant - JP Morgan Chase & Co, Research Division

J.P. McKim

Zarak Khurshid - Wedbush Securities Inc., Research Division

Operator

Good day, ladies and gentlemen. And welcome to the Pacific Biosciences of California First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Trevin Rard.

Trevin Rard

Good afternoon, and welcome to the Pacific Biosciences First Quarter 2014 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 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'll be making forward-looking statements, including plans and expectations relating to our financial projection 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 annual report on Form 10-K.

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'll now turn the call over to Mike Hunkapiller.

Michael W. Hunkapiller

Thanks, Trevin. Good afternoon, and thank you for joining us today. We are pleased with our first quarter 2014 results and the progress we are making in driving our overall business.

Highlights of our first quarter financial results are as follows. We booked orders for 9 PacBio RS II systems in the first quarter, representing more than double the bookings we had in Q1 of last year. We also delivered 9 systems during the quarter, which brings our install base up to 97.

With the replenishment of 9 new orders in the quarter, our backlog of systems ended up once again at 13 units as of the end of March. Consumable revenue for the first quarter was $2.5 million, up more than 30% from the prior year Q1 consumer revenue of $1.9 million, signaling continued strong utilization in our install base. We continue to average over $100,000 in consumer revenue per year per install system.

Total revenue for the first quarter was $11.6 million, up over 100% from $5.6 million in Q1 2013, driven primarily by a significant increase in system sales. A recent uptick in bookings is now being reflected in our revenues as the systems are getting installed. With another strong quarter of bookings in Q1, we're looking forward to continued solid revenue growth over last year.

We raised $21 million in cash during the quarter using our at-the-market equity facility. We ended the quarter with $119 million in cash, which is up $6 million from our cash balance at the end of 2013.

And finally, I would like to call your attention to our joint press release issued yesterday regarding the recent investment by HistoGenetics and PacBio RS II systems for HLA typing and analysis. I will provide further color on this matter later in my remarks.

Now I would like to provide some highlights from scientific conferences we attended since our previous earnings call. The conference that tends to get the most attention each year is the Advances in Genomes Biology and Technology or AGBT conference, is held at Marco Island, Florida each year.

At this year's AGBT, we had a very strong presence with 38 poster and podium presentations featuring PacBio. This was up over 50% from the 24 last year. The 38 this year represented approximately 10% of all the posters and presentations at the entire conference. The posters and presentations by our customers spanned a wide range of applications, including microbial, viral, fungal, human and plant and animal sequencing.

The PacBio workshop, our Chief Scientific Officer, Jonas Korlach, presented on one of our most recent and exciting applications, full length transcript isoform sequencing. As background, a very popular application for short read sequencing is transcriptome shotgun sequencing or RNA-Seq. At these studies, researchers used quantitative counting techniques to analyze the expression of genes.

However, with short read links, they have great difficulty identifying the exact form of the genes being expressed and running through assembly problems that are typical of short read sequencing. The PacBio long reads, however, researchers have been able to sequence through entire transcripts with literally no assembly required. PacBio isoform sequencing has already enabled scientists to identify thousands of genes and gene isoforms that were previously unknown.

Concurrent with the AGBT, we released the first PacBio de novo assembly of a human genome. The genome we sequenced was the well-studied CHM1 human cell line. Consistent with other data sets we have posted recently, this data set represented a significant quality improvement over previous de novo human assemblies.

To give you an example, since 2007, there had been a total of 6 de novo human assemblies published. The first was achieved with Sanger sequencing. The other 5 since then have been performed with Illumina or Roche 454 sequencing systems.

To assess the quality of each assembly, we compare each contig N50, which is the proxy for the average length of each assembled piece. For those first 6 de novo human assemblies, the contig N50 ranged from 5.5 kilobases on the low end, to 144 kilobases on the high end. In comparison, the PacBio assembly we recently released had a contig N50 of 4.4 megabases, which is more than 30x longer than the best assembly of the other 6 de novo assemblies published.

The data from the CHM1 sequencing has already being used to fill in gaps of the human reference genome arising from complex sequence context that are refractory to short read sequence analysis. This includes sequence discovering numerous medically important gene regions.

