Pacific Biosciences of California, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company develops and sells SMRT sequencing systems, instruments, consumables, software, and related services. Its products include the Sequel II and Sequel IIe systems.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $29.0 million | $15.6 million |
| Product revenue | $25.3 million | $12.3 million |
| Gross profit / margin | $13.0 million / 44.8% | $7.5 million / 48.0% |
| Operating expenses | $46.7 million | $40.2 million |
| Operating loss | $33.7 million | $32.7 million |
| Net income (loss) | $(87.4) million | $1.3 million |
| Operating cash flow | $(23.1) million | $75.4 million |
- Revenue increased 86%, driven primarily by instrument revenue, which rose to $14.9 million from $4.0 million, and higher consumables revenue as the Sequel II installed base grew.
- Gross margin declined 3.2 percentage points. The filing attributes higher product costs principally to increased shipments; service costs also rose.
- Research and development expense increased 35% to $20.5 million; sales, general and administrative expense increased 5% to $26.1 million. Stock-based compensation was $10.2 million, versus $4.0 million.
- At March 31, cash and cash equivalents were $932.4 million and investments were $227.9 million, totaling $1.16 billion. Cash, cash equivalents and restricted cash totaled $936.7 million.
- The company reported $900 million principal amount of 1.50% convertible notes due February 15, 2028; their net carrying amount was $895.7 million. Current liabilities were $33.7 million and total liabilities were $972.3 million.
Material changes and unusual items
- In February 2021, PacBio issued $900 million of convertible notes to SB Northstar LP, a SoftBank Group subsidiary, for net proceeds of approximately $895.6 million. The initial conversion price is $43.50 per share; holders may convert, and the company may settle in shares, cash, or a combination.
- The financing triggered repayment of $52.0 million in Illumina Continuation Advances. The repayment was recorded as an expense, contributing substantially to the Q1 net loss. By contrast, Q1 2020 included a $34.0 million gain related to those advances, making the prior-year net income comparison unusually favorable.
- Q1 2020 operating cash flow included cash received from Illumina’s $98.0 million Reverse Termination Fee. This receipt materially affects comparison of operating cash flow between periods.
- The company entered a multi-year development and commercialization agreement with Invitae in January 2021 for production-scale, high-throughput sequencing products. PacBio received $4.1 million through March 31, recorded as non-current deferred revenue; funding is tied to development costs and the arrangement gives Invitae preferential pricing on future products.
Outlook, commentary and risks
- Management expects cash, cash equivalents and investments to fund projected operating requirements for at least 12 months from the filing date, while noting that it expects ongoing operating losses and negative annual operating cash flow.
- For 2021, management expects significant increases in both R&D and SG&A expense as it expands product development and commercial operations. It expects $20–25 million of Invitae-related development costs during fiscal 2021.
- The stated strategic priorities are expanding commercial reach, accelerating product development, and pursuing leadership in whole-genome clinical sequencing. The Invitae development program is expected to last about 60 months, but could be shorter or longer; success and commercial availability are not assured.
- COVID-19 continues to create uncertainty around customer purchasing, capital budgets, operations, and supply. The filing also identifies manufacturing yields and quality, sole-source suppliers and semiconductor shortages, competition, customer concentration, lengthy sales cycles, and continued losses as important risks.
- Legal matters include PacBio’s appeal following an adverse patent-validity jury finding in its U.S. litigation against Oxford Nanopore, and patent infringement cases brought by Personal Genomics of Taiwan in the U.S. and China. Management stated that the outcomes were not considered probable or reasonably estimable as of the filing.
Important facts for investors to verify
- Whether revenue growth, particularly instrument shipments and Sequel II consumables demand, is sustained and supports improved gross margin.
- Cash burn and spending against management’s 2021 R&D and SG&A plans, including the $20–25 million expected Invitae development spend.
- Convertible-note terms, potential dilution or cash settlement requirements, and the company’s capacity to meet future obligations.
- Progress, funding, termination provisions, and commercial prospects of the Invitae program, including any refund or revenue-sharing obligations.
- Developments in COVID-19, supply constraints, customer concentration, and the disclosed patent litigation.