Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for spending by and welcome to the plus to think volume sign for <unk> Californian Corporation first quarter 2020, or long sunk in school I could find all participants are inefficient on them out after two speakers that presentation. There will be a question and answer session.
To ask a question during the session you want to press the star one on more telephone.
In addition to require any farther insistence you compress bars here I would now like to hand, the conference over to your first speaker today, <unk> <unk> <unk> man fiscally.
Good afternoon, and welcome to the Pacific Bio Sciences first quarter 2020 conference call, we hope that you're keeping well during this time.
Hosting our call from a number of different locations today. So please bear with us if there are any technical challenges or a positive.
Earlier today, we issued a press release outlined in the financial results will be discussing on today's call a copy of which is available on the investor section of our website W.W.W. dot P.A.C.B. dot com or alternatively as furnished on form eight k. available on the Securities and Exchange Commission.
Website at W.W.W. Dot F.E.C. Dot Gov.
With me today are Mike Hunkapiller, our Chief Executive Officer, Susan bonds are Chief Financial Officer, and then gone or Vice president of financing treasure.
Before the again I would like to remind you that Anthony's call. We maybe we maybe making forward looking statements, including plans and expectations relating to our financial projections products and other feature events such as the impact of covert 19 pandemic on our business partners customers and employees and the use of our <unk>.
<unk> 19 research.
You should not please do reliance on forms looking statements because they are subject to assumption risks and uncertainties and me differ materially from actual results.
In particular, the extent of covert Nineteens continued impact on our business will depend on several factors, including the severity duration and the extent of the pandemic as well as actions taken by governments businesses and consumers in response to the pandemic all of which continued to evolve and remain uncertain at this time.
These risks and uncertainties are more slowly described in our securities and Exchange Commission filings, including our most recently file reports on forms eight K. 10, K. inform 10 q.
Pacific Bio Sciences undertakes no obligation to update forward looking statements.
In addition, please note that today's call is being recorded and will be available for audio replay on the investor section of our website shortly after the call.
Investors electing to use the audio replay are cautioned that forward looking statements made on today's call me differ or might change materially after the completion of our life call I'd now like to turn the call over to Mike.
Thanks for having.
Good afternoon, and thank you for joining us today.
In this call we will review our results for the previous quarter as usual.
You also describe how the covert by team pandemic has impacted our business and how we have been responding.
Well established some highlights about 212020 financial results.
Consumable revenue for the quarter was $8.3 million up 6% from 212019 and down 11% sequentially from two for 2000 lighting.
This result was generally in line with our expectations going into the corridor.
As anticipated considerable sales into China were down sequentially due to seasonality an early impacts the costs were shut down some trying to do to cope with my team.
Meanwhile, Arco civil sales in the U.S. in Europe, we're generally stone for most of the quarter with customers only starting to cut back in the latter part of March.
Instrument revenue for the first quarter was $4 million down 28% from 212019.
Oh instrument revenue was negatively impacted by cope with 19 as many customers postponed taking delivery of instruments they had ordered.
Instrument sales installs are usually weighted heavily towards the end of each quarter.
However, that's customers across the U.S. in Europe again, shutting down their operations in March.
Able to complete numerous installations.
Indeed, the corner with an install base of 125 sequel to systems.
Total revenue for the first quarter was $15.6 million down 5% from 212000 my team.
And the early part of the quarter, we expected R.Q. on revenue to increase compared to last year.
However, this was before cope with 19, it began to spread in areas outside of China.
Picture changed drastically mid March as many about customers.
And the U.S. in Europe shut down operations.
As a result revenue we generated in the last week, so the quarter were much weaker than usual.
Gross margin for the first quarter was 48% up from 31% and Q1 2019 and up from 46% into for 2000 by team.
Oh, the terms with the merger termination agreement with aluminum we received a total of $132 million from Illumina during the first quarter.
Which we recorded $34 million is not operating income.
The result, we generated positive that income of $1.3 million for the quarter.
We ended the corner with $142.6 million in cash and investments on hand.
No provide a few comments regarding our current state of operations.
Headquarters and manufacturing facility is located in one of the countries at first issue Healthys.
First issued shelter in place orders on March 16th.
These orders force many businesses in our area to shut down.
However, central businesses have been permitted to continue operating.
We were considered an essential business by virtue of the fact that we rely sciences company, that's supplies other essential businesses with tools and consumables necessary for them to carry out critical activities.
However for the safety of all employees and those close to them, we were having the majority of our employees work from home.