Shifting now to publications. We continued to see an increasing rate of publications of SMRT technology. There were at least another 50 publications of SMRT sequencing in Q1, which brings the cumulative total to over 150. We view the increasing rate of publications as validation that SMRT technology brings unique value to our customers that is a precursor for a widespread adoption.

One paper worth highlighting in particular appeared last month in Proceedings of the National Academy of Sciences, or PNAS, entitled Cartography of neurexin alternative splicing mapped by single-molecule long-read mRNA sequencing. The authors of the paper, including Thomas Südhof and Steve Quake at Stanford University, described how they use SMRT sequencing to characterize the genes encoding neurexins, which were involved in a formation of connections between cells in the human brain.

Because of the high number of different spliced isoforms, these genes have been extremely difficult to study in the past. With SMRT sequencing, the researchers identified hundreds of different neurexin isoforms, highlighting the staggering complexity of these gene families.

This paper does a nice job showcasing the power of PacBio isoform sequencing, and we are seeing a lot of excitement building in our customer base around this application. This is a good lead-in to describing our latest SMRT analysis software release, which we announced earlier this month.

Our SMRT Analysis 2.2 release showcased 2 streamlined applications. The first is full-length transcript isoform sequencing called IsoSeq. The new software toolkit provides enhanced functionality to streamline types of transcriptome studies I described earlier.

The second application we introduced with this release is HLA typing for research. To provide some background, the human leukocyte antigen or HLA loci are a group of genes critical to immune system function. Human's HLA genes are extraordinarily polymorphic. Several thousand alleles have been described, and the number of new alleles continues to increase.

HLA allele-specific genotyping is critical for autoimmune disease associated studies, drug hypersensitivity research and other applications. The long reads provided by PacBio sequencing are ideally suited for accurate allele-level genotyping with unambiguous allele phasing. We are seeing growing interest in our customer base on HLA analysis, and we believe it can become a significant opportunity for us going forward.

Referring to the joint press release I mentioned earlier, Dr. Nezih Cereb, Chief Executive Officer and Cofounder of HistoGenetics, said, and I quote, "As a leader in the HLA typing market, we aggressively seek out technologies that can accurately analyze this complex region of the genome. With its industry-leading read lengths, accuracy and fast turnaround time, PacBio's sequencing platform is exactly what this market needs. We are eager to use our new PacBio RS II machines to get comprehensive novel views of the HLA region and other genes relevant to immunology, such as KIR."

In addition to HLA typing and isoform sequencing tools, our SMRT Analysis 2.2 release includes additional tools for detecting minor variants, which can be particularly useful in viral and cancer studies. And finally, we improved the HGAP assembly algorithm, providing a 10x speed improvement for microbial assembly projects.

Last quarter, I outlined a series of product enhancements we had planned for the year, and we're on track to achieve those plans. Later this year, we plan on launching improvements to our chemistries which will extend read links beyond 10,000 bases on average and well above 40,000 bases for the longest reads.

We are also working on ways to increase the efficiency of our SMRT cells so that more reads can be obtained from the same cell. We are targeting a fourfold improvement in throughput per SMRT cell this year. In addition, we are continuing to make improvements to sample preparation, and we have further software improvements planned for the second half of the year.

On the commercial front, we're excited to see momentum building on several areas. Following the plant and animal genome conference that we spoke about in our last conference call, we are seeing new sequencing projects being started involving important cash crops. The human sequencing we have begin working with leading HLA typing centers such as HistoGenetics, have started using their first PacBio system this past quarter and are planning to install the second system later this year.

In the area of microbial sequencing, the work involving the cataloging of pathogens has continued, customers like the FDA, the Public Health England, the University of Maryland, and we have noted more interest for industrial applications such as biofermentation and veterinary health. As the application for SMRT sequencing expands, so does the demand for PacBio RS II systems. Our pipeline for new systems sales is robust, and we are on track for another year of healthy growth in sales.

That concludes my remarks. And I will turn the call over to Susan.

