Pacific Biosciences of California, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited consolidated financial statements; amounts below are in U.S. dollars.
Business context
PacBio develops and sells sequencing systems, consumables and services based on its Single Molecule, Real-Time (SMRT) technology. In September 2015, it launched the Sequel System, designed for higher throughput, greater scalability, a smaller footprint and lower project costs than the RS II. Sequel development is part of the Roche collaboration.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $13.9m | $20.6m | $56.5m | $43.7m |
| Gross profit / margin | $6.6m / 47.1% | $13.2m / 63.8% | $27.0m / 48.0% | $19.0m / 43.4% |
| Operating income (loss) | $2.6m | ($8.4m) | ($28.1m) | ($45.0m) |
| Net income (loss) | $1.8m | ($9.2m) | ($30.3m) | ($47.2m) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($47.2m) | ($36.1m) |
- Q3 product revenue rose 12% to $7.6m; service and other revenue rose 27% to $2.8m. Contractual revenue fell 69% to $3.6m, principally because Q3 2014 included a $10m Roche milestone.
- Nine-month revenue increased 29%. Product revenue grew 24%, with consumables growth attributed to a larger installed base and higher instrument utilization. Contractual revenue included a $10m Roche milestone achieved in April 2015.
- Q3 net income included a one-time $23.0m gain from lease amendments. Excluding that gain, the quarter remained loss-making; management said it did not expect otherwise to achieve profitability in the near term.
- Cash, cash equivalents and investments totaled $58.9m at September 30, 2015, down from $101.3m at year-end 2014. Current assets were $86.2m and current liabilities $38.8m.
- Notes payable had a $14.8m carrying value; the notes bear 8.75% annual interest. The original principal was $20.5m, and substantially all company property secures the facility. The debt agreement requires at least $2.0m of cash and cash equivalents at each quarter-end.
- Common shares outstanding were 75.7m at September 30. From October 1 through November 2, the company sold 2.7m additional shares through its at-the-market offering for $19.5m net proceeds.
Changes, outlook and notable items
- Research and development expense rose 38% in Q3 and 27% for the nine-month period, driven mainly by Sequel development and increased compensation and headcount. Nine-month selling, general and administrative expense rose 16%.
- Management expected limited U.S. Sequel shipments in Q4 2015, manufacturing scale-up in early 2016 and international shipments thereafter. It expected product revenue to increase significantly in 2016 compared with 2015, citing early Sequel interest and anticipated sales to Roche.
- Management expected to earn the remaining $20m Roche development milestone in Q4 2015, subject to achievement, and projected Q4 gross margin of approximately 70% based on that milestone. It also said 2015 net loss was expected to be approximately half the 2014 net loss. The filing cautions there can be no assurance the milestone will be earned.
- A revised estimate of the Roche agreement’s development period increased 2015 contractual revenue by $5.7m for the first nine months, with a $1.9m Q3 effect. At September 30, $15.7m of upfront contractual revenue remained deferred for recognition over the revised remaining delivery period.
- The amended existing-facility leases eliminated rent payments for their remaining terms and made $20m in landlord payments receivable; $5m had been received, $10m was recorded as a current receivable and $5m as a long-term asset. The company recorded the $23m gain after permitting contingencies were satisfied.
- A new 132-month lease for the O’Brien premises is expected to involve approximately $80m of rent and $24m of operating expenses over its term. The company also expects substantial additional improvement and relocation costs; a $4.5m letter-of-credit deposit was required in October 2015.
- Management believed existing cash, cash equivalents and investments would fund projected operating requirements for at least 12 months, but planned to raise additional capital. It reported no off-balance-sheet arrangements and no material changes to internal control over financial reporting.
Key risks and contingencies
- Commercial adoption, manufacturing yields, reliability and timely scale-up of Sequel and its new SMRT Cells and consumables are uncertain; delays or defects could impair revenue and margins.
- The company expected continued substantial losses and negative operating cash flow. Additional financing may dilute shareholders; funding may not be available on acceptable terms. Debt covenants, collateral rights and the notes’ potential claim on 25% of certain equity-financing proceeds add financing constraints; noteholders waived that right for the reported ATM issuance.
- Key risks include competition, reliance on limited or single-source suppliers, customer capital-spending variability, product-transition effects on RS II sales and inventory, and dependence on the Roche relationship and milestone payments.
- The new facility transition could cause cost overruns, manufacturing disruption or shipment delays. The final $5m payment under the amended existing leases could be forfeited if the company breaches and fails to cure applicable lease obligations.
- The filing describes ordinary-course claims and litigation as inherently unpredictable, while stating the company did not believe current ordinary-course matters would have a material adverse effect.
Important facts for investors to verify
- Whether the remaining $20m Roche milestone was achieved in Q4 2015 and the related revenue and margin were recognized.
- Sequel shipment timing, customer adoption, production capacity, SMRT Cell yields and the basis for the 2016 revenue outlook.
- Subsequent cash burn, financing proceeds and share dilution, including use of the remaining ATM capacity and any debt repayment claims.
- Collection of the landlord receivables, compliance with the amended leases, and total costs and timing of the O’Brien facility transition.
- How much reported earnings and revenue depend on nonrecurring lease gains, Roche milestone payments and the revised contractual-revenue estimate.