Pacific Biosciences of California, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise. The company develops and sells sequencing systems, consumables, software and services, primarily using its SMRT technology, and is developing a short-read platform using Omniome’s Sequencing by Binding technology.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $34.9 | $19.1 | $94.5 | $51.8 |
| Gross profit / margin | $15.4 / 44.0% | $7.1 / 37.0% | $42.1 / 44.5% | $21.2 / 40.9% |
| Operating loss | $(74.5) | $(24.2) | $(145.8) | $(80.4) |
| Net income (loss) | $16.5 | $(23.7) | $(111.9) | $(45.5) |
- Q3 revenue grew 83% year over year: product revenue rose 94% to $30.5 million, including instrument revenue of $15.9 million and consumables of $14.6 million. Service and other revenue increased 32% to $4.4 million. PacBio placed 44 Sequel II/IIe systems in Q3 versus 20 a year earlier; nine-month placements were 123 versus 54.
- Higher volume and factory utilization supported gross-margin improvement. Operating expenses increased 188% in Q3 to $89.8 million, including $30.7 million of merger-related expenses; R&D rose 67% and sales, general and administrative expense rose 114%.
- Q3 net income reflects a one-time $94.8 million deferred tax benefit related to deferred tax liabilities recorded in the Omniome and Circulomics acquisitions. The company says it maintains a full valuation allowance on its U.S. net deferred tax assets. The nine-month result remained a net loss.
- Operating cash flow was $(79.5) million for the first nine months of 2021, versus $33.8 million provided in 2020. Investing cash outflow was $744.3 million, including acquisitions and net investment purchases; financing inflow was $1.17 billion, mainly from convertible notes and an equity placement.
- At September 30, cash and cash equivalents were $425.4 million and investments were $654.5 million, totaling $1.08 billion; restricted cash was $5.1 million. Current assets were $1.13 billion and current liabilities $55.6 million.
- Debt included $900 million principal of 1.50% convertible senior notes due February 2028, carried net of issuance costs at $895.9 million. Initial conversion price is $43.50 per share. The company also assumed approximately $4.3 million of Omniome term loans bearing about 17% annual interest. Operating lease liabilities totaled $57.1 million.
Material changes versus the prior comparable period
- Revenue increased 83% in both the quarter and nine-month period, principally from instrument placements and higher consumables sales as the installed base grew. Management also cited customer-site reopening and comparison with pandemic-affected 2020 activity.
- Nine-month operating loss widened to $145.8 million from $80.4 million. Higher R&D, commercial investment, stock-based compensation and acquisition costs contributed; the comparison also includes a $34.0 million gain from Illumina in 2020 and a $52.0 million repayment of Continuation Advances in 2021.
- The September Omniome acquisition added $400 million of in-process R&D, $392.2 million of goodwill and a $168.6 million contingent consideration liability. Circulomics was acquired in July for $29.5 million in cash. Acquisition purchase-price allocations were preliminary.
- Financing materially increased liquidity and potential dilution: the company issued $900 million of convertible notes and 11.2 million shares in a private placement, raising approximately $294.8 million net. It also issued 8.9 million shares as Omniome acquisition consideration.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management expected Sequel II/IIe placements to continue growing through the remainder of 2021 and said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from the filing date.
- Management expected R&D and SG&A expenses to increase significantly in 2021, including from Omniome integration, hiring and commercial expansion. It planned to more than double quota-carrying sales representatives versus year-end 2020; headcount was 44 at September 30. Estimated 2021 Invitae collaboration development costs were approximately $20 million.
- The Invitae agreement is a multi-year development program expected to last about 60 months. Its $16.8 million of receipts was recorded as non-current deferred revenue; termination under certain circumstances could require refunds and/or revenue sharing. Success and commercialization are uncertain.
- Key risks include persistent operating losses and negative operating cash flow; execution, integration and impairment risks from acquisitions; product development, manufacturing yields and sole-source supply exposure; customer capital-spending and COVID-19 uncertainty; competition and pricing pressure; and reliance on Gene Company Limited, which represented 17% of Q3 revenue.
- Legal matters include patent disputes with ONT and a stayed U.S. case brought by Personal Genomics of Taiwan. The company’s appeal in the ONT U.S. district court matters was denied in May 2021. In a related China proceeding, all claims of the asserted patent were invalidated by the CNIPA in September 2021; the company requested dismissal of the infringement action. Management stated it did not believe the described matters were probable or reasonably estimable as material losses, while noting litigation outcomes are unpredictable.
- COVID-19, including the Delta variant, could continue to affect customer demand, manufacturing, suppliers and capital spending. The filing also identifies semiconductor constraints, U.S.–China trade and geopolitical exposure, intellectual-property disputes, and potential dilution or cash-settlement demands under the convertible notes as risks.
Important facts for investors to verify
- Whether instrument placements translate into sustained consumables usage, revenue growth and improved gross margins.
- Progress, costs, milestone timing and purchase-price allocation for Omniome, including the contingent $200 million milestone consideration and the value recoverability of acquired IPR&D.
- Cash burn and liquidity runway against management’s stated expectation of funding needs for at least 12 months; note that the tax benefit is non-cash and non-recurring.
- Future dilution and cash obligations from the convertible notes, equity compensation, acquisition consideration and any further financing.
- Whether acquisition integration, Invitae product development, supply availability and customer demand meet management’s expectations; no detailed quantified revenue or profitability guidance is given.