Susan K. Barnes

Thank you, Mike. And good afternoon, everyone. I will begin my remarks today with a financial overview of our first quarter that ended March 31, 2014. I will then provide details on our operating results for the quarter and a year-over-year comparison to the first quarter of 2013. 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 $11.6 million and incurred a net loss of $18.9 million. We ended the quarter with $118.7 million in cash and investments, $6.2 million higher than the $112.5 million reported at the end of last year. During the quarter, we raised $20.6 million in equity funding from at-the-market facility. Excluding these proceeds, cash and investments decreased by $14.4 million.

Turning to revenue. Revenue increased substantially year-over-year across our products and services. The total revenue for the quarter of $11.6 million was more than double the $5.6 million recognized in Q1 of 2013.

Instrument revenue nearly tripled year-over-year, increasing to $5.3 million for Q1 2014 from $1.9 million during the same period last year. The increase in revenue reflects the 9 instruments recognized during the current quarter compared to 3 last year.

Consumer revenue was also strong, increasing 31% to $2.5 million from the current quarter, up from $1.9 million reported during the first quarter of 2013.

Service and other revenue increased 19% to $2.1 million in the quarter compared to $1.7 million in Q1 of 2013. And finally, we continue to recognize $1.7 million in revenue per quarter associated with the $35 million upfront payment that we received from Roche in Q3 2013.

Gross profit was $1.7 million in Q1 of 2014, representing a gross margin of 23%. In Q1 of 2013, we recognized $900,000 of gross profit with a gross margin of 17%. Gross profit for the quarter also included the $1.7 million of margin relating to the Roche revenue.

The increase in gross margin was tempered by a change in product mix. We recorded a large amount of instrument revenue for Q1 2014 in comparison to previous quarters. Since the instrument revenue has the lower margin than our consumables, the mix of instruments to consumables affects the gross margin percent result.

Moving to operating expenses. While revenues were -- for the quarter were up significantly year-over-year, operating expenses were down slightly year-over-year. Operating expenses in the first quarter of 2014 totaled $20.9 million compared to $21.5 million incurred in Q1 of 2013.

Breaking down our operating expenses. R&D expenses in the quarter were $11.8 million, essentially unchanged from the $12 million of expenses in Q1 of 2013. R&D expenses this quarter included $900,000 of noncash stock-based compensation expense. Sales, general and administrative expenses for the quarter were down by $400,000 from a year ago.

In Q1 2014, we incurred $9.1 million compared to $9.5 million in Q1 of 2013. SG&A expense for this quarter included $1.2 million of noncash stock-based compensation expense.

Also, in the area of other income and expense, in Q1, we recorded $600,000 of net other expense, primarily related to the interest expense associated with the debt that we took on in Q1 of 2013. Ben will provide further guidance on our ongoing expense rate later on the call.

Now turning to our balance sheet. As I mentioned at the beginning of my comments, cash and investments increased to $118.7 million at the end of the first quarter. Excluding the proceeds from our ATM facility, cash and investments decreased during the quarter by $14.4 million, primarily reflecting our first quarter net loss of $18.9 million, less $3.5 million in noncash expenses from stock-based compensation expense and depreciation.

Balance sheet effects further contributed to the reduced cash used in the quarter; most notably, a decrease in inventory as the result of a greater number of RS II instruments delivered in the quarter. Inventory balances as a consequence of the 9 systems recognized in Q1 were reduced by $1.7 million to $8.3 million at the end of the quarter, down from $10 million at the end of 2013.

Accounts receivable increased to $3.4 million at the end of Q1, compared to $2.7 million at the end of last year. The increase in AR is due to increased revenue and normal fluctuations associated with instrument delivery and collection timing.

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

Ben Gong

Thank you, Susan. I will be providing an update to our 2014 financial forecast. Starting with revenue, we are pleased with the system bookings we achieved in the first quarter and the continuing solid system utilization that is driving year-over-year growth in consumable sales. Therefore, we are increasing our revenue growth forecast for the year, from 55% previously to approximately 70%, which translates a total annual revenue estimate of between $47 million and $48 million for 2014.

We expect significant year-over-year increases in revenue for each quarter this year. That said, please keep in mind that on a quarter-to-quarter basis, our revenue can fluctuate based off the number of systems installed each quarter, which is dependent on customer site readiness.

For example, our sequential jump in revenue this past quarter was largely driven by the 9 systems we delivered in Q1, compared with the 5 systems we delivered in Q4.

