Pacific Biosciences of California, Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The company designs and sells DNA sequencing systems and consumables based on its Single Molecule, Real-Time (SMRT) technology. It launched the higher-throughput Sequel System in 2015 and began limited U.S. shipments in the fourth quarter.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $92.8 million | $60.6 million |
| Product revenue | $37.5 million | $35.3 million |
| Gross profit / margin | $53.5 million / 57.6% | $23.4 million / 38.6% |
| Operating loss | $29.1 million | $62.9 million |
| Net loss | $31.7 million; $0.42 per share | $66.2 million; $0.94 per share |
| Cash used in operating activities | $47.9 million | $51.5 million |
| Cash, cash equivalents and investments | $82.3 million | $101.3 million |
| Working capital | $72.4 million | $86.3 million |
| Notes payable, carrying value | $14.9 million | $14.0 million |
FY2015 revenue included $44.4 million of contractual revenue under the Roche collaboration, including the final $20 million development milestone. Product revenue comprised $18.7 million of instrument revenue, down 15%, and $18.8 million of consumables, up 43%. The filing reports a 100% gross margin on contractual revenue, so the reported gross margin is not representative of product economics alone.
Cash and investments of $82.3 million exclude $4.5 million of restricted cash pledged for the new lease. Current assets were $110.5 million and current liabilities were $38.2 million. The debt bears 8.75% interest; scheduled remaining principal-and-interest payments total $27.2 million. The debt is secured by substantially all company property and subject to covenants.
Material changes and unusual items
- Total revenue rose 53%, but much of the increase came from Roche contractual revenue, which rose $27.6 million. Product revenue increased only 6%; instrument sales fell while consumables and service revenue grew.
- FY2015 contractual revenue included $30 million of Roche milestones and $14.4 million of upfront-payment amortization. A revised estimate of the Roche development period added $7.6 million of revenue in 2015 and reduced loss per share by $0.10. All Roche milestones have now been achieved.
- A one-time $23.0 million gain from amendments to existing Menlo Park leases reduced operating expenses. The company’s third-quarter profit was largely attributable to this gain; the full year remained loss-making.
- Cash and investments declined $19.1 million year over year. Financing activities provided $36.5 million, including $29.1 million net proceeds from at-the-market stock sales. Shares outstanding increased to 79.98 million at year-end; 2.7 million additional shares were sold through March 7, 2016, for $23.4 million net proceeds.
- Research and development expense increased 25% to $60.4 million, while sales, general and administrative expense increased 19% to $45.2 million.
Outlook, risks and contingencies
- Management expected product revenue to be relatively flat early in 2016 and to rise significantly later, assuming increased Sequel shipments. It expected gross margin below 2015 levels, R&D expense similar to 2015, and SG&A expense to increase.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, while also stating that additional capital would be needed. The company continued to have substantial operating losses and negative operating cash flow.
- Sequel execution depends on product reliability, customer adoption, scaling instrument production and transferring new SMRT Cell production to a high-volume manufacturer. The filing warns of potential delays, low initial yields, defects and consumable variability.
- Roche is an important collaboration partner and has exclusive clinical commercialization rights under the agreement. No further milestone payments are expected; remaining deferred revenue from the upfront payment was $12.1 million at year-end, with amortization scheduled to decline significantly in the fourth quarter of 2016. Roche-related product sales could have lower margins than sales to other customers.
- The new O’Brien facility lease is a significant commitment: estimated rent and operating expenses total approximately $104 million over the lease term, with additional improvement and relocation costs. The filing excludes this lease from its contractual-obligations table because the timing and completion of landlord improvements remained uncertain.
- Other key risks include competition from better-resourced sequencing companies, reliance on sole- or single-source suppliers, potential dilution from future financing, debt covenants and collateral, regulatory and intellectual-property risks, and the possibility that backlog orders are delayed or canceled. Instrument backlog was $16.7 million at year-end, versus $8.4 million a year earlier; the company expected conversion in 2016 but noted cancellation and delay risk.
- The company reported that its financial statements and internal control over financial reporting received unqualified audit opinions; management assessed disclosure controls and internal control as effective at year-end.
Important facts for investors to verify
- How much 2016 revenue and gross profit is generated by recurring product and service sales versus Roche-related contractual revenue.
- Whether Sequel shipments, customer adoption, SMRT Cell yields and manufacturing scale-up meet management’s expectations.
- Actual operating cash burn, available unrestricted liquidity and the timing and terms of any further equity or debt financing.
- Roche collaboration progress, remaining upfront-payment amortization, future Roche product orders and the margin impact of those sales.
- Total costs and timing for the O’Brien facility, including tenant improvements, relocation, and any related offsetting landlord payments.