Pacific Biosciences of California, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
PacBio develops, manufactures and sells genetic-analysis products based on its single-molecule, real-time (SMRT) technology. Its first commercial system, the PacBio RS DNA sequencer, began shipping in April 2011 and uses proprietary consumables. During 2011, the company sold 48 instruments to 45 customers. It remains an early-stage commercial company and is investing in product development, manufacturing, sales and customer support.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $33.9 million | $1.7 million |
| Product revenue | $31.5 million | None |
| Service and other revenue | $1.5 million | None |
| Grant revenue | $0.9 million | $1.7 million |
| Gross profit | $13.0 million | $1.7 million |
| Gross margin | 38.5% | Not comparable; 2010 revenue was grant revenue |
| Operating expenses | $122.8 million | $141.9 million |
| Operating loss | $(109.8) million | $(140.2) million |
| Net loss | $(109.4) million | $(140.2) million |
| Net loss per share | $(2.03) | $(14.10) |
| Cash used in operating activities | $(103.0) million | $(122.0) million |
FY 2011 revenue growth reflects the start of commercial product sales; 2010 and 2009 revenue consisted solely of grants. Revenue included $30.2 million from instrument sales and $1.3 million from consumables. The company reported a fourth-quarter revenue of $12.4 million, gross profit of $1.5 million (12.3% gross margin), operating loss of $22.7 million and net loss of $22.8 million.
At year-end, cash, cash equivalents and investments totaled $177.4 million, down from $283.7 million a year earlier. Working capital was $180.2 million; total assets were $218.3 million and stockholders’ equity was $191.5 million. Total liabilities were $26.9 million, including a $2.9 million facility financing obligation; the filing reports no off-balance-sheet arrangements. Contractual obligations included $14.9 million of operating lease payments and $1.8 million of facility-financing payments. Management said available cash and investments should fund projected operating requirements for at least 12 months, while noting additional financing would likely be needed in the future.
Material changes and management commentary
- Product and service revenue began in 2011, and the company recognized revenue on 48 installed instruments. System revenue backlog fell to approximately $11.0 million for 16 systems at year-end, from $24.0 million for 38 systems at year-end 2010. Management expected to convert the 2011 backlog during the first half of 2012, subject to customer delays or cancellations.
- Research and development expense declined 32% to $76.1 million, while sales, general and administrative expense rose 55% to $46.7 million, reflecting expanded commercial functions, public-company costs and legal matters. Total operating expenses fell 13%.
- Management warned that product costs as a percentage of sales would increase significantly in 2012 and reduce gross margin: certain instrument costs had been expensed as R&D before commercial designs were finalized, and that previously expensed inventory had been used by year-end 2011. Service costs also exceeded service revenue in 2011.
- The September 2011 restructuring reduced the workforce by approximately 130 employees (28%) and resulted in $4.9 million of termination costs; substantially all amounts had been paid by year-end. The company reported 326 employees at December 31.
- Management highlighted C2 chemistry improvements versus the original chemistry, including typical readlength gains of 2x, mappable data per SMRT Cell gains of 3–4x, and a 50% reduction in required input sample, while reporting consensus accuracy of Q50. These are company-reported product performance claims.
- After year-end, on January 5, 2012, Hugh Martin resigned as CEO and president; the board appointed Executive Chairman Michael Hunkapiller to those roles.
Risks, contingencies and unusual items
- The company has sustained significant losses since inception, expects further losses and negative cash flow, and may never achieve or sustain profitability. Product adoption, customer capital budgets, long sales cycles, competition and the need for future financing create substantial uncertainty.
- PacBio disclosed customer-reported instrument reliability issues, variable SMRT Cell performance, low manufacturing yields and high consumable costs. It also relies on some sole- or single-source suppliers and cautioned that scaling production and reducing costs may be difficult.
- Several lawsuits were pending, including Helicos patent-infringement litigation and securities class actions and a shareholder derivative action. The USPTO had rejected claims in the four patents asserted by Helicos during re-examination, but the company said the litigation outcome remained uncertain. PacBio provided no estimate of possible losses and recorded no liability for these matters.
- Other risks include intellectual-property challenges and licensing obligations, possible future product regulation, international and foreign-exchange exposure, and earthquake or other disruption to California operations. The company began a foreign-exchange hedging program in January 2012.
- PacBio reported a full valuation allowance against $180.8 million of deferred tax assets and approximately $9.3 million of unrecognized tax benefits. It also stated that prior ownership changes may limit use of net operating losses under Section 382.
- Ernst & Young issued unqualified opinions on the 2011 financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Most important facts for investors to verify
- Whether the $11.0 million instrument backlog converted to revenue as expected, and whether new orders replaced the substantially lower backlog.
- Subsequent revenue mix, installed-system utilization, consumables demand and customer retention—not just instrument shipments.
- Whether manufacturing yields, instrument reliability and service economics improved, and how higher product costs affected gross margins in 2012.
- Cash burn relative to the $177.4 million year-end cash and investments, management’s funding assumptions, and the timing and terms of any additional financing.
- Developments and potential financial exposure in the Helicos and securities-related lawsuits; the filing does not provide a loss estimate.