Pacific Biosciences of California, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PacBio develops and sells sequencing systems, consumables and related services, including HiFi long-read technology, and is developing SBB short-read technology. Figures below are in U.S. dollars; financial statement amounts are in millions unless indicated.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $35.5 | $30.6 | $68.6 | $59.6 |
| Gross profit / margin | $16.2 / 45.7% | $13.8 / 44.9% | $30.3 / 44.2% | $26.7 / 44.8% |
| Operating loss | $(68.0) | $(37.6) | $(145.5) | $(71.3) |
| Net loss | $(71.4) | $(41.0) | $(152.9) | $(128.4) |
| Basic and diluted loss per share | $(0.32) | $(0.21) | $(0.68) | $(0.65) |
Six-month revenue rose 15%, led by consumables and services as the Sequel II/IIe installed base grew to 460 systems from 282 a year earlier. Six-month product revenue was $58.4 million and service and other revenue was $10.2 million. Q2 revenue grew 16% year over year; the company reported $3.7 million of Q2 product revenue from Invitae purchases under the amended agreement.
Six-month operating expenses increased 79% to $175.8 million. Research and development rose $60.5 million, primarily reflecting Omniome-related costs, product development and increased headcount; sales, general and administrative expense increased $23.9 million. Gross margin improved year over year in Q2 but declined for the first half, with higher average product costs cited as a factor.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $310.4 million and investments were $588.7 million; together, $899.2 million, down from $1.044 billion at December 31, 2021. Restricted cash was an additional $3.2 million.
- Cash used in operating activities was $139.6 million for the first half, versus $38.8 million in the comparable 2021 period. The company attributed the 2022 outflow principally to its net loss and working-capital changes, including a $13.2 million inventory increase and an $11.4 million decrease in accrued expenses.
- Investing activities used $18.2 million, including $7.7 million of property and equipment purchases and net investment purchases. Financing activities provided $5.7 million, mainly from equity-plan issuances.
- Convertible senior notes had $900 million principal and a $896.4 million net carrying value. They bear 1.50% interest and mature February 15, 2028. The filing also reports $3.17 million of remaining term-loan principal acquired with Omniome.
- Management stated existing cash, cash equivalents and investments should fund projected operating requirements beyond 12 months from the filing date. It also expects ongoing operating losses and negative operating cash flow, and says additional capital may be needed over time.
Material changes, outlook and risks
- For the first half, operating loss increased $74.2 million. Net loss increased by a smaller $24.5 million because the 2021 comparison included a $52.0 million expense for repayment of Illumina continuation advances; that repayment did not recur in 2022.
- Management expects R&D expense to continue increasing in the remainder of 2022, citing product development and a full year of Omniome expenses. It described moderating hiring to manage expense growth amid inflation and supply-chain costs. No numerical revenue or earnings guidance is provided.
- The company aims to launch its SBB short-read platform in 2023 and expects further Sequel II/IIe placements during 2022. These are stated objectives, not guaranteed outcomes.
- Management cited lengthening customer sales cycles, inflation, semiconductor shortages, supply-chain constraints, and COVID-related lockdowns in China as pressures on demand, costs, margins and cash flow. A stronger U.S. dollar may also weigh on international demand and reported revenue.
- On June 24, 2022, PacBio amended its Invitae collaboration through June 30, 2028. Invitae is no longer contractually obligated to fund development or participate in development decisions. In exchange for prior non-refundable payments of $23.5 million, PacBio provides purchase credits; unused credits expire June 30, 2025. Deferred revenue related to the agreement was $21.4 million current at June 30.
- Omniome acquisition consideration includes up to $200 million contingent on the first commercial shipment using SBB technology ($100 million cash and $100 million stock). The liability was $163.2 million at June 30; its $6.5 million fair-value reduction benefited first-half operating results and was primarily attributed to higher discount rates.
- PacBio faces patent litigation with Personal Genomics of Taiwan. In the U.S., one IPR decision found challenged claims unpatentable and PacBio is appealing an adverse decision on other claims; the district court case has reopened. A related China infringement action was dismissed in May 2022 after the patent claims were invalidated by the Chinese authority, with an appeal pending. The company says outcomes are unpredictable and has not recorded a material provision for these matters.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter; no off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether revenue and consumables growth continue as the installed base expands, given longer sales cycles and customer project delays.
- Cash burn and liquidity against management’s stated runway, including the funding needed to develop SBB and other platforms.
- Whether supply constraints, inflation and product mix pressure gross margins and cash flow.
- Progress, costs and timing toward the targeted 2023 SBB launch and the Omniome-related commercial milestone that triggers contingent consideration.
- Use and recognition of Invitae credits and the remaining performance obligations under the amended agreement.
- Developments in PGI litigation and the potential cash, stock dilution or liquidity effects of the convertible notes and Omniome milestone payments.