Pacific Biosciences of California, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. PacBio develops and sells genomic sequencing systems, consumables and services, including HiFi long-read products and its emerging SBB short-read platform.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $47.6 | $35.5 | $86.5 | $68.6 |
| Gross profit / margin | $15.5 / 33% | $16.2 / 46% | $25.3 / 29% | $30.3 / 44% |
| Operating loss | $73.2 | $68.0 | $164.4 | $145.5 |
| Net loss | $69.8 | $71.4 | $157.8 | $152.9 |
| Basic and diluted loss per share | $0.28 | $0.32 | $0.64 | $0.68 |
| Operating cash flow | — | $(136.4) | $(139.6) |
- Revenue mix: First-half product revenue was $78.3 million, comprising $50.6 million of instruments and $27.7 million of consumables; service and other revenue was $8.2 million.
- Liquidity: Cash, cash equivalents and investments totaled $829.9 million at June 30, 2023, versus $772.3 million at year-end 2022. Cash, cash equivalents and restricted cash declined $116.3 million in the first half to $212.0 million. Management said existing cash, cash equivalents and investments should fund projected requirements beyond 12 months from the filing date.
- Debt: Convertible notes had $900 million aggregate principal outstanding: $459 million due 2028 and $441 million due 2030. Their combined net carrying value was $891.8 million. The June exchange extended the maturity of $441 million of 2028 notes to 2030; it generated no cash proceeds.
- Other balance-sheet items: Total assets were $1.85 billion, total liabilities $1.21 billion and stockholders’ equity $642.0 million. Current assets were $935.6 million versus current liabilities of $271.4 million. Inventory rose to $67.6 million from $50.4 million at year-end.
Material changes versus comparable periods
- Q2 revenue rose 34%; first-half revenue rose 26%, mainly from Revio instrument sales. PacBio reported 45 Revio placements in Q2 and an installed base of 77 at quarter-end.
- Gross margin fell to 33% in Q2 from 46%, and to 29% for the first half from 44%. The company cited lower-margin Revio sales, loyalty discounts and initial manufacturing costs; first-half results also included about $3.5 million of adjustments primarily for excess Sequel II/IIe consumables inventory as customers transitioned to Revio.
- First-half operating loss increased $18.9 million, while net loss increased $5.0 million. Operating expenses included a $14.2 million increase in the fair value of Omniome contingent consideration, compared with a $6.5 million decrease in the prior-year period. Higher investment income partly offset losses.
- January’s public equity offering raised approximately $189.2 million net and issued 20.1 million shares. Shares outstanding increased to 250.5 million at June 30 from 226.5 million at year-end 2022.
Outlook, commentary and risks
- Management expects Revio adoption and its installed base to grow, with Revio consumables increasing over time; it expects Sequel II/IIe instrument placements and consumables to decline. Service revenue is also expected to decline as customers transition platforms and fewer renew Sequel-related service contracts.
- Management expects gross margin to expand in the remainder of 2023, but said results will depend on the product transition, consumables ramp, manufacturing efficiency and pricing. It anticipates operating expenses to increase slightly in the remainder of the year, including from contingent consideration remeasurement and Apton-related merger costs. The filing provides no quantified revenue or earnings guidance.
- In August 2023, PacBio began Onso instrument shipments; related consumables shipments were expected later that month. The Omniome milestone is triggered once both instrument and consumables have shipped to one customer; the related contingent consideration is approximately $200 million, split between cash and stock. The liability was $186.3 million at June 30 and is subject to significant estimation uncertainty.
- PacBio acquired Apton on August 2, 2023, after quarter-end. Consideration included approximately 6.3 million shares, with a further $25 million payable in cash, stock or a combination if technology-related revenue reaches $50 million.
- The company expects ongoing operating losses and negative operating cash flow. Cited risks include slower product adoption or customer capital spending, execution and manufacturing challenges, supply-chain and geopolitical exposure, competition, dilution and the ability to meet future debt obligations. Patent litigation remains pending; management does not believe the described matters are probable or reasonably estimable to have a material adverse effect, but litigation outcomes are unpredictable.
Important facts for investors to verify
- Whether Revio placements translate into sustained consumables demand and improved gross margins, and how quickly legacy Sequel revenue and inventory decline.
- The timing and financial consequences of the Omniome milestone, including cash versus stock settlement, and the progress and potential dilution or payment obligations from Apton.
- Operating cash burn, liquidity sufficiency and any future need for financing, alongside the terms and settlement requirements of the 2028 and 2030 notes.
- Whether investment income, inventory adjustments and contingent-consideration remeasurement materially affect reported results in subsequent quarters.
- Developments in the PGI and Take2 patent proceedings and any resulting costs, restrictions or liabilities.