Pacific Biosciences of California. (NASDAQ:PACB) Q4 2016 Results Earnings Conference Call February 2, 2017 4:30 PM ET
Trevin Rard - IR
Mike Hunkapiller - CEO
Susan Barnes - CFO
Ben Gong - VP, Finance and Treasurer
Amanda Murphy - William Blair
Bryan Brokmeier - Cantor Fitzgerald
Alex Nowak - Piper Jaffray
Joe Munda - First Analysis
Tycho Peterson - JPMorgan
Good day, ladies and gentlemen, and welcome to the Pac Biosciences of California Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded.
I would now like to introduce your host Trevin Rard, you may begin.
Good afternoon and welcome to the Pacific Biosciences fourth quarter 2016 conference call. Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or alternatively as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.
With me today are Mike Hunkapiller, our Chief Executive Officer; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer.
Before we begin, I would like to remind you that on today's call, we may be making forward-looking statements, including plans and expectations relating to our financial projections, products and other future events. You should not place undue reliance on forward-looking statements because they 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 reports on Form 8-K and 10-Q. Pacific Biosciences undertakes no obligation to update forward-looking statements.
In addition, please note that today's call is being recorded and will be available for audio replay on the Investors section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call.
I'd now like to turn the call over to Mike.
Thanks Trevin. Good afternoon and thank you for joining us today. We are pleased with our fourth quarter results and our continued progress in driving growth in our business. Highlights of our Q4 and full year 2016 financial results are as follows: We booked orders for 30 systems in the fourth quarter, up sequentially from the 20 systems we booked during the third quarter. Q4 bookings included a five system order we received from GrandOmics.
In January of this year, we also received a ten system order from Novogene which was not included on account of 30 systems booked in Q4. We generated $24.4 million in product and service revenue for the fourth quarter, up 92% from Q4, 2015. For the year, our product and service revenue grew 62% from $48.4 million in 2015 to $78.6 million in 2016.
Instrument revenue for the quarter increased by more than 150% from $5.2 million in Q4, 2015 to $13.1 million in Q4, 2016 and for the year instrument revenue more than doubled from $18.7 million in 2015 to $41 million in 2016. We shipped and installed more than 160 Sequel instruments in 2016 ending the year with an installed base of over 110 Sequel systems.
Consumable revenue for the fourth quarter was $7.5 million, up 64% from $4.6 million recorded in Q4 2015. Consumable revenue generated from our installed base of Sequel systems started to have a bigger impact towards the end of the year. For the year as a whole, our consumable revenue increased by 26%. We generated $10 million in gross profit from product and service sales in Q4, more than triple the roughly $3 million in gross profit from product and service sales in Q4, 2015.
For the year, we generated $32 million in gross product, the profit from product and service sales, again more than triple the $9 million generated in all of 2015. Gross margin on product and service sales increased from about 20% in 2015 to over 40% in 2016.
Turning now to sales activity. We have seen signs of a pick up at instrument sales starting in Q4 when we released improvement store sampling loading reagents and protocols. These improvements allowed Sequel customers to efficiently load long fragment DNA sequencing libraries key to de novo genome assembly and structural variation analysis. The order from GrandOmics was particularly encouraging as they had purchased one Sequel system earlier in the year and once we overcame the issue with sample loading, they had confidence in the Sequel performance to purchase five more systems.
Novogene was one of the largest Sequencing service providers in the world followed soon afterwards with a ten system order. These multi-system orders demonstrate the growing demand we are seeing particularly from sequencing service providers. We are excited to have recently introduced new chemistry and software that we began shipping to customer last week. These enhancements further leveraged the strengths of the Sequel system for structural variation detection and targeted Sequencing by enabling [M50 polymerase read] links in excess of 20,000 bases and generating up to 8 gigabasis of data on a single SMRT Cell, depending on the application, sample type and preparation method used.
Furthermore, the system is now capable of loading extra long genomic libraries of up to 80 kilobases, which can have a dramatic effect on both the quality and efficiency of Sequencing experiments.
