Pacific Biosciences of California, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; financial statements are unaudited. PacBio develops and sells sequencing systems, consumables and related services based on its SMRT technology.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $24.6m | $21.6m | $41.0m | $40.9m |
| Gross profit | $9.6m | $8.9m | $14.7m | $16.2m |
| Gross margin | 39.0% | 41.1% | 35.9% | 39.5% |
| Operating loss | $(24.4)m | $(21.7)m | $(54.5)m | $(45.7)m |
| Net loss | $(24.6)m | $(22.5)m | $(54.9)m | $(46.7)m |
| Basic and diluted loss per share | $(0.16) | $(0.17) | $(0.36) | $(0.37) |
Revenue mix and trends: Q2 product revenue rose 15% to $21.3m, led by instrument revenue of $12.7m versus $8.5m; consumables fell to $8.6m from $10.0m. Management attributed instrument growth to more shipments and installations, and lower consumables to reduced RSII and Sequel consumables. H1 revenue was essentially flat: higher Sequel II instrument shipments were offset by lower Sequel instrument and consumables revenue. North American revenue increased, while Asia-Pacific revenue declined. Gene Company Limited, PacBio’s China distributor, represented 23% of Q2 and 20% of H1 revenue.
Profitability and expenses: Gross margin declined year over year in both periods. Management cited product transition costs, including an inventory reserve for excess inventory amid lower sales forecasts during the Sequel-to-Sequel II transition. H1 R&D expense decreased 5% to $30.4m, while SG&A rose 30% to $38.8m, primarily due to $9.3m of merger-related legal expenses. Merger expenses were $3.8m in Q2. H1 net loss widened by $8.2m.
Cash flow, balance sheet and debt
- Liquidity: Cash, cash equivalents and investments, excluding restricted cash, totaled $66.8m at June 30, 2019, down from $102.4m at December 31, 2018. Cash and cash equivalents were $30.4m; investments were $36.5m.
- Cash flows, H1: Operating activities used $42.9m, versus $33.3m used in H1 2018. Investing activities provided $45.8m, mainly from net investment maturities; financing activities provided $8.1m, primarily from equity-plan share issuances. Ending cash, cash equivalents and restricted cash was $34.4m.
- Debt: $16.0m principal remained outstanding under Deerfield notes bearing 8.75% interest, due February 2020. The notes are classified as current; substantially all company assets, including intellectual property, secure the debt. The agreement includes covenants and a minimum quarter-end cash requirement of $2.0m.
- Leases: Adoption of the new lease standard resulted in $47.6m of operating lease liabilities at June 30, 2019, including $3.6m current and $43.9m non-current.
- Balance sheet: Total assets were $170.6m, total liabilities $94.8m, and stockholders’ equity $75.8m. The accumulated deficit was $1,037.0m.
Outlook, material developments and risks
- Illumina merger: Illumina agreed to acquire PacBio for $8.00 per share in cash. Shareholders approved the merger, but regulatory reviews remained outstanding; the FTC and UK CMA were reviewing the transaction, with the CMA moving to Phase 2. The companies expected completion in Q4 2019, but closing and timing were not assured. Under specified termination circumstances, Illumina may owe a $98.0m reverse termination fee; it would not apply in every termination scenario.
- Going-concern uncertainty: Management stated that timely receipt of the reverse termination fee or other remedies upon certain merger terminations would be necessary to alleviate substantial doubt about PacBio’s ability to repay the notes due in February 2020 and fund projected operating needs for at least twelve months from filing. If funds are unavailable or delayed, the company may need additional capital, face collateral enforcement, reduce operations or development programs, or cease operations.
- Product and operating risks: The Sequel II System and SMRT Cell 8M began commercial shipment beyond early-access sites in 2019. Adoption, manufacturing scale and quality, product transition costs, customer concentration, and competition could affect revenue and margins. Management provided no specific revenue or earnings guidance in the supplied filing text.
- Legal and other items: Ongoing patent litigation with Oxford Nanopore in U.S. courts has uncertain outcomes; a U.S. District Court trial was scheduled for March 2020. The company also reported adverse European Patent Office decisions on two patents and intended to appeal. Five merger-related shareholder lawsuits were dismissed after supplemental proxy disclosures and a $0.3m attorneys’ fee payment. On August 2, 2019, PacBio gave notice that it would terminate a GE Healthcare license effective November 3, 2019, without an early termination penalty.
- Other risks: The filing highlights potential merger failure or delay, financing constraints, reliance on a key distributor, product quality and supply risks, intellectual-property disputes, and international trade and regulatory exposures.
Important facts for investors to verify
- Current status and conditions of the Illumina transaction, regulatory reviews, expected closing, and any termination-fee entitlement.
- Cash burn and available liquidity relative to the February 2020 debt maturity and management’s stated substantial-doubt assessment.
- Sequel II adoption, shipment levels, consumables demand, inventory reserves, and whether gross margins recover.
- Revenue concentration and trends at Gene Company Limited and in Asia-Pacific.
- Developments in the Oxford Nanopore cases, patent appeals, and associated legal costs.