Pacific Biosciences of California, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. PacBio develops and sells sequencing systems, consumables, software and related services based on its SMRT technology. Financial statements are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $30.6 million | $17.1 million | $59.6 million | $32.7 million |
| Gross profit / margin | $13.8 million / 44.9% | $6.6 million / 38.7% | $26.7 million / 44.8% | $14.1 million / 43.2% |
| Operating expenses | $51.3 million | $30.1 million | $98.0 million | $70.3 million |
| Operating loss | $37.6 million | $23.5 million | $71.3 million | $56.2 million |
| Net loss | $41.0 million | $23.1 million | $128.4 million | $21.8 million |
| Net loss per share, diluted | $0.21 | $0.15 | $0.65 | $0.14 |
| Cash used in operating activities | Not separately stated | Not separately stated | $38.8 million | Cash provided: $51.6 million |
- Revenue growth: Q2 revenue rose 79% year over year. Product revenue increased 93% to $26.5 million; service and other revenue rose 23% to $4.1 million. Six-month revenue increased 82%.
- Drivers: PacBio placed 38 Sequel II/IIe systems in Q2 versus 23 a year earlier, and 79 in the first half versus 34. Consumables revenue benefited from a larger installed base and recovering utilization compared with pandemic-affected 2020.
- Margins and costs: Higher shipment volumes and factory utilization lifted gross margin. Q2 research and development expense increased 48% to $22.3 million and sales, general and administrative expense increased 92% to $29.1 million. Six-month stock-based compensation was $26.0 million, versus $7.3 million.
- Cash and liquidity: At June 30, cash and cash equivalents were $459.8 million and investments were $684.6 million, totaling approximately $1.14 billion. Operating cash use was $38.8 million for the first half; investing cash use was $452.6 million, mainly reflecting net investment purchases. Financing provided $868.6 million.
- Debt: PacBio issued $900 million of 1.50% convertible senior notes due February 2028, with an initial conversion price of $43.50 per share. Net carrying value at quarter-end was $895.8 million; estimated fair value was $1.014 billion. The notes are convertible and may require cash settlement depending on the Company’s election and circumstances.
Material changes and unusual items
- Q2 revenue growth accompanied a wider operating loss, reflecting substantial planned investment in commercial expansion, product development and personnel.
- The six-month net loss included a $52 million expense from repaying Illumina continuation advances after the convertible-note financing. By comparison, the six months of 2020 included a $34 million gain on those advances. The 2020 period also benefited from a $98 million Illumina reverse termination fee recognized in Q4 2020, not in the comparable first-half period.
- Gene Company Limited, PacBio’s primary distributor in China, represented approximately 17% of Q2 revenue and 14% of first-half revenue.
- Common shares outstanding increased to 198.9 million at June 30 from 192.3 million at December 31, 2020. The filing also reports significant equity-based compensation and potential dilution from convertible notes and equity awards.
Outlook, management commentary and risks
- Management expected Sequel II/IIe placements to increase in the second half of 2021 compared with the first half, citing expanded commercial presence and customer demand. The filing does not provide formal revenue or earnings guidance.
- PacBio expected 2021 research and development expense and sales, general and administrative expense to increase significantly. It estimated Invitae collaboration development costs of $20–25 million for 2021; these costs are expensed as incurred. Management stated cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from filing.
- Invitae is funding development of production-scale, high-throughput sequencing products. The program is expected to last approximately five years, but may not succeed; certain termination circumstances could require repayment of funding or revenue sharing. $8.7 million of Invitae-related amounts was included in non-current deferred revenue at quarter-end.
- After quarter-end, PacBio agreed to acquire Omniome for approximately $600 million at closing (about $300 million cash and 9.4 million shares), plus up to $200 million in contingent consideration tied to a milestone. A related $300 million private placement of common stock was conditioned on closing the acquisition. Both transactions remained subject to conditions; the acquisition could increase development costs and cause dilution.
- Key risks include ongoing operating losses and negative operating cash flow, execution and adoption of current and future products, competition, manufacturing and semiconductor supply constraints, COVID-19 uncertainty, customer concentration, and intellectual-property litigation. The company’s appeal in its patent litigation against ONT was denied in May 2021. A separate PGI patent case in the U.S. was stayed pending inter partes review; related proceedings in China remained unresolved.
Important facts for investors to verify
- Whether second-half instrument placements and consumables demand developed as management expected, and whether higher sales translate into sustained gross-margin improvement.
- Actual operating cash burn and the adequacy of liquidity as planned R&D, sales-force and other operating costs rise.
- Closing, final consideration, funding and dilution from the Omniome acquisition and related private placement.
- Progress, economics and termination exposure under the Invitae collaboration, including the path to commercially available products.
- Convertible-note conversion, cash-settlement and repurchase obligations, and the effect of equity awards and share issuance on ownership.
- Developments in the ONT and PGI intellectual-property matters and any related financial or operating consequences.