Looking forward we are continuing to work on improvements to Sequel performance and we are targeting to double the throughput of the system by the end of this year. We’ve also begun work on a new version of the SMRT Cell that has eight times the capacity of the existing Sequel SMRT Cell.
Our target is to make that available to customers by the end of next year. By increasing the throughput of our systems over the past several years, we have significantly broadened the applications we can add value to and consequently expanded the addressable market for our products. We believe that by creating a pathway to increase throughput, by factor of eight to 16 times over the next two years, the demand for our products will continue to increase.
Now turning to other highlights. Last month, the Annual Plant & Animal Genome Conference was held in San Diego, which brings together over 3000 people from academic, government and industrial institutions to focus on recent developments in this space. PacBio was featured in over 115 podium presentations and posters at the conference. An overwriting theme with a SMRT Sequencing was essential for de novo assembly of large genomes with more than 60 new genomes presented this year with PacBio data and numerous others in progress. We feel that we’ve established our technology as an essential element in planned animal research and development. We continue to see very strong demand for SMRT Sequencing from the AgBio community and this market appears to be expanding.
On the publications front, we have counted well over 2000 publications to date referencing SMRT Sequencing. It is now common to receive five publications on a single day. One recent paper from Stanford University’s clinical genomic service reported the results of a study using low coverage SMRT Sequencing on our Sequel system to detect genomic structure variance in a translational research sample from an individual complex and various symptoms.
The author sequenced the genome to an average debt with only nine fold and following mapping and genomied structure variant calling it identified novel structural variance occurring in six genes listed in OMIM, the online Mendelian inheritance in Man database.
One of these genes was associated with Carney syndrome which was a match for the person’s physiology and identification of the gene was validated by other methods. Dr. Euan Ashley the senior author of this study stated “We are not quite ready to make it routine but we are interested in introducing long read sequencing into our clinical genomic services lab for cases where we have a strong suspicion and structure variation plays a prominent role in that disease.
Although sequencing on a Sequel is still more expensive in short-read sequencing, the real question is what is the cost of a diagnosis? It doesn’t matter how cheap a short regenome is if it doesn’t find the answer”.
This study illustrates the power of our SMRT technology used to elucidate structural variance that can contribute to human disease. It was carried out using the version of sequel chemistry available last fall. Using the new chemistry we released last week, we’ve been able to demonstrate the ten-fold human genome coverage can be obtained using one half the number of SMRT cells using the Stanford study while producing even greater coverage of structural variance.
Since three force of the basis that vary from one human genome to another are present as structural variance rather that simple, single nucleotide changes, we believe that structural variant analysis can be an important application of our technology which can analyze both types of variation in the same experiment. This capability provides both research and clinical opportunities for placement of our sequencing systems. While we now have a well established footprint in the various research markets, we are beginning to see an increased interest from segments of the clinical market that are starting to recognize the value of SMRT sequencing and analysis of important, but complex generic systems involved in human disease.
That concludes my initial remarks. I’ll now turn it over to Susan to provide more details on our financial results.
Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with the financial overview of our fourth quarter that ended December 31, 2016. I will then provide details on our operating results for the quarter and year, with a comparison to the Q4 of 2015 and the full year of 2015 respectively. I will conclude my remarks with a brief discussion of our balance sheet.
Starting with our fourth quarter and 2016 financial highlights. During the quarter, we recognized revenue of$25.7 million and incurred a net loss of $19 million. This brings our total annual revenue to $90.7 million and our net loss to $74.4 million. We ended the quarter with $72 million in cash and investments.
Turning to revenue. Total revenue for the quarter was $25.7 million, $10.6 million lower than the $36.3 million recognized in Q4 of 2015. Excluding Roche contractual revenue, 2016 Q4 product service and other revenue was up $11.7 million, 92% higher than in Q4 of 2015.
Total revenue in 2016 was $90.7 million, also lower than the $92.8 million recognized in 2015. Again, comparing only product service and other revenue and excluding Roche’s contractual revenue each year, 2016 revenue was $30.2 million higher than 2015, up 62% year-over-year.