Moving on to gross margin. We have seen in the past 2 quarters $1.7 million of quarterly amortization of the Roche payment from last September continues to result in a favorable year-over-year gross margin comparisons. Another significant factor that can drive fluctuations in our gross margins is the relative mix of instrument revenue, which has a lower gross margin than consumables revenue. During our call last quarter, we mentioned that we expected a higher mix of instrument revenue as we begin to install our larger backlog of orders.

In Q1, the number systems we installed was on the high end of what we expected, which caused our gross margin to decrease more than we anticipated. Based on our positive outlook on bookings this year, we expect to continue having a higher mix of instrument revenue throughout the year compared to last year.

Taking this into account, along with the continued amortization of the Roche payment, we're forecasting our gross margins to be between 23% and 27% for the remainder of the year. As a continued reminder, at our current revenue levels, small changes in gross profit dollars can cause fluctuations in our gross margin percentage.

Our operating expenses came in as expected at $21 million this quarter, and we plan on maintaining expenses at about this level throughout 2014. Please keep in mind that our quarterly expenses can vary due to the timing of certain research and development expenses.

Our operating expenses continued to include noncash stock compensation expense and depreciation expense that together amounts to between $3 million and $4 million per quarter. Net interest expense for the quarter was right in line with our expectations this past quarter, and we expect to continue to record between $600,000 and $650,000 in net interest expense per quarter this year.

With regard to cash, our use of less than $15 million this past quarter puts us right on target for meeting or beating our previous forecast of consuming $60 million for the year. Taking into account the $21 million in additional cash we raised in Q1 from our at-the-market facility, we now expect to consume less than $40 million for the year. Therefore, we should end the year with at least $73 million in cash and investments.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC, Research Division

Have you seen an improved funding environment so far? And do you see any impact on orders in the first quarter, or were new funds really not available until the second quarter?

Michael W. Hunkapiller

Well, I think we certainly have seen an increase in the pipeline, particularly relative in the U.S. to government entities in terms of their ordering process. I don't know if that translated in specific orders in Q1. But certainly, their budgets in particular have become a little more freed up than they were for quite a while. I think we've seen at the consumable side even probably in Q1, but certainly, on the instrument side going forward.

Bryan Brokmeier - Maxim Group LLC, Research Division

Are you able to identify that?

Michael W. Hunkapiller

In the academic world, it's not just -- given the budget setup, it's also going through the whole grant approval process that drags that out a little bit longer.

Bryan Brokmeier - Maxim Group LLC, Research Division

Right. Are you able to identify any impact from weather in the quarter? In particular, your consumable revenue, the pull-through is down sequentially, a little bit below what I expected. And we've heard from a lot of other companies about the impact they saw because of the inclement weather.

Michael W. Hunkapiller

Yes, no doubt that there was some. But it's a little hard for us to kind of measure that directly.

Ben Gong

Yes. And Bryan, it was actually right in line with what we expected. I think we even guided last quarter that we thought it would be relatively flat just because Q4 was such a big jump.

Bryan Brokmeier - Maxim Group LLC, Research Division

Okay. And then, lastly, the -- can you comment -- you talked about -- Ben just talked a little bit about the gross margins and -- due to the instruments versus consumable mix. But can you comment on the geographical breakdown of your installations and maybe some way to qualitatively talk about how that impacted your ASPs and margins?

Ben Gong

Bryan, thanks for the question. Yes, geographically, I would say that Q1 was particularly strong in Asia. And that does, quite frankly, have an impact on the average selling price, because in Asia, when we do sell to distributors, we could have a lower average selling price. But that's -- we've seen that in some other quarters before. And that's why I think quarter-to-quarter is a little bit harder to call and you're able to see fluctuations in the ASP quarter-to-quarter. We are definitely continuing to see, I would say, consistent pricing within the regions that we are selling our products.

Operator

Our next question comes from Bill Quirk from Piper Jaffray.

William R. Quirk - Piper Jaffray Companies, Research Division

First off, I guess, just a question on the installation capacity. I guess, is 9 kind of stretching it? Or do you think, given your comments regarding a strong order book and obviously backlog, that stretches out or at least appears to stretch out or -- for more than one quarter, could you just talk to whether or not you have some flexibility there? How should we think about that?

