Business Context and Reporting Period
Company: Pacific Biosciences of California, Inc. (PacBio)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Status: Development stage enterprise. The company is developing a single-molecule, real-time (SMRT) DNA sequencing platform (PacBio RS). As of the reporting date, the company had not commercially launched its product and had not recognized revenue from product sales. Revenue to date consists solely of government grants.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Cumulative (Inception to Sep 30, 2010) |
|---|---|---|---|
| Revenue | $220,000 | $1,394,000 | $8,318,000 |
| Net Loss | $(40,708,000) | $(103,747,000) | $(282,934,000) |
| Operating Expenses | $40,916,000 | $105,039,000 | $294,717,000 |
| Cash and Cash Equivalents | $62,717,000 (as of Sep 30, 2010) | ||
| Investments | $50,215,000 (as of Sep 30, 2010) | ||
| Total Liquidity | $112,932,000 | ||
| Facility Financing Obligation | $3,052,000 (Total Present Value) |
Note: All figures in thousands except per share data. The company reported a deficit accumulated during the development stage of $295.7 million as of September 30, 2010.
Material Changes vs. Prior Period
- Revenue: Revenue increased from $0 in the prior year periods to $220,000 (Q3) and $1,394,000 (YTD) due to increased work performed under existing and newly awarded government grants.
- Operating Expenses:
- R&D: Increased 56% in Q3 and 67% YTD compared to 2009. Driven by a $7.1 million (Q3) and $19.5 million (YTD) increase in prototype materials, and significant increases in personnel-related expenses due to headcount growth.
- SG&A: Increased 133% in Q3 and 125% YTD. Driven by increased personnel costs, promotional activities, and facility expenses.
- Net Loss: Net loss increased 66% in Q3 and 74% YTD compared to the prior year periods, reflecting the substantial increase in operating expenses.
- Capital Structure: Issued Series F Convertible Preferred Stock in June and July 2010, raising gross proceeds of approximately $108.8 million.
Outlook, Risks, and Subsequent Events
- Initial Public Offering (Subsequent Event): The company completed its IPO on November 1, 2010, selling 12.5 million shares at $16.00 per share. Underwriters exercised an overallotment option for an additional 1.875 million shares. Net proceeds were approximately $210.4 million.
- Commercial Launch: The company expects to commence deliveries of revenue-generating commercial release PacBio RS instruments in the first half of 2011. Revenue recognition for limited production release units is deferred until the commercial upgrade is delivered.
- Backlog: As of September 30, 2010, backlog was approximately $20 million. The company does not expect to recognize revenue on these orders prior to December 31, 2010.
- Legal Proceedings:
- Helicos Biosciences: Named as a defendant in a patent infringement lawsuit filed in August 2010. The company intends to defend vigorously.
- Affymetrix: Named as a defendant in a complaint filed in November 2010 alleging tortious interference with contractual relationships regarding employee hiring.
- Life Technologies: Involved in a patent interference proceeding; the company is currently the senior party.
- Risk Factors: The company faces risks related to its development stage status, lack of commercial operating history, potential inability to achieve profitability, manufacturing scalability, and intellectual property litigation.
Investor Verification Checklist
- Revenue Recognition Timing: Verify the specific criteria for recognizing revenue from the $20 million backlog, noting that revenue is deferred until commercial release units are delivered and accepted (expected H1 2011).
- Manufacturing Scalability: Assess the company's ability to scale production of complex consumables (SMRT Cells) and instruments to meet demand, given current low yields and high costs.
- Legal Exposure: Monitor the outcomes of the Helicos and Affymetrix lawsuits, as adverse rulings could result in injunctions or significant damages.
- Cash Burn Rate: Review the trajectory of operating cash burn ($82.9 million used in operations YTD 2010) against the $210.4 million IPO proceeds to determine runway to profitability.
- CEO Health: Note the disclosure regarding the CEO's diagnosis of multiple myeloma and the potential impact on leadership continuity.