As a reminder, in 2015 we recognized a total of $30 million and Roche milestone achievements, an addition of $14.4 million of non-cash amortized revenue related to the initial $35 million payment received from Roche in 2013. This compares to only $12.1 million of non-cash amortized revenue recognized in 2016.
Breaking down the revenue, Instrument revenue quarter-over-quarter was substantially a $13.1 million recognized in Q4 2016 compared to $5.2 million recognized in Q4 of 2015. In 2016, instrument revenue was $41 million, 119% higher than the $18.7 million recognized in 2015.
Consumable revenue continues to be strong, increasing 64% to $7.5 million for the quarter, up from $4.6 million reported during the fourth quarter of 2015. This substantial Q4 revenue increase highlights the sequel system consumables sales momentum that began in late 2016.
For the year, consumables revenue increased 26% to $23.6 million in 2016 compared to $18.8 million in 2015.
Service and other revenue increased 31% to $3.8 million in the quarter compared to $2.9 million in Q4 of 2015. 2016 revenue was up 28% to $14 million from $10.9 million in 2015. And finally Q4 2016 revenue included a recognition of $1.3 million which was the remaining amount of non-cash contractual amortization associated with the $35 million upfront payment that we received from Roche in Q3 2013.
This amount was essentially lower than the $23.6 million recognized in Q4 of 2015, which included both recognition of the $20 million milestone achievement and $3.6 million quarterly non-cash contractual amortization of the initial $35 million Roche payment.
In 2016, we recognized $12.1 million of non-cash contractual revenue compared with $44.4 million in 2015. The determination of the Roche agreement, the remaining contractual revenue scheduled to be amortized into future years was completely recognized in Q4 of 2016. All revenue related to the Roche in 2013 collaboration agreement has now been recognized.
With regards to gross profit and margin, we generated gross profit of $11.4 million in Q4 of 2016, representing a gross margin of 44%. This was lower than the $26.5 million of gross profit and 73% gross margin recognized in Q3 of 2015.
Excluding the contractual revenue was $1.3 million in Q4 of 2016 and $23.6 million in Q4 of 2015 product service and other gross profit in Q4 of 2016 increased $7.2 million from Q4 of 2015. And the product and service gross margin increased to 41% in Q4 of 2016 up from 23% in 2015.
In 2016, gross profit was $44.2 million representing a gross margin of 49% with gross profit of $53.5 million and a gross margin of 58% in 2015.
Excluding the contractual revenue of $12.1 million in 2016, and $44.4 million in 2015, product service and other gross profit increased $23 million and gross margins increased to 41% in 2016 up from 19% in 2015. This achieved increase in product and service gross profit and margin is primarily a result of higher revenue and margins recognized from sales of the Sequel system.
Moving to operating expenses. Operating expenses in the fourth quarter of 2016 totaled $29.3 million compared with $27.5 million in Q4 of 2015. For the year, operating expenses increased to $115.4 million from $82.6 million in 2015. As a reminder, we recognized a one time $22 million gain associated with amendments to our facility leases in Q3 of 2015. This gain offset the operating expenses.
Excluding this gain in 2015, operating expenses in 2016 were $9.8 million or 9% higher than those incurred in 2015.
Included in this $9.8 million of expense growth was $5 million of growth in non-cash stock-based compensation expenses. Thus, 2016 operating expenses excluding the onetime gain and the growth of non-cash stock compensation expenses were only up $4.8 million, or 5% higher than those incurred in 2015.
Non-cash stock-based compensation including operating expenses increased $700,000 quarter-over-quarter and $5 million year-over-year as I highlighted before.
Breaking down our operating expenses. R&D expenses in the quarter were $16.3 million, $1.6 million higher than the $14.7 million expenses incurred in Q4 of 2015.
2016 total R&D expenses were $67.6 million, a $7.2 million increase over the $60.4 million of expenses in 2015.