<unk> maintain limited onslaught operations.
Menlo Park facility.
They continued suppliers can syllables in instruments to our customers who are still operating.
A certain number of our employees in the field also providing also support to customers as needed.
In addition, we're continuing to conduct certain research and what live activities largely in support of efforts related to cope with 19.
I'd like to acknowledge the efforts of all the employees, who are working to ensure that our customers could continue their important on covered by team other essential areas.
Yeah, I would like to offer some perspective on how peck biased products and technology can be useful in the fight against cope with 19 pandemic.
First of all.
Hi demand in the near term for testing individuals to see if they've been infected by the by worse is not an application suited for pet bottles products or other sequencing technologies.
Such tests are based on the reverse transcriptase polymerase chain reaction R.T.P.C.R., which can generate a relatively fast inexpensive diagnostic tests from a sample taken from an individual.
<unk> bias products on the other hand can be valuable for studying how the virus responsible for covert 19, namely Sars coat.
You will be two balls overtime.
Viruses in general tend to mutate overtime in order to adapt to their environments.
Characters can seek what's different samples collected at different times with individual within a community request regions.
In order to track held the virus may have evolved are held the virus to spread across different regions.
Which strange the bars are present.
Pac Bell sequencing technology can be particularly valuable for this type of research because it allows researchers to easily detect multiple mutations that an individual virus particles genome with very high accuracy.
As an example, we've partnered with Labcorps.
Well positioned to conduct studies or the Sars coby too virus.
Pac Bell sequencing systems Labcorps is already inexperienced user a smart sequencing for applications and human Biomedical research and we are pleased in order to that they're expanding the use of our products for coded like teen research.
In the future scientists and researchers develop anti biotherapeutics to come back cope with 19.
Will also be valuable to understand how the virus menu take this response to both drugs and vaccines.
Another valuable application for Pac Bell sequencing the analysis and study of the host immune response to the virus.
Researchers can sequence the genome so people who have been infected with Sars coby to.
Identify antibodies that these patients to generated the part the bars.
Ready a protective anybody's in recovering patients can be very babble valuable and the ongoing development vaccine candidates.
Researchers are also interested in studying the genetic background opposed to understand how different people are affected by exposure to the virus.
Well, we have seen how exposure to the virus can be deadly for some people others who've tested positive experience very little negative impact.
The explanation for why there is such a wide range of reactions across different host maybe hidden in the underlying differences within the host you know.
Sequencing has proven to be a valuable tool for sequencing the complex regions within the human genome that control immune response.
We are proud to be serving multiple customers, who engage in various studies aimed at fighting to cope with 19 pandemic.
Said in the new term I business has decreased significantly at this time, a majority of our customers would sequence equal to systems shut down most of their operations.
Difficult to estimate when these sites will come back on line and resume running two Pac Bell systems.
It will likely very read region by region and state by state in the long run we remain confident that the demand for high value Peck bout sequencing will continue to increase.
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<unk>.
Thank you, Mike and good afternoon, everyone.
I will begin my remarks today with the financial overview.
Of our first quarter that ended March 31st 2020.
I will then provide details of our operating results for the quarter with a comparison to Q1 of 2019.
We'll conclude my remarks with a brief discussion of our balance sheet.
Starting with our first quarter 2020 financial highlights.
During the quarter, we recorded revenue of $15.6 million.
And recognized net income of $1.3 million.
We ended the quarter with $142.6 million in cash and investments.
Turning to revenue the $15.6 million a product service and other revenue in Q1 of 2020 was 5% lower than a $16.4 million a product service and other revenue we recorded in Q1 of 2019.
Breaking down the revenue instrument revenue recognized in Q1, 2020 was $4 million down from $5.6 million recognized in Q1 of 2019.
Consumable revenue for the first quarter of 2020 was $8.3 million up from $7.8 million reported in the first quarter of 2019.
Service and other revenue was $3.3 million in the quarter compared to $3 million in Q1 of 2019.
With regards to gross profit and margin in Q1 of 2020, we generated a gross profit of $7.5 million, resulting in a gross margin of approximately 48%.
This is up from $5.1 million to gross profit and 31% gross margin in Q1 2019.
Moving to operating expenses.
Operating expenses in the first quarter of 2020 totaled $40.2 million compared to $35.3 million in Q1 of 2019.
This increase was primarily result of a $6 million advisory fee incurred in conjunction with the termination of the merger agreement with Illumina.
Noncash stock based compensation included in operating expenses.
