The sequencing business continues to hold a lot of promise for Pacific Biosciences of California (PACB -7.76%), but it will take a little longer to start seeing its full potential. The company reported fourth-quarter 2015 earnings after the market closed on Thursday, and there were both positives and negatives as it tries to build demand for its most important product yet. Let's start with the raw numbers.

Pacific Biosciences of California results: The raw numbers


Q4 2015 Actuals 

Q4 2014 Actuals

Growth (YOY)


$36.3 million

$16.9 million


Net Income

($1.4 million)

($19.0 million)


Adjusted EPS




Data source: Company earnings release.

What happened with Pacific Biosciences of California this quarter?
Pacific Biosciences is in the process of transitioning from the RS II product line to the Sequel System, so the numbers being reported for the fourth quarter don't necessarily indicate the company's position long term. There's also an uneven impact of contract revenue, primarily from a Roche milestone, which makes results lumpy from quarter to quarter. Here are a few highlights that investors should keep in mind:

  • The driver of revenue growth shown above was contractual revenue increasing from $1.7 million a year ago to $23.6 million. This was primarily due to a $20 million payment from Roche for meeting contractual milestones.
  • Product revenue, which is what Pacific Biosciences wants to grow long term, fell 24% in the quarter to $9.8 million. This was in part due to the Sequel System launch and management said this product launch will ramp up the portion of revenue from product over the next year.
  • Sequel launched in December, and backlog is growing, but management is going to take a slower approach to deliveries than it could so the launch goes smoothly. This may mean uninspiring results early in 2016, but the goal is to have a consistent growth business by the end of the year.

What management had to say
When management talked with analysts about the ramp of Sequel they took a very measured approach. Revenue is expected to be flat in the first quarter versus a year ago without any major contract milestone payments. But sales are expected to increase each quarter in 2016 as Sequence deliveries grow. It'll probably be Q3 or Q4 before we really get an indication of what the potential of Sequel will be, so investors should keep an eye on the ramp later in the year.

The other big topic was the balance sheet. With consistent product revenue yet to ramp, there's constant pressure on Pacific Biosciences' cash. To keep up with those cash needs management said it would likely need to raise additional capital needed during the year, and it filed with the SEC that it will sell up to $30 million in stock "at-the-market" price. This wouldn't be a huge dilution given the stock's $953 million market cap at the market's close on Wednesday, but it's something to be aware of.

Looking forward
Slow and steady wins the race sometimes in investing, and it looks like that's the approach Pacific Biosciences' management is taking with its next product launch. With its smaller size and better performance, it could finally deliver the ramp in revenue investors have been looking for. But for now, investors will have to wait for that performance until the second half of 2016 and just be happy that the company was within shouting distance of breaking even in the fourth quarter.