The expense increases in R&D were primarily related to compensation, non-cash stock based compensation and chip development. R&D expenses in the quarter include a $2.1 million of non-cash stock-based compensation expense, a $700,000 increase over the $1.4 million expense in Q4 of 2015. For the year, R&D non-cash stock-based compensation expense was $8.3 million in 2016, a $3.1 million increase over the $5.2 million expense incurred in 2015.
Sales, general and administrative expenses in the quarter were $13 million compared to $12.8 million in Q4 of 2015. For the year, SG&A expenses increased $2.6 million to $47.8 million in 2016, up from $45.2 million in 2015.
SG&A expense for the fourth quarter of 2016 include a $2.2 million of non-cash stock-based compensation expense, flat to the $2.2 million of non-cash stock-based compensation expense recognized in Q4 of 2015. 2016 SG&A non-cash stock based compensation expense were $9.2 million, up $1.9 million, from the $7.3 million recognized in 2015.
And finally in Q4, we recorded $1.1 million of net interest and other expense primarily as a result of the incurred interest and derivative expense associated with the debt we took along in Q1 of 2013. Year-To-Date our interest and net other expenses have totaled $3.2 million.
Now turning to our balance sheet. As I mentioned at the beginning of our comments, our balance of cash and investments was $72 million at the end of the fourth quarter. This represents a $15.4 million decrease during the quarter. For the year, our balance of cash investments decreased $10.3 million and excluding $58 million of financing proceeds from the issuance of stock under our ATM. This represents a cash use of $68.3 million in 2016.
Today we announced that we have filed a supplemental perspective to offer up to an additional $60 million under our ATM facility. Inventory balances decreased $900,000 since the quarter to $15.6 million from $16.5 million at the end of Q3. Accounts receivable decreased slightly in Q4 to $11.4 million from $11.8 million at the end of Q3.
This concludes my remarks on the financial results for the quarter. I’d like to now turn the call over to Ben.
Thank you, Susan. I will be providing a forecast of our 2017 financial performance. First of all, as Mike mentioned earlier, we booked orders for 30 systems this past quarter, which was in line with our expectations. We also booked a large order for an additional 10 systems in early January.
With regards to reported bookings, this past year we reported bookings to provide better indication of our sales performance since we were limiting our sequel instrument shipments during the early stages of our product launch.
Our instrument backlog has since normalized. So going forward, we expect our instrument revenues to be a good indicator of our sales performance. Therefore we do not plan on reporting our system bookings on future earnings calls.
Now moving on to the revenue forecast, we were pleased with our fourth quarter revenues which came in at the high end of our previous forecast. Building on the 62% growth on product and service revenue last year, we are targeting another 40% to 60% growth in product and service revenue this year.
As a reminder, contractual revenue from the Roche agreement has been fully amortized. Therefore we expect to report zero contractual revenue this year compared with $12.1 million recorded last year.
Taking this into account we are targeting total revenue for the year to grow between 21% and 38% over last year. In the near term we expect our Q1, 2017 revenue to be a little lower than our Q4, 2016 revenue primarily due to the drop off in contractual revenue, however we are expecting significant revenue growth in comparison with Q1 of 2016.
Moving on to gross margin, as we saw in Q4 with the reduction in contractual revenue, our gross margin also came down. Our average gross margin over the last – over the past year on product and service revenue was approximately 41%.
Looking forward we’re likely to start off the year with gross margin percentage in the low 40s. We will have some additional fixed cost absorb this year which I will describe in more detail momentarily, but if our revenue increases during the year as anticipated, the expected gross margin percentage to gradually increase and get to the mid-40s by the end of the year.
Before providing a forecast of our 2017 operating expenses, I will describe the estimated impact of our new building lease. At the beginning of this year we began moving into our new 180,000 square foot multipurpose facility which will house all manufacturing, R&D marketing and G&A functions.
We will begin accounting for the rent and appreciation costs associated with the building this quarter. Roughly speaking this will add approximately $3 million in cost per quarter to our P&L from an accounting perspective. However from a cash perspective we estimate only about 30% of this other expense will represent cash uses this year.
