Pacific Biosciences of California, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited. The company develops and sells sequencing systems based on its Single Molecule, Real-Time (SMRT) technology, including the Sequel instrument and related consumables.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $18.2 million | $23.5 million | $59.1 million | $68.5 million |
| Gross profit / margin | $3.2 million / 17.6% | $8.2 million / 34.9% | $19.4 million / 32.7% | $25.2 million / 36.7% |
| Operating loss | $24.7 million | $21.6 million | $70.4 million | $69.3 million |
| Net loss | $25.0 million | $22.0 million | $71.8 million | $71.4 million |
| Net loss per share | $0.19 | $0.19 | $0.55 | $0.70 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $(47.4) million | $(47.3) million |
At September 30, cash and cash equivalents were $38.1 million and investments were $77.7 million; together, $115.7 million, excluding $4.5 million of restricted cash. Current assets were $143.9 million and current liabilities $21.6 million. Notes payable had a $14.4 million carrying value and $16.0 million aggregate principal outstanding. The company reported $69.7 million of future minimum operating lease payments.
Changes versus the prior comparable period
- Q3 revenue declined 23%, driven mainly by fewer instrument shipments and installations and lower consumable sales. Nine-month revenue fell 14%, with management attributing the decline primarily to fewer system installations.
- Q3 gross margin fell to 17.6% from 34.9%. The quarter included $2.4 million of product-transition costs, including an inventory reserve on older consumables, and lower manufacturing output that increased the fixed-cost burden per unit.
- Nine-month operating loss widened slightly, while net loss was broadly stable. Lower research and development and selling, general and administrative expenses were offset by lower gross profit.
- Cash and investments increased from $62.9 million at December 31, 2017, principally reflecting $97.7 million of net proceeds from 2018 public equity offerings. The company issued 30.6 million shares through those offerings.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from the filing date, but noted potential future capital needs and possible dilution or unfavorable financing terms. The forecast depends in part on product demand.
- Management expected total operating expenses to remain consistent for the rest of 2018. It anticipated beta testing the higher-throughput SMRT Cell 8M in early 2019, with a broader launch some months later. Instrument sales were described as variable, with some customers delaying purchases in anticipation of 8M.
- After quarter-end, on November 1, 2018, PacBio agreed to be acquired by Illumina for $8.00 per share in cash, an approximately $1.2 billion fully diluted transaction. Closing was expected in mid-2019, subject to stockholder approval and other conditions, including regulatory approvals. Certain termination circumstances could require PacBio to pay Illumina $43 million.
- The merger’s pending status could affect customers, employees and operations. The filing also identifies product adoption, manufacturing and product quality, customer concentration, competition, financing needs, and intellectual-property litigation as significant risks. One China distributor accounted for 20% of Q3 revenue and 28% of nine-month revenue.
- Patent disputes with Oxford Nanopore remained ongoing in the U.S.; the company said the financial effect could not be estimated. The UK and German proceedings were settled in May 2018, with specified product and patent restrictions through 2023. Separately, the PTAB denied Oxford Nanopore’s petition to review one asserted U.S. patent.
- Other notable events: the chief commercial officer resigned effective October 30, 2018 and the CEO assumed those duties. The board approved cash bonuses of $617,500 for the CFO and $1.03 million for the CEO; both had previously received $1 per year in cash compensation for their services.
Key facts for investors to verify
- Whether the Illumina transaction receives stockholder and regulatory approvals, meets closing conditions, and closes on the anticipated timetable.
- Whether instrument installations and consumable demand recover, particularly as customers await SMRT Cell 8M, and whether the planned product testing and launch proceed as expected.
- Whether gross margins improve after the product-transition costs and lower manufacturing output reported in Q3.
- Whether cash use, future financing requirements, debt restrictions and dilution remain consistent with management’s liquidity expectations.
- Developments in the U.S. and European patent proceedings, and any resulting costs or business effects.