Pacific Biosciences of California, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results. The company develops and sells sequencing systems based on its SMRT technology, including the Sequel platform, instruments, consumables, and related services.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $23.5 million | $25.1 million | $68.5 million | $65.0 million |
| Gross profit | $8.2 million | $12.6 million | $25.2 million | $32.8 million |
| Gross margin | 34.9% | 50.3% | 36.7% | 50.4% |
| Operating loss | $21.6 million | $16.7 million | $69.3 million | $53.4 million |
| Net loss | $22.0 million | $17.5 million | $71.4 million | $55.3 million |
| Net loss per share | $0.19 | $0.19 | $0.70 | $0.63 |
- Q3 product revenue rose 13% to $20.3 million, including $9.7 million from instruments and $10.6 million from consumables. Service and other revenue was $3.2 million. No contractual revenue was recorded in Q3 2017.
- Nine-month product revenue increased 32% to $58.2 million, attributed to higher Sequel shipments and installations, greater instrument utilization, and a larger installed base. Service and other revenue was nearly flat at $10.3 million.
- Prior-year comparisons include Roche contractual revenue: $3.6 million in Q3 and $10.8 million in the first nine months of 2016. Roche terminated its agreement, effective February 2017. Excluding that high-margin contractual revenue, disclosed adjusted gross margins were 42.0% for Q3 2016 and 40.6% for the first nine months of 2016, versus 34.9% and 36.7% in 2017, respectively.
- Q3 gross profit declined 35%; cost of product revenue increased with consumables sales, product transition costs, and consumables warranty costs. Service costs also rose to support a larger installed base. The nine-month results included a $1.6 million charge related primarily to leased RS II instruments and a change in estimated useful life.
- Research and development expense declined 3% for the nine months, mainly on lower chip-development costs. Sales, general and administrative expense increased 29%, including higher legal and professional fees, building-improvement depreciation, and compensation.
- Cash used in operating activities was $47.3 million for the nine months, compared with $55.0 million a year earlier. Investing activities used $12.2 million, principally for $9.4 million of property and equipment purchases. Financing activities provided $68.7 million.
- At September 30, cash and cash equivalents were $25.9 million and investments were $58.0 million, totaling approximately $84.0 million; $4.5 million of restricted cash is separate. Current assets were $113.6 million and current liabilities $30.3 million.
- Notes had $16.0 million aggregate principal outstanding, with $2.9 million classified as current. Balance-sheet carrying value was $13.4 million. The notes bear 8.75% interest and are secured by substantially all company property. The company repaid $4.5 million of principal in June.
Changes, outlook, and key risks
- The company raised approximately $52.5 million net in a June underwritten equity offering and $11.9 million net through its at-the-market program, which it terminated in June. Shares outstanding increased to 116.2 million from 92.7 million at December 31, 2016. An effective shelf registration permits up to $150 million of securities to be offered over three years.
- Management said cash, cash equivalents, and investments should fund projected operating requirements for at least 12 months from filing, based on its 2018 forecast and assumptions including increased product demand. Management also said additional capital may be needed; no specific revenue or earnings guidance was provided.
- Risks to liquidity include slower product adoption, inability to secure collaborations or financing, R&D needs, acquisitions, and litigation costs. Additional equity financing could dilute shareholders; debt terms may require repayment of up to 25% of net proceeds from qualifying equity financings at lenders’ election.
- Patent litigation with Oxford Nanopore is active in the United States and Europe, including company claims and claims against the company. Management said outcomes and financial effects could not be estimated; litigation is a significant expense and may be material. The company did not believe the described matters were probable or reasonably estimable at filing.
- Other significant risks include continued operating losses and negative operating cash flow; customer concentration and variable purchasing patterns; Sequel adoption, reliability, manufacturing yields and supply constraints; competition; and the loss of Roche as a commercial partner. One customer accounted for more than 10% of revenue in the periods reported.
- The company reported no substantial doubt about its ability to continue as a going concern and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Sequel instrument shipments, installed-base utilization, and consumables demand continue to grow enough to offset the loss of Roche revenue.
- Whether gross margins improve as product transition, warranty, and service costs evolve, and how much future profitability depends on scale.
- Cash burn against management’s 12-month liquidity assessment, including the distinction between unrestricted liquidity and $4.5 million of restricted cash.
- Debt maturity, collateral, covenants, and potential lender claims on proceeds from future equity financings; also assess the dilution from recent and potential share issuance.
- Developments and potential costs in patent litigation, as well as manufacturing and supply risks affecting Sequel systems and consumables.
- The impact of adopting the new revenue-recognition standard in 2018; the company expected no material impact but had not completed its assessment.