Pacific Biosciences of California, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. The company develops and sells sequencing systems based on its SMRT technology, including the Sequel platform.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $20.1 million | $20.7 million | $45.0 million | $39.9 million |
| Gross profit | $8.0 million | $10.6 million | $16.9 million | $20.1 million |
| Gross margin | 39.9% | 51.3% | 37.7% | 50.5% |
| Operating loss | $24.4 million | $18.1 million | $47.7 million | $36.6 million |
| Net loss | $25.5 million | $18.5 million | $49.4 million | $37.9 million |
| Net loss per share | $0.26 | $0.21 | $0.52 | $0.44 |
| Cash used in operations | Not stated for quarter | Not stated for quarter | $29.5 million | $39.2 million |
Q2 product revenue rose 22% to $16.5 million, led by consumables; service and other revenue was $3.5 million. Six-month product revenue increased 46% to $37.8 million, reflecting higher instrument shipments and consumable sales. Contractual revenue was zero in 2017 versus $3.6 million in Q2 2016 and $7.2 million in the first half of 2016, following termination of the Roche agreement.
Reported prior-year gross margins benefited from Roche contractual revenue recognized at 100% margin. Excluding that revenue, management reported adjusted gross margins of 41.1% for Q2 2016 and 39.6% for the first half of 2016. The 2017 first-half margin also included $1.6 million of charges related primarily to revised useful-life estimates for leased RS II instruments.
At June 30, 2017, cash and cash equivalents were $36.5 million and investments were $66.1 million, totaling $102.6 million; an additional $4.5 million was restricted cash. Total assets were $177.9 million, current liabilities $35.7 million, and stockholders’ equity $115.9 million. Notes had $16.0 million aggregate principal outstanding, including $2.6 million classified as current; the balance-sheet carrying value was $13.1 million. The notes bear 8.75% interest.
Changes versus prior comparable periods
- Q2 revenue declined 3%, despite growth in product revenue, as Roche contractual revenue ended. First-half revenue increased 13% for the same period-comparison reason.
- Q2 and first-half net losses widened to $25.5 million and $49.4 million, respectively. SG&A increased 39% in Q2 and 34% in the first half, including higher legal and professional fees, compensation and facility costs.
- Operating cash use improved to $29.5 million from $39.2 million in the first half of 2016. Cash and investments increased from $72.0 million at year-end 2016, primarily supported by equity financing.
- The company raised $11.9 million net through its at-the-market offering and $52.7 million net through a June public offering, issuing 17.7 million shares in the latter. It used $4.5 million of offering proceeds to repay debt principal. Common shares outstanding increased from 92.7 million at December 31, 2016 to 115.6 million at June 30, 2017.
- Property and equipment, net, rose to $40.3 million from $14.6 million, reflecting the move into and capitalization of improvements at the new O’Brien premises.
Outlook, commentary and risks
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, based on its forecast through the second quarter of 2018 and assumptions including expected demand growth. It also noted that additional capital may be needed.
- Management expected SG&A expense to increase in 2017 compared with 2016. The filing provides no specific revenue or earnings guidance.
- The Roche agreement termination became effective February 10, 2017. The company may need to expand internal commercial capabilities or find new partners to pursue markets Roche would have addressed.
- Risks highlighted include continued losses and negative operating cash flow; uncertain adoption and commercialization of Sequel; manufacturing yield, quality and supply constraints; competition; potential need for further financing and dilution; and debt covenants and collateral rights.
- The company reported patent disputes with Oxford Nanopore Technologies (ONT), including claims brought by both sides. After quarter-end, an administrative law judge granted a motion to terminate the USITC proceeding on July 19; PacBio petitioned the USITC for review on July 31. The company stated the litigation’s financial effect could not be estimated.
- The O’Brien lease carries $78.0 million of future minimum lease payments as of June 30, 2017. Management reported no off-balance-sheet arrangements and concluded disclosure controls were effective at a reasonable-assurance level.
Investor verification priorities
- Track Sequel instrument shipments, installed-base utilization, consumable sales and manufacturing quality or capacity constraints.
- Assess whether operating cash burn and losses remain consistent with management’s stated liquidity horizon and whether additional financing may be required.
- Review the effects of equity issuance and potential future dilution, as well as the $16.0 million debt principal, repayment terms and covenants.
- Monitor the ongoing ONT and Harvard-related patent proceedings, including potential legal costs and any effect on products or commercialization.
- Evaluate the new facility’s lease obligations and whether higher SG&A and service costs translate into sustainable revenue and improved margins.