Michael W. Hunkapiller

Well, I think we have the flexibility with a little bit of planning. What we've always said is it takes usually a minimum of 1, usually 2 quarters. And it mostly has to do with the fact that it's a fairly big purchase commitment for customers. So they get the order in, but then they have to get the facilities ready. And frequently, that takes them longer than they expect. Sometimes, it's because a new facility is being outfitted in a broader sense. Sometimes it's just they have to go through the process of getting the right AC system put in place, the right voltages and so forth. And we do very careful site prep so that we know that the computing facilities are appropriate and so forth with them, and the power supplies are appropriate. And it's mostly gated by their site readiness and how our matching of their site being ready to have the install. We can do the installs within a matter of a few days, but their sites may take several months to get ready after they place an order. And that's what the gating thing is. And sometimes -- at this time, we ask the installers then to put up more, at least at the high end of what we would have anticipated based on the orders that we had at hand at the beginning of the quarter.

William R. Quirk - Piper Jaffray Companies, Research Division

Okay. Got it. And then just building off of an earlier question regarding, overall, like, I guess, geographic mix. And candidly, the instrument ASPs held in a lot better than what I would have expected based on some earlier comments. So can you just elaborate on that? Are we at more of a steady run rate here for ASPs, recognizing they can bump around a little bit?

Unknown Executive

I kind of think that we've been in a -- at a state of ASPs for quite a while. And the only thing that has made on a quarter-to-quarter basis -- the thing that's impacted it quarter-to-quarter is just the geographic mix out of these systems that we've installed.

Michael W. Hunkapiller

And whether they're direct sales or whether they're through distributors.

Unknown Executive

Yes.

William R. Quirk - Piper Jaffray Companies, Research Division

Okay. And then just lastly for me, just any update on the Roche collaboration? I recognized that you probably somewhat has it in stock about things in the pipeline. But is there anything, from a public milestone standpoint, that we should keep our eyes open for?

Michael W. Hunkapiller

Well, you should keep your eyes open. But no, I think you've probably seen comments from them that they're committed to the technology and they've recently reiterated why they're committed to the technology diagnostics space. We continue to have a fruitful collaboration, a development program underway with them. And in particular, when they deem appropriate, we will jointly make comments regarding the progress of that.

Operator

The next question comes from Tejas Savant from JPMorgan.

Tejas Savant - JP Morgan Chase & Co, Research Division

Just wanted to lead off with a quick question on competitive dynamics on HLA, given some of the recent comments from your competition.

Michael W. Hunkapiller

Okay. And the question, you slipped in your...

Tejas Savant - JP Morgan Chase & Co, Research Division

I mean, just your take on it, Illumina has highlighted HistoGenetics, and TMO is talking about One Lambda moving to [indiscernible]. So just wanted to get your take on that.

Michael W. Hunkapiller

Well, so the -- using DNA sequencing in the typing market is not new. It's been around with Sanger technology for quite a while. And it's been around with other methodologies who are antibody based, or pro-based PCR methods or even longer. All those technologies, putting the ones that are short read or even Sanger read based sequencing, traditionally go about looking at isolated exons that are at least, at one point, were thought would be the main determinants in a transplant sense of whether or not you had a likelihood of a match or mismatch. The problem with all those reads -- schemes, in all the pro-based methodologies, and even worse, with the antibodies, is that they don't necessarily tell you which alleles in one exon are necessarily paired with alleles in another exon, even with a specific -- a given gene. And so a lot of the key opinion leaders within the HLA community have realized that what they really need is to look at the entire gene as a whole, in all of the elements of the HLA families. And being able not just to look at individual exons, but to look at the whole gene and know exactly how variations in one exon relate to variations in another. And they can't -- they've realized they can't do that properly with any of the short-read sequencing or probing technologies. And so we've been working with several of the labs for quite a while now to demonstrate that the long-read sequencing technology gives them exactly what they would like to have. Now it's early in that process. But I think the quote from HistoGenetics, which is the leading typing lab in the U.S., who's recently begun to adopt our technology, highlights what they really want to get to. And I think using the previous speaker, keep your eyes open; you may see additional announcement from other leading KOLS in the relatively near future who are going to say essentially the same thing. But that's where they want to get to. The other thing that we've seen is an interest, not just within the traditional HLA typing community, but within the pharma community, who want to look at HLA typing during large clinical trials, so that they can associate specific kinds of haplotypes in the HLA families with specific outcomes in those trials. And that can -- once that's going to be an even larger number of samples being processed. And they know that they can't get the kind of results that they want in those trials from the short-read technologies already, even where you're trying to do a whole genome approach in getting it. And so we've had a lot of interest already from people who are doing CRO-type work on behalf of pharmas and having that capability. So it's early. And I don't expect that there are going to be other technologies that are going to be used in this space. But we're already in a position, I think, now to demonstrate that even in a production environment, we can do full-length HLA Class I sequencing for a lower cost than people can do the isolated exons. And even that and given the additional information that we get from the full-length sequencing, we think, over time, as we develop it and as we, in the end, go through a clearance process or a diagnostic-type test, that we'll have a very strong position in the HLA market, both for research and eventually, for the diagnostic world.

