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Why Pacific Biosciences Shares Are Falling 15.4% Today

By Todd Campbell – Nov 3, 2016 at 12:14PM

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Concerns over the number of orders received in Q3 and cautious commentary from management are weighing down shares in this fast-growing gene-sequencing company.

Image source: Pacific Biosciences.

What happened

Following third-quarter results that raised questions over whether the company will meet its full-year target for orders for its next-generation gene-sequencing machine, the Sequel, shares in Pacific Biosciences (PACB 9.09%) are down 15.4% at 11:30 a.m. EDT on Thursday. 

So what

Demand for Pacific Biosciences' Sequel remains strong; however, during the company's third-quarter conference call, VP of finance Ben Gong said:

Our Q3 revenue was in line with our previous forecast. Our instrument bookings in Q3 were less than our target, resulting in a lower backlog at the end of the quarter. Therefore we may not achieve our previous revenue forecast for the year. We currently estimate our product and service revenue to grow between 55% and 65% for the year. Previously we've forecasted a 70% increase.

Management also reminded investors during the conference call that the fourth quarter of 2015 offers a tough comparable this year because of a $20 million milestone payment received last year from Roche Holdings, the exclusive distributor of the Sequel system to the diagnostic market. The absence of a similar payment from Roche in this year's Q4 will cause gross margin to decline sequentially to 40% from 50% last quarter.

Now what

Management's cautious commentary took attention away from what was an otherwise dramatic year-over-year increase in sales. Revenue grew 80%, to $25.1 million, in Q3 from a year ago, and after excluding contract revenue from Roche, sales increased by more than 100%. In total, 30 Sequel instruments were put in place in the quarter, bringing the total installed base of Sequel systems to 75, and those placements resulted in instrument revenue of $11.5 million, up 400% from last year.

Consumable revenue also increased by 22%, to $6.5 million, in the quarter. However, that increase was primarily tied to legacy RS II systems, not the Sequel. Management thinks Sequel consumable revenue will improve from here, now that delays in Sequel's supply chain have been resolved.

Overall, Pacific Biosciences' management estimates total revenue will be between $86 million and $90 million this year, and that momentum will increase in the coming quarters. Gong also expects growth in 2017, though he didn't mention a specific number:

So we hesitate to give exact forecasts, but we purposely are saying that we expect fourth quarter to be greater than third quarter. As Mike [CEO Mike Hunkapiller] mentioned before, I will use a different term though, I would see that there is positive momentum in sales now that is higher than it was before we had this latest release of the improvement to the performance. That gives us confidence that we are definitely going to be seeing growth in the orders and we're not giving yet a forecast that's specific for 2017, but we certainly expect the growth in the order to continue through 2017.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this. The Motley Fool recommends Pacific Biosciences of California. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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