Business context and reporting period
Pacific Biosciences of California, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company develops and sells single-molecule, real-time (SMRT) genetic analysis technology. It began commercial shipments of its PacBio RS sequencing system in April 2011 and ceased being classified as a development-stage enterprise following the commercial launch.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $10.6 | $0.6 | $10.9 | $1.2 |
| Gross profit | $7.9 | $0.6 | $8.2 | $1.2 |
| Gross margin | 74.3% | 100.0% | 74.9% | 100.0% |
| Operating expenses | $30.6 | $33.3 | $65.8 | $64.1 |
| Operating loss | $(22.7) | $(32.7) | $(57.6) | $(62.9) |
| Net loss | $(22.5) | $(32.7) | $(57.3) | $(63.0) |
| Net loss per share | $(0.42) | $(51.20) | $(1.08) | $(99.58) |
Q2 product revenue was $10.1 million, including approximately $10.0 million from instruments and $0.2 million from consumables; service and other revenue was $0.2 million. Grant revenue was $0.3 million. Revenue was recognized on 16 instrument installations, including 11 upgraded beta systems and five additional systems.
At June 30, 2011, cash and cash equivalents were $54.5 million and investments were $162.1 million, totaling approximately $216.6 million. The combined balance declined $67.1 million from year-end 2010. Current assets were $244.7 million versus current liabilities of $21.5 million. Total liabilities were $27.9 million, including a $3.0 million facility financing obligation; the filing reports no off-balance-sheet arrangements.
For the first half, operating cash use was $64.4 million, investing cash use was $32.4 million, and financing provided $3.7 million, primarily from option exercises. Capital expenditures were $5.6 million. Stockholders’ equity was $233.3 million, down from $279.9 million at December 31, 2010.
Material changes versus prior periods
- Commercial product sales began in Q2, lifting quarterly revenue to $10.6 million from $0.6 million a year earlier. First-half revenue rose to $10.9 million from $1.2 million.
- Q2 net loss narrowed to $22.5 million from $32.7 million; first-half net loss narrowed to $57.3 million from $63.0 million.
- Q2 R&D expense fell 28% to $19.5 million, partly because manufacturing costs previously expensed as development costs were capitalized or included in cost of revenue. First-half R&D fell 17% to $43.7 million.
- Q2 SG&A rose 77% to $11.0 million, and first-half SG&A rose 89% to $22.1 million, reflecting hiring, customer support, legal and public-company costs.
- Inventory increased to $19.6 million from $6.9 million at year-end, and accounts receivable rose to $5.4 million from $0.3 million, consistent with the start of commercial shipments.
Outlook, commentary, and risks
- Management reported approximately $22 million of backlog, comprising 35 systems, and expected to convert it to revenue by December 31, 2011. Backlog consists of orders management considers firm but may be delayed or canceled.
- Management believed existing cash, cash equivalents and investments would fund projected operating requirements for at least 12 months, while noting plans could change and additional funding might be needed.
- The company expected Q2 R&D expense to be more indicative of the quarterly rate for the remainder of 2011, SG&A to increase as sales and support infrastructure expanded, and product-related costs to rise significantly as previously expensed inventory was used up.
- Key operating risks include uncertain customer adoption, product performance and reliability, low SMRT Cell manufacturing yields, scaling production, reliance on some single-source components, and possible excess or obsolete inventory.
- Helicos Biosciences’ patent lawsuit sought injunctive relief and unspecified damages. The USPTO ordered re-examination of the asserted patents and rejected their claims as unpatentable over prior publications; PacBio denied infringement, but stated the outcome could not be guaranteed. No loss estimate was recorded because a possible loss or range could not be estimated with confidence.
- The filing disclosed that CEO Hugh Martin had been diagnosed with multiple myeloma; the company reported no then-current effect on his performance but could not assure there would be no future effect.
- Management stated disclosure controls were effective at a reasonable-assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the 35-system, approximately $22 million backlog converted to revenue as expected, and whether orders were delayed or canceled.
- Subsequent instrument placements, consumables demand, customer acceptance, and manufacturing yields and costs—especially the anticipated increase in product cost.
- Cash burn, operating expenses, capital spending, and whether the stated minimum 12-month funding outlook remained achievable.
- Developments and potential financial or operating consequences in the Helicos litigation and related patent re-examinations.
- Whether commercial performance, customer support requirements, and product reliability support the company’s growth assumptions.