Tejas Savant - JP Morgan Chase & Co, Research Division

Okay, and that's helpful. And just one quick follow-up. Can you talk about how broad based was this trend that you saw in consumables? And then in terms of your backlog, how much was new customers versus existing customers?

Ben Gong

Yes. This is Ben. So none of the 9 orders that we got were from existing customers. So the 9 orders were from new customers. The first question was how broad-based was the consumables. As we said in the past, it's pretty broad. It's -- generally speaking, it's not a 20% of the customers ordering 80% of the consumables. It's much more spread out than that, and Q1 was similar.

Susan K. Barnes

So you're asking about the customer concentration or the types of runs they're doing on the system?

Tejas Savant - JP Morgan Chase & Co, Research Division

Just the customer concentration, actually.

Michael W. Hunkapiller

One quick follow-up on the HLA market. So the other thing that people are realizing, that there are other gene families that are involved in the whole immunochemistry process. And elements like KIR, which has even more complicated gene family and there's much more variation in many cases than there is even in HLA are recognized as very important, and had been just completely refractory almost to any kind of analysis. To the point that only very recently has that region finally been added to the human reference genome, mostly from sequences generated on the PacBio RS. And that's come up as an area of significant interest from some of the people doing traditional HLA typing as an additional thing that they want access to. And they know that none of the other technologies that are out there can even touch it.

Operator

Our next question comes from Amanda Murphy from William Blair.

J.P. McKim

It's actually J.P. in for Amanda. I just have a couple of quick ones. I guess, you'd say we've noticed some increased demands for whole genome sequencing and just want to get your take on that, and if that will ultimately lead to additional demand for your systems?

Michael W. Hunkapiller

You're talking about whole genome in the human space or in a broader sense?

J.P. McKim

Yes, human.

Michael W. Hunkapiller

Well, I think that there is an increase in demand for human whole genome sequencing. And in essence, it's actually whole genome resequencing. And I would define it more as an effort at doing sequencing with the way of doing genotyping. Because it really isn't doing whole genome sequencing in a de novo sense and anything; it gives you very good data on a portion of the human genome. It leaves out a lot. And I don't think that we're at a throughput and a cost perspective to do large numbers of human genome resequencing in that sense. That said, there are areas of the human genome in those studies that you just do not see. HLA is a good example in that sense, but it's one of many. And so the interest that we're seeing, along with that increase in interest in the sort of whole genome shotgun approach, is how to supplement that with some targeted areas that are missing from those regions. And so in that sense, I think we are seeing an increased interest in our technology. It's not to do what the short-read technology does really well, it's to do what it can't do in that space.

J.P. McKim

Okay, got it. And then can you kind of talk about your -- the pipeline? You mentioned it being strong and kind of higher than you would expect this time. Can you talk about the customer mix a little bit and if there's any new customers coming to or any surprises that you just didn't expect?

