Business context and reporting period
Pacific Biosciences of California, Inc. develops and sells sequencing systems based on its Single Molecule, Real-Time (SMRT) technology, including instruments, consumables, software and service contracts. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. The Sequel II System and SMRT Cell 8M launched commercially in April 2019.
Financial performance and liquidity
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $21.9 | $18.2 | $63.0 | $59.1 |
| Gross profit / margin | $6.9 / 31.5% | $3.2 / 17.6% | $21.6 / 34.4% | $19.4 / 32.7% |
| Operating loss | $(28.1) | $(24.7) | $(82.6) | $(70.4) |
| Net loss | $(29.1) | $(25.0) | $(84.0) | $(71.8) |
| Net loss per share | $(0.19) | $(0.19) | $(0.55) | $(0.55) |
| Cash used in operating activities | Not separately stated | Not separately stated | $(60.1) | $(47.4) |
- Q3 revenue rose 21%. Product revenue increased 22%, with instrument revenue up as shipments and installations increased; consumable revenue declined as customers transitioned from Sequel to Sequel II and Sequel utilization was lower. Service revenue grew with the installed base.
- Nine-month revenue increased 7%. Gross margin improved year over year in both comparisons. Q3 margin included $2.8 million of product-transition costs, including reserves for older consumables; the comparable 2018 quarter included $2.4 million of such costs.
- Operating expenses rose 26% in Q3 and 16% for the nine months, principally reflecting higher sales, general and administrative expense. Merger-related costs were $3.6 million in Q3 and $12.8 million for the nine months; patent-litigation legal fees also increased. R&D expense declined 2% for the nine months.
- At September 30, cash, cash equivalents and investments totaled $49.2 million, excluding $4.0 million of restricted cash, versus $102.4 million at December 31, 2018. Nine-month investing cash flow was positive $65.5 million, mainly from net investment maturities; financing cash flow was $8.4 million, versus $101.9 million in 2018, when public offerings generated proceeds.
- Total assets were $146.1 million, total liabilities $95.1 million and stockholders’ equity $51.0 million. Current assets were $76.9 million and current liabilities $50.7 million. These balances include current notes payable of $15.5 million and current operating lease liabilities of $3.7 million.
- Notes had $16.0 million of principal outstanding, bear 8.75% interest and mature in February 2020. Operating lease liabilities totaled $46.7 million. Substantially all property, including intellectual property, secures the debt.
Material changes, outlook and risks
- The company disclosed substantial doubt about its ability to meet obligations and fund projected operations for at least twelve months without timely merger-related funding, the reverse termination fee or other remedies. It may need additional capital; if unavailable, it could reduce or discontinue development, commercialization or other operations, or be unable to meet its debt obligations.
- Illumina agreed to acquire PacBio for $8.00 per share in cash. Stockholders approved the merger, but regulatory review remained unresolved: on October 24, 2019, the UK Competition and Markets Authority announced a provisional view that the deal could substantially lessen competition; the FTC was also reviewing it. The agreement’s outside date was extended to December 31, 2019, with Illumina able to extend to March 31, 2020.
- Under the amendment, Illumina agreed to continuation advances of $6.0 million on specified dates. PacBio had received the October 1 and November 1 payments by the filing date; the December 2 payment was still due. Additional specified payments would apply if Illumina exercised its further extension right. Some advances may become repayable after termination under specified financing or change-of-control circumstances. A $98.0 million reverse termination fee may be payable in certain circumstances; PacBio could owe Illumina a $43.0 million termination fee in others. Closing and payment are not assured.
- No specific revenue or earnings guidance is provided. Management expects continuing losses and negative operating cash flow and identifies product adoption, Sequel-to-Sequel II transition, manufacturing quality and capacity, customer concentration, competition, litigation and merger uncertainty as significant risks. Gene Company Limited, the China distributor, represented about 18% of Q3 revenue and 14% of nine-month revenue.
- Legal matters include ongoing patent litigation with Oxford Nanopore Technologies and a patent-infringement complaint filed by Personal Genomics of Taiwan in September 2019. Management said outcomes are uncertain and litigation costs may be material. The merger-related shareholder suits were dismissed after supplemental disclosures and payment of $0.3 million in attorneys’ fees.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the FTC and CMA approvals are obtained, any conditions imposed, and whether the merger closes by the extended deadline.
- Timing and terms of continuation advances and any reverse termination fee, including potential repayment obligations.
- Liquidity runway, the ability to repay the February 2020 notes, and access to financing under merger and debt restrictions.
- Sequel II adoption, instrument shipments, consumable utilization, product-transition reserves and resulting gross margins.
- Customer concentration and the financial and operational effects of ongoing patent litigation and other claims.