With that in mind, we our forecasting about a 15% increase in operating expense this year over last year. However the majority of this increase will be non cash expense. Adding up our revenue, gross margin and operating expense estimates for the year, we are forecasting a higher reported net loss for 2017, but a lower cash burn compared with 2016.
Earlier today, we file the Prospectus Supplement to raise up to an additional $60 million using the same ECM mechanism we had used in the past. While we had no immediate need to raise capital we will likely go so during the course of this year.
And with that, we will open the call up to your questions.
Thank you. [Operator Instructions] Our first question comes from the line of Amanda Murphy from William Blair. Your lines now open.
Hi. Good afternoon. So, I know, I appreciate that you're not going to be giving orders going forward, but I just had a question around kind of how customers are thinking about that kind of platform now just given the meaningful updates that you’ve outlined and expectations going forward.
So are they – have you kind of gotten through these early adopters at this point and now people are going to wait and see how the platform evolve sort of longer-term to your point around the April improvement throughout next year? Or are you seeing sort of continued cadence, obviously you talked about the large order, but kind of outside of that?
This is Mike. So, yes, in terms of getting around it, I think the answer generally is yes. We’ve had a couple of user meetings around the world since we introduced the upgrades to the sample loading process back at the beginning of Q4, and that's been generally very well received. And the fact that we've now added to the performance of the sequencing chemistry itself which they were anticipating, because we started beta sites of that last quarter and start talking about it at those same user meetings. That’s been well received as well.
So I think the best indicator of the fact that people are kind of over waiting was the [Brando] mix order, because they had one of our first two installs in Asia and went through all the birthing pains to the system back early last year. And once we dealt with the one major application that they were still waiting to do, which is being able to do de novo assembly because of the loading issue. They very quickly pull the trigger on additional five instruments and then that was followed very closely by the order of 10 from another large service operation out of mixture of China and the U.S.
So, I think that those are indications not just that there is acceptance now the system doing what people want it to do, but it was in a message to other people that that was in fact the case and people are willing to start placing multimillion dollar orders from system. So we're reasonably pleased with the response particularly over the last three or four months in terms of people getting on track not just for single unit purchases, but for others.
Great. And then, I guess there's been – obviously you had the Roche termination, I'm just curious how customers, if you’ve had any feedback about that as their concern going forward at all in on that front. And then just curious also obviously about the launch from alumina, obviously you’re servicing very different market, but curious just even thinking about capital, and there is a lot of new instrument purchase possibilities now, so is that something that you expect could either hurt you on terms of the capital front or maybe even help you know to take some [Indiscernible] people are just doing more sequencing particular for humans genomes for example?
One on the latter point I would point out that de novo genome was, I think the largest single purchaser of the new system from Illumina at the back of same time that they purchased 10 of our systems. So, do I think that's going to hurt us? No. They are used for different things right now. And so in many cases they are still complementary. So the more interest there is in sequencing particularly on bigger projects, the better I think for all of us in the space.
Okay. And just last one in terms of the consumable usage, so as you said it’s ramped towards end of the year. Have you got a sense yet of how people are using the platforms, I don’t know if you’re give us more sort of a range per year or something like that just given from modeling perspective would be helpful to get an idea of how people are leveraging them from a consumable perspective?
Well, what we said in the past for the RS System we were averaging approximately $130,000 a year of consumables per system and that given the relative price of reagents for the Sequel System, we would anticipate that it would be a higher usage dollar-wise per instrument. But I think it's still a little early for us to get that. We really had sort one quarter to start off things ramping up, last quarter that's not enough to base a actual number on, but I think we’re still comfortable that we expected to ramp up over the year to a higher number per box than what we got with the RS.
I would echo that but that also what is to repeat something I think we said in the past is, it’s not a clean sort of separation between the two because of the shared set of consumables use on both platforms and we actually have customers that have both platforms. So, in terms of segregating the consumables on one versus the other there’s always going to be some overlap there.
And those that have both are they still using the legacy platform of the RS?
Okay. Thanks very much.
Our next question comes from the line of Bryan Brokmeier from Cantor Fitzgerald. Your line is now open.