Michael W. Hunkapiller

Well, we didn't expect. I mean, you expect a halt [ph], but getting orders through the door is not always a trivial process. I think that the mix is kind of what we thought in a sense that it's fairly broad. And one of the things that we tried to highlight both in the last conference call and this one is that it's certainly branching out from the niche that some people tried to paint us in as being only good for bacterial sequencing. We are very strong there, but we're becoming recognized as being very strong in the plant and animal field, where the short-read technologies have really not done, in my opinion, a very good job at all of creating good genomes, even for references there, that the assemblies tend to be of really pretty poor quality. And given that they tend to be in cases that are valuable from a monetary perspective to the businesses associated with a lot of these crops are having much better assemblies. And genome references for reading purposes is really important, and we provide much better reference genomes and there's an enormous number of valuable plant and animal species out there to work on, and we're beginning to be much more recognized in that space. In the human area, both because of the -- both the increase in the throughput that we've had, which makes studies there a little more palatable from a cost perspective, and the recognition of exactly how much is missing in important areas, in the short-read data we're beginning to get more recognized as well. So all those things I think are beginning to broaden out, based on customers that have an interest in our technology. I think the whole IsoSeq approach is going to be a new opportunity for us. And it turns out that there were people doing it before we even had the tools out there that we we're supporting directly. We mentioned in the last conference call a couple of papers that will come out in the fall from some of our customers who had developed their own sort of home-built software tools to do that a little bit. But now we have much more developed software tools put into our core analysis algorithms and very defined protocols. And more and more people are using that, and we had several presentations from customers at AGBT on that and then really a landmark publication from the group of Stanford this quarter in an important field. So I think that's -- I wouldn't say it's a surprise. We kind of knew that was likely for a long time to be a key application area. But I think it was maybe a surprise to people as to how much was missing in the data sets from RNA-Seq that had been worked on over a 10-year period on a lot of these cell lines. And so the whole business of what forms of genes were actually being expressed and what tissues and even, in a lot of cases, what genes were present in a period, was grossly underestimated by people.

Operator

[Operator Instructions] The next question comes from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Ben, in terms of the growth guidance, just wondering if you could clarify how much of that is a result of better instrument demand versus more aggressive delivery schedules versus better consumable pull-through expectations?

Ben Gong

I'd say that the increase from last quarter's forecast to this one is all predicated on system revenue, pretty much. And that's driven from -- starting with the orders, including the orders that we've got in Q1. But that also has to get reflected in installations, otherwise, you don't give the revenue. So that's predominantly the growth there. Consumables, again, came in right in line with where we expect in Q1. So we have not yet changed the expectations there. That said, if you do install more systems, generally speaking, you do expect to have more consumables. We just want to see that play out a little bit.

Susan K. Barnes

Well, there was revenue, yes. And the other revenue as well, so...

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it. And then just in terms of the deliveries expected for this year, as we think about kind what happened with the [indiscernible] last year, how would you characterize kind of the quality of placements this year versus last year? Would you say there's kind of better throughput potential overall or not?

Ben Gong

I'd say that we are definitely -- I mean, sometimes, the numbers are -- you got to be careful about averages and things. But when people are buying systems, they definitely have used this in mind. For example, we talked quite a bit about HistoGenerics already, and these are certain applications that they have in mind. So hopefully, that's going to lead to a lot of pull-through revenues.

Operator

The next question comes from Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC, Research Division

You're just talking about -- a little bit about the biopharma market. I don't believe you've had many or maybe any placements in the biopharma market. Is this interest by pharma new? And besides HLA typing, is pharma using the PacBio RS in any other way?

Michael W. Hunkapiller

Actually, I think we had mentioned that we had plans at pharma before. I think the HLA one is one that's new because we've just now begun to be more public about the fact that we're willing to support that. So that is new, but we've had interest in the pharma side before.

Operator

I am showing no further questions.

Michael W. Hunkapiller

Okay. So in closing, we remain steadfast on our commitment to bring the unique vantages of our SMRT technology and products to our customers and the scientific community in general. We believe that SMRT sequencing provides the industry's most complete and accurate picture of genomes due to its superior performance in the sequencing accuracy, uniformity of coverage, extremely long read links and the ability to characterize DNA-based modifications. We continue to make progress in driving the adoption of our products. It's rewarding to see momentum building in our business. We look forward to talking again in 3 months' time. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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Source: Pacific Biosciences of California Management Discusses Q1 2014 Results - Earnings Call Transcript
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