There are two types of companies when it comes to sequencing human genomes: Illumina and everyone else. While Pacific Biosciences of California (PACB 6.16%) failed on its promise and hype in 2010 to revolutionize human genome sequencing, it has carved out a spectacular niche and built an envious reputation when it comes to sequencing microbial genomes with ultrahigh accuracy. Good news: high-quality microbial genomes are becoming increasingly more important in commercial applications and Pacific Biosciences is gradually developing additional business opportunities as it expands its capabilities.
The genomic diagnostics partnership signed with Roche in September 2013 is a prime example of management's vision to diversify the business -- and it has certainly catalyzed share gains for investors.
Yet, while encouraged by the progress and commitment from a blue chip biotech company, investors are also curious about the path to profitability. Do the recent Pacific Biosciences earnings provide any clues? Here's what you need to know.
By the numbers
Pacific Biosciences had a great quarter for two reasons. First, it realized $11.7 million in revenue from the Roche partnership: $10 million from hitting a milestone and $1.7 million in quarterly amortization of the upfront payment. Second, it grew product revenue 15.6% and service revenue 34.7%. The company booked 16 orders of its third-generation DNA sequencing system, the PacBio RS II, and has now booked 30 systems year to date. That compares favorably to the 16 bookings made through the first three quarters last year and should keep the momentum going.
|
3Q14 |
3Q13 |
% Change | |
|---|---|---|---|
|
Product Revenue |
$6.7 million |
$5.8 million |
15.6% |
|
Service and Other Revenue |
$2.17 million |
$1.61 million |
34.7% |
|
Contract Revenue |
$11.7 million |
-- |
-- |
|
Total Revenue |
$20.6 million |
$7.4 million |
178% |
|
Operating Expenses |
$21.6 million |
$21.2 million |
1.9% |
Source: Pacific Biosciences press release.
Management continues to exhibit discipline in maintaining operating expenses and cash burn, which registered at $13.3 million during the quarter -- nearly identical to cash burn during the first quarter of the year. The company now has about $99.3 million in cash on hand, or enough to maintain operations into the second half of 2016.
However, if the revenue realized from Roche is excluded, then it quickly becomes apparent that Pacific Biosciences has a tough road ahead. Although product and service revenue grew roughly 20% in the quarter compared to the year ago period, it's not close to covering operating expenses. So, how can the company carve out a path to profitability?
Diversification of applications and customer types
Investors may be interested in Pacific Biosciences' ability to pursue opportunities that lie outside of microbial genome and regional analysis, which has been the core focus of the single molecule, real-time platform. The company is certainly moving in that direction as it expands and improves its capabilities, such as accurately sequencing longer strands of DNA, but investors should begin focusing on the diversification of customers within current markets, too. After all, it represents the lowest hanging fruit.
For example, consider that, historically, most of the company's customers have been academic or government labs. Those customers can build an important foundation for revenue generation and marketing (through published papers), but they represent a niche market that are unlikely to provide profitable operations. To make a truly sustainable business, the company needs to expand sales to corporate customers that require deeper insight into genomes, microbe or otherwise, with commercial applications.
Why? The purchases will be larger, the importance of the relationship will be significantly higher (the success of another business will depend on Pacific Biosciences), and the markets for biology as technology are expanding quickly enough to make it all possible.
The PacBio RS II. Source: Pacific Biosciences brochure
Luckily, sales to commercial customers are beginning to gain momentum. Pacific Biosciences recently sold two systems to each Macrogen, which is developing customized mouse models for biomedical research, and Human Longevity, which is attempting to develop technologies that will allow humans to live more fulfilling lifestyles as they age. The latter is intriguing for investors because it highlights a developing trend: Companies are coupling the purchase of Illumina's HiSeq X Ten Sequencing Systems (for cost reductions, speed, and volume) with purchases of PacBio RS II systems (for studying specific genomic regions in higher detail). It's not a bad idea to pounce on the opportunities created by the gaps of a market leader's platform.
Is Pacific Biosciences executing on its vision?
Investors should be encouraged by the growth in bookings, which demonstrates a growing demand for Pacific Biosciences' flagship product. Additionally, disciplined management of operating expenses demonstrates that the company is focused on efficiency. While growth continues and sales to commercial customers are beginning to pick up, it's important to realize that it will take several years before Pacific Biosciences is capable of churning out profits.