Hi, good afternoon. Have you seen any market disruptions, from the Roche termination that delayed purchasing decisions by customers, and can you touch a bit on the strength of your pipeline that you’ve seen since termination?
Yes. I apologize to Amanda who asked that first part of the question. The response that we seen from the clinical labs that we knew were interested in and Sequel Technology has actually been positive and we reengage with all those. I think who come to us in the past that we directed over to Roche while the contract with Roche was in place and begun to see not just interest but trying to run samples and in some cases actually placing orders there.
So, I don't think that that's hurt us in that space at this point. And it’s early in the process, but we've gotten positive responses, I think almost universally if not universally from that group. And as we try to say we're still seeing a ramp-up in interest and in the order pipeline particularly in the middle of the end of Q4 and continued into this quarter. In both sort of basic biological research arena as well as in the [Ag Biospace] where we traditionally done very well.
And do you have the capacity in place for installing the systems and getting customers up and running. And then also you have the -- I believe that the high throughput manufacture for the consumables is up and running. Are they producing capacities that customers are desiring?
Yes. We have no limitations relative to the -- bookings that we have relative to producing either consumables or instruments. The timing of instrument installs is almost universally related to customer’s lab renovations or whatever they need to do to get ready to receive the instrument.
And we have the sale capacity to install them when they want them.
Great. And you’ve announced a couple of large multi-system orders as you’ve talked about an already. And you never had anything of the magnitude anywhere close to those. Are there more opportunities like these out there that we could hear about the near term or is there now a lot of capacity in the markets, so any additional service providers may not place similar orders for a while?
Well, yes, there are lots of opportunities out there. I mean, these are two service providers that need service part of China predominantly, which is hardly the entire world, but there are other large service providers even in the Chinese market and clearly elsewhere. I mean they are a large order, but we have had reasonable size order for RS Systems actually from another service supplier and China was our largest RS service provider. And then our supplier of RS systems, customers of RS systems was HistoGenetics in the U.S. which has still by far the largest install base of that.
And I think Bryan as Mike said earlier, we use long read for us somewhat complementary to Illumina cases and other cases very different. We are not anyway near long read capacity out there where we think there is a cannibalization either on RS line or our ability to continue to grow and penetrate in a large way. And that’s why we can do 40% to 50% growth rates that you see in the guidance.
Okay. Are you still shipping RS II?
Not so much. I would say from this point on there’s a recurring stream certainly with the RS II, but we have not been manufacturing the RS II lately.
Okay. Thanks a lot.
Our next question comes from the line of Bill Quirk from Piper Jaffray. You line is now open.
Good afternoon everyone. This is actually Alex Nowak filling in for Bill today. So, the first one is just on the clinical side, now that were couple of weeks after the Roche termination, do you have any updated thoughts on how you plan to address the clinical market. And have you begin to hire any additional clinical sales for regulatory people?
Yes. I mean, the answer to the latter is yes, we’ve looked at stuffing up both from a marketing perspective as well as from the sales perspective. As we try to emphasize before counting on a large number of Roche sales in the coming year, and since predominantly those would've come from customers that we were already familiar with. We think that we’re well-positioned other than just simple numbers of having the distribution organization to meet that. Longer-term will look at it little more aggressively.
From a regulatory perspective we were already moving along the pathways that we needed to anyway in order to support Roche and we will continue on that pathway. So as I said we've sold into that clinical testing market in the past particularly in areas where companies had kind of a mix of clinical testing or clinical sequencing and research development sequencing. So we know that market plays a good part of it pretty well and have reengaged with a large number of those customers already since the Roche announcement. Some at the instigation of those customers, so we feel reasonably well positioned certainly for this year to do that and as we go forward I think we mentioned before that we may look at somewhat more regional partners to distribute in various areas where it's essential and in certain not essential but useful in certain countries to have a local partner.
Okay. That’s helpful…
And some of those discussions we’ve already started.
Okay. That’s helpful. And just going off of that and recognizing there could be some incremental spend on the clinical side and there could be some puts and takes. But what the revenue level needed to hit breakeven -- cash flow breakeven?
Yes. Alex, this is Ben. So we’re modeling a breakeven when the run rate of revenues is a $200 million a year or let’s say $50 million a quarter. At that point in time we think that on a cash basis we’d be at breakeven.
Okay, great. And then just last question from me. I believe during the commentary you stated that you plan to double throughput on the existing 1 million ZMW chip, I was just curious is that from increasing the number of active wells on the chip or from increase in the well [movie] length from six hours?
Well, it’s about variety of factor, but it's not increasing the number of wells because 1 million ZMW chip is going to fixed, but it may involve increasing number of those be productively loaded in a single run. It will come from increasing the effective read length per ZMW, and the sort of normal things that we've done with the RS over the years that in themselves resulted in approximately 100 fold increased in throughput on the same chip. So those are things we know how to do. The real jump is when you can actually increase the number of ZMW's to start with and that’s a simple multiplicative competitive number even if you do it. We’re targeting that for the latter half of next year.
Okay, great. Thank you.
If you have sort of a twofold by eightfold to get up to 16 then you start to get the quite reasonable throughputs on a single cell.
Great. Thank you very much.
Our next question comes from the line of Joe Munda from First Analysis. Your line is now open.
Yes. Thanks for taking questions. Little quick, Mike I was wondering if you could give us a number on the install base of the RS II, I know you’re not shipping it anymore, but if you could give us a number there that would be great for model?
Yes, Joe, this is Ben. And by the way you're not coming through very clearly but I could make out question. Yes, the installed base of the RS II is in pretty stable at something little over 160 systems, it’s been that way for pretty much the past year.
Okay. As far as size of the sales force could you give us a number there as well?
Sure. Over the past year we have added people to the field organization. Roughly speaking there’s about 70 people in the field and that's a mixture of people that are sales of service and that what we call field application scientist.
Okay. Then Mike, shifting gears here, I was wondering if you had any updates or a timeline with the patent issues with Oxford Nanopore on 2D and 1D, if you can give us any color there without, I know it’s a legal issue, but if you can give it a time line or anything along those lines, that would be great?
Well, I can’t give you anything beyond what we said before as the ITC action in the U.S. typically has a timeline of between 12 months and year and a half from decision to the action, and that's underway but I can't add anything to what process is at this point.
Okay. And then, Susan a couple housekeeping items, can you give us depreciation and amortization for the quarter and total stock-based comp from quarter?
Okay. So total stock base, well we’ll work out for you is the stock-based compensation numbered non-cash for the operating expenses.
I think I can help you there.
Yes. Go ahead.
And Joe, this is Ben. So roughly speaking non-cash stock-based comp for the quarter was about $5 million, it was pretty similar what was in Q3, it could be offline about $100,000 on that. The depreciation of why do you ask that question, so on a quarterly basis now depreciation has been something less than a $1 million, but on a go forward basis, it’s actually going to increase for those reasons that I’ve talked about before because of the new building that we just moved into. And there’s – when it comes out on the balance sheet, we’re going to see things that have to do with build to suit lease accounting where we also can recapitalize some of the improvements that the landlord put in there.
So, that's why I try to give like some of indication in terms of the non-cash expense on a go forward basis. It is going to be much higher and just to repeat, we think operating expenses are going to increased roughly 15% this year, but more than half of that increase the non-cash expenses.
Okay. Then just piggybacking off that comment, I mean as far as OpEx is there a bias more towards SG&A or is it going R&D due to the you know better performance that you guys are advocating for this year and next year or the end of the year if you will?
Yes. So the building related depreciations that’s going to kind of get with almost rateably I would say, between those two things. So if you see some increases in both, it has to do it again. I think of it is still an appreciation or building rent. In terms of where we’re going to growing more this year versus the other? It’s probably going to be more geared toward the SG&A side of things as Mike had mentioned that we are definitely continued to invest in the field organization to go after those opportunities and to actually support the large install base.
Right. We have a base of people worked on million whole chips, so that base will continue that in R&D organization on 8 million whole chips.