Was $3.5 million in Q1 of 2020 down from $3.9 million in Q1 of 2019.
Breaking down our operating expenses.
R&D expenses in the quarter were $15.3 million slightly down from the $15.5 million incurred in Q1 of 2019.
Sales General and administration expenses in the quarter were $24.9 million up $5.1 million from the $19.8 million in Q1 of 2019. This increase was result of 6 million dollar advisory fee I mentioned earlier.
In Q1 2020, we recorded at 34 million dollar gain below the operating income line.
This really out of the continuation advances we received from alumina.
Larger is result of the 34 million dollar gain recorded net income of $3.1 million in Q1, 2020 compared to a net loss of $30.3 million in Q1 of 2019.
Turning to our balance sheet as I mentioned at the beginning of my comments, our balance of unrestricted cash and investments was 140.
$2.6 million at the ended the first quarter compared with $49.1 million at the ended fourth quarter of 2019. This increase was primarily result of about $132 million received from aluminum alumina, which was a combination of $34 million continuation.
Advances and the 98 million dollar merger termination fee.
Inventory balances increased in Q1 to $16.1 million from 13.3 million at the end of Q4 2019.
Accounts receivable decreased in Q1 to $7.3 million from $15.3 million at the end of Q4.
2019, and finally in February 2020, the debt, we had outstanding under the facility agreement matured.
We repaid the principal balance of $60 million to retire at this concludes my remarks on the financial results for the quarter I would like to turn the call over to Ben.
Thank you Susan.
In light of the uncertainty caused by the cover 19 pandemic.
We will not be providing a revenue forecast.
That said, we're continuing to experience the headwind caused by the pandemic.
As Mike mentioned earlier, well majority of the size of pack wireless systems are currently shut down.
At this time, we're not able to project when the sites, who have shutdown will resume their normal operations.
We are still supplying those sites that are running with consumables.
Moving onto gross margin, we were pleased to see the improvement in our gross margin during the first quarter.
For most of Q1, we were running our manufacturing facility at a production rate and output level similar to that of Q4.
However, since the middle of March we have significantly reduced or manufacturing output.
Leading to idle capacity.
As a result, we expect our gross margin to decrease significantly in the near term.
Now moving to operating expenses in Q1, we recognized a onetime expense of $6 million related to the termination of our merger agreement with Illumina.
Since there are no further such expenses scheduled to occur we expect our operating expenses in subsequent quarters this year to be significantly lower than what we recorded in Q1.
Below the operating income line. We noted earlier that we received the $98 million reversed termination fee from alumina in Q1.
But did not recognize it as income in Q1.
We anticipate recognizing this as non operating income later in the year.
In addition, since we retired debt in February we will no longer be incurring the interest expense associated with it.
Finally regarding our cash we ended the quarter with a $142.6 million in cash and investments on hand.
Well this represents a higher cash balance than what we've had over the past several years.
Due to the ongoing uncertainty in our sales as a result of the cover 19 pandemic, we're not providing a specific forecast or future cash usage at this time.
That concludes our prepared remarks, and we will now open the call up for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pankey. Please standby will be compiled the Korean a roster.
The first question is from Doug Schenkel of Cowen Your line is open.
Hey, guys. This is to go on for Doug.
Let me answer that and much of this is in China. How did revenues of this in China over the course of Q1 I know, it's cyclical but now that it's stabilizing how has it sells it to equal and what this is steady over the outlook for the rest of year for sequels improvements in licensing and I have a couple of follow up.
I'm, sorry, but only caught about half of what you said, there, but but I gathered is that you're asking how do we see the.
The.
The revenue.
Plus or minus going forward.
Is that correct yes.
Yes, Thats little.
Well as Bill noted I think that the issue for US is we ended.
Last year, what we thought was a pretty strong position.
The success of our.
Sequel to introduction.
Well at this time last year.
The end of April.
And particularly the success of the Hi Fi chemistry approach that we demonstrated on that system.
The good highly accurate long read.
For the first time.
Put us in a pretty strong position.
And the Decarbonizing, obviously caught everybody off guard in that and.
While we have a lot of customers operating right now still although the number of sites is gone way down they're mostly focused on coldlight team are very closely related.
Activity and they've cut down a lot on the other kind of things that were a lot of the bread and butter of our customer base.
And how fast we recover from that is totally dependent upon how fast.
The sites are able to get up and running in a lot of or academic customers. For example, if they were doing research in this area had been impacted pