Pacific Biosciences of California, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unaudited consolidated results; amounts below are in U.S. dollars unless stated otherwise.
Business context
PacBio develops and sells genomic sequencing systems and consumables based on HiFi long-read and SBB short-read technologies. Its products include the Revio long-read and Onso short-read platforms. Management’s stated priorities include growing adoption, developing future platforms, improving gross margins and reducing operating expenses.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $38.8 million | $38.9 million; down 0.2% |
| Product revenue | $35.0 million | $34.7 million; up 1% |
| Service and other revenue | $3.8 million | $4.2 million; down 10% |
| Gross profit / gross margin | $11.3 million / 29% | $9.8 million / 25% |
| Operating loss | $81.4 million | $91.3 million |
| Net loss / diluted loss per share | $78.2 million / $0.29 | $88.0 million / $0.36 |
| Cash used in operating activities | $75.7 million | $94.7 million |
| Cash, cash equivalents and investments | $561.9 million at March 31 | $631.4 million at December 31, 2023 |
Instrument revenue fell 8% to $19.0 million; PacBio shipped 28 Revio systems versus 32 a year earlier. Consumables revenue rose 15% to $16.0 million, primarily reflecting growth in the Revio installed base. Gross-margin improvement reflected the nonrecurrence of approximately $3.5 million of excess-consumables inventory adjustments recorded in Q1 2023, partly offset by higher acquired-intangible amortization.
At March 31, current assets were $677.0 million and current liabilities were $73.0 million. Total assets were $1.670 billion and stockholders’ equity was $649.0 million. Convertible senior notes had a net carrying value of $892.5 million; aggregate principal outstanding was $900 million: $459 million of 1.50% notes due 2028 and $441 million of 1.375% notes due 2030.
Cash, cash equivalents and restricted cash decreased by $103.3 million during the quarter. Financing provided $6.6 million, mainly from equity plans; investing used $34.1 million, chiefly reflecting net investment purchases and capital expenditures. The company reported $19.5 million of share-based compensation expense.
Changes, outlook and management commentary
- Operating loss improved by $9.9 million year over year, mainly reflecting lower R&D expense and a $12.3 million favorable change in contingent-consideration remeasurement, partly offset by higher SG&A and acquired-intangible amortization.
- Management said longer-than-expected Revio sales cycles and slower consumables ramp-up weighed on results. Factors cited included uncertainty in capital-equipment funding, procurement delays, slower customer sample-volume growth, sample delays at some large customers and lower utilization among some China-based service providers.
- Management expects existing cash, cash equivalents and investments to fund projected operating requirements beyond the next 12 months from the filing date. It also expects ongoing operating losses and negative annual operating cash flow, and stated that it does not expect to be profitable in 2024.
- In Q2 2024, PacBio began expense-reduction actions, including global workforce reductions, closure of its San Diego office, facilities downsizing and a narrower development pipeline. Management aims to reduce certain annualized run-rate operating expenses by year-end 2024. The restructuring charge had not yet been estimable.
- Management anticipates gross-margin improvement from cost and manufacturing-efficiency initiatives, but cautioned that margins may vary with Revio costs and volumes, manufacturing performance, warranty costs and selling prices. It expects R&D expense to decline during 2024 and service revenue to begin increasing in the second half as customers transition to Revio service plans after warranty periods.
Risks, contingencies and unusual items
- Key business risks include product adoption and lengthy sales cycles, customer funding uncertainty, continued losses and cash burn, execution of cost reductions, manufacturing and supplier concentration, competition, and U.S.–China and China–Taiwan trade or geopolitical disruption.
- PacBio is defending patent matters brought by Personal Genomics of Taiwan and Take2 Technologies/Chinese University of Hong Kong. The filing says outcomes are unpredictable and no material loss was considered probable or reasonably estimable. In April 2024, the Patent Trial and Appeal Board instituted review of all claims challenged in the Take2 patent; the parties later proposed a stay of the court case pending review.
- A $25 million Apton acquisition milestone payment may become due if specified technology-related revenue reaches $50 million within five years of the acquisition; payment may be in cash, shares or a combination. The related liability was valued at $19.5 million at March 31, 2024.
- Notes may require cash repayment at maturity, on conversion depending on settlement choice, or following specified fundamental-change events. The company warns that it may not have sufficient cash or financing for such payments.
- No off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Revio placements and consumables growth accelerate enough to offset lower instrument sales and declining Sequel II/IIe consumables.
- Progress and realized savings from workforce, facilities and development reductions, including the eventual restructuring charge and any effect on product development or commercial execution.
- Cash burn, investment balances and funding needs relative to the $900 million principal amount of convertible notes and their conversion, repurchase and maturity terms.
- Gross-margin trajectory and the extent to which improvement reflects durable manufacturing gains versus the nonrecurrence of prior-period inventory adjustments.
- Developments in the PGI and Take2 patent proceedings, including any financial or operating consequences.