Pacific Biosciences of California, Inc. (Nasdaq: PACB) — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter report. The company develops and sells SMRT long-read sequencing systems, consumables and related services.
Financial results
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Total revenue | $78.9 million | $90.9 million | Down 13% |
| Product revenue | $65.4 million | $77.7 million | Down 16% |
| Service and other revenue | $13.5 million | $13.1 million | Up 2% |
| Gross profit / margin | $32.6 million / 41% | $34.6 million / 38% | Profit down 6%; margin up 3 percentage points |
| Operating expenses | $137.0 million | $135.1 million | Up 1% |
| Operating loss | $(104.4) million | $(100.5) million | Loss widened by $3.8 million |
| Net income (loss) | $29.4 million | $(84.1) million | Improved by $113.5 million |
| Cash provided by (used in) operations | $19.5 million | $(78.3) million | Improved; 2020 included material non-operating gains |
Instrument revenue fell to $34.3 million from $45.1 million, and consumables revenue declined to $31.1 million from $32.6 million. The filing attributes lower instrument shipments and consumable utilization primarily to COVID-19 disruptions. Gross margin improved partly because 2019 included inventory and other product-transition costs in the Sequel-to-Sequel II transition.
Liquidity, capital and debt
- Cash, cash equivalents and investments totaled $318.8 million at year-end, versus $49.1 million a year earlier. Working capital was $317.1 million; total liabilities were $78.5 million.
- Year-end balance-sheet cash and investments exclude restricted cash. Cash and cash equivalents were $81.6 million, investments $237.2 million, and restricted cash $4.3 million.
- Cash flow from investing activities was $(219.3) million, principally reflecting net investment purchases; financing activities provided $251.8 million. Capital expenditures were $1.0 million.
- The company repaid its remaining $16.0 million Deerfield debt in February 2020. It had no notes payable at December 31, 2020.
- In August and November 2020, public stock offerings generated approximately $187.2 million net proceeds and issued 29.4 million shares. Year-end common shares outstanding were 192.3 million.
- Subsequent to year-end, the company issued $900 million of 1.50% convertible senior notes due 2028 to a SoftBank subsidiary. Initial conversion price is $43.50 per share, subject to adjustment. The financing triggered repayment of $52 million of Illumina continuation advances in February 2021.
Material changes, unusual items and outlook
- Reported 2020 net income included a $98 million Illumina reverse termination fee, recognized in October after a repayment contingency lapsed, and $34 million of Illumina continuation advances. The advances were repayable under specified financing or change-of-control conditions and were repaid in February 2021. Without these items, the company reported a $104.4 million operating loss; it cautions that it expects continued substantial losses and negative operating cash flow absent such gains.
- COVID-19 reduced customer operations, capital purchases and instrument utilization. Management said pandemic-related revenue pressure would likely continue through the first half of 2021; the duration and full financial impact remained uncertain.
- For 2021, management expects sales, general and administrative expense and research and development expense to increase significantly. Plans include more than doubling quota-carrying sales personnel and hiring over 50 additional R&D employees.
- The January 2021 Invitae collaboration is intended to develop a production-scale, high-throughput sequencing platform over an expected approximately 60-month program. PacBio estimated $20–25 million of related development costs in 2021. Commercial success is uncertain; termination under certain conditions could require refunds and/or revenue sharing.
- Year-end instrument backlog was approximately $10.1 million, up from $6.6 million in 2019. Management expected conversion to revenue during 2021, subject to cancellations or delays.
- One China distributor, Gene Company Limited, accounted for 14% of 2020 revenue, down from 17% in 2019. International customers represented 55% of revenue.
- Notable risks include competition and pricing pressure, reliance on limited and sometimes sole-source suppliers, product quality and manufacturing scale, customer concentration, regulatory uncertainty for clinical applications, COVID-19, and intellectual-property litigation. The company was appealing an adverse patent-validity jury finding in litigation against Oxford Nanopore; separate PGI U.S. and China proceedings were ongoing.
Investor facts to verify
- Separate recurring operating performance from the $132 million of 2020 Illumina-related gains; assess operating losses, cash burn and the sustainability of revenue and margins.
- Review the terms, conversion dilution, cash-settlement and repayment provisions of the $900 million convertible notes, including the post-year-end repayment of Illumina advances.
- Track 2021 instrument installations, consumable utilization, backlog conversion and the continuing effects of COVID-19.
- Evaluate whether planned commercial and R&D spending, including the Invitae program, produces adoption, product development progress and a viable path to profitability.
- Monitor distributor/customer concentration, supply availability, product reliability, and the outcomes and potential costs of patent litigation.
Audit and controls: Ernst & Young issued an unqualified opinion on the consolidated financial statements. The auditor was not engaged to opine on internal control effectiveness; management concluded internal controls were effective at year-end.