Okay. Thank you. I’ll halt back in the queue.
[Operator Instructions] Our next question comes from the line of Tycho Peterson from JPMorgan. Your line is now.
Hey, guys. It’s [Tijas] on to Tycho. Just one quick question here on the clinic market. Ben can you share some color on what you’re assuming in terms of shipments or perhaps revenue to the clinical market and just in the context of your 2017 guidance, and could you help us to mention how that have change sort of free versus post growth. Is it sort of about the same? Is it 50% of what you thought it would before?
So, this is Mike. So rather than trying to give individual numbers because it still early in that, but I think that one thing that’s to keep in mind is that even if we, I’m not saying we would plan to do this. If we were selling fewer units than what we anticipated from Roche next year and remember we weren’t planning on them doing anything until the latter part of this year. That doesn't have as big an impact on us as you might think given that the revenue sharing thing that we had with Roche would really translate the fact that we can sell fewer instruments and actually make more money, and so as because our margin would be higher under direct sales.
And so, I don't think that we planned on it having a particularly big impact one way or another versus what we plan to do. We were going to ramp-up our sales force to some degree just for the fact that we expect to sell more instruments in the research market will as I pointed out maybe add a little bit just specifically focus on the clinical arena mostly just because we need more expertise there than we have within the sales force. But the models that we've given you since last December were relatively neutral once Roche made a decision not to do it, because we expected to be have good growth. In terms of units it may make a difference it may not, but in terms of our ability to make money on the sales it should have completely neutral input.
Got it. That's actually helpful color, Mike. One quick follow-up, I mean after the termination, I mean, do you thought this question if you [Indiscernible]. Are you hearing anything from your customers or just context the industry in terms of potential Sequencer launched from Roche based on the Genia technology, is that sort of something you’re factoring into your expectation or do you think whatever comes out it’s not really going to be a direct competitor at least in the near term?
I don’t know that we’re hearing anything from customers relative to Genia and we have no particular insight knowledge on where they are or are in the development program.
Got it. And couple of quick follow-ups here, any impact in terms of academic spending trends after the elections, is there any sort of change in pattern of your conversation with your customers there?
I don’t know that we’ve had any input to our sales force that I’m aware about in that regard. I think people have no clue to what’s going to happen. Other than that, yes, there doesn’t seem to be a particular attack on funding of agencies like NIH which are involved in human health from Congress, but you’re guess is as good as mine what’s going to happen in the broader sense. I don’t think that’s particular threat. And most of the spending that we would see this year has already been allocated in the sense into NIH and they have to really cut it back that cause a problem. And whilst at the end of the last year the Republican Congress passed the substantial increase for NIH. So who knows?
Make sense. And finally Mike, anything you’d like to highlight just heading into [EGPT] in a couple of weeks?
Well, we will be there obviously and we have reasonably good I think workshop that will highlight some of the uses of the Sequel System and show what it can do. That’s we’re not playing introducing to new instrument [Indiscernible], so it’s not from that sense, but we will certainly highlight the results of the latest chemistry release that we’ve done. And some of the software improvements that go along with that. And looking at the agenda for the meeting as a whole I’d be a little surprise if there’s a lot of new stuff there, but you never know.
Got it. Thanks so much guys.
I am showing no further questions. I would now like to turn the call back to Mike Hunkapiller for any further remarks.
Thanks. In closing I’d like to reiterate our enthusiasm around our latest product improvements and the increasing demand we’re seeing for the Sequel System. It’s encouraging to see an increasing number of multiunit system orders as customer are adopting a Sequel System for high volume applications.
As always we remain stat fast in our commitment to bring the unique advantages of our SMRT technology and products to our customer and to the scientific community in general. We believe this SMRT sequencing provides the industries most complete and accurate of genomes due to its superior performance in sequencing accuracy, uniformity of coverage, extremely long read lengths and ability to characterize DNA base modifications.
Furthermore by providing scientist with an ability to obtain the comprehensive set of sequence information for single experiment. SMRT sequencing is often the lowest cost and only research to available to meet their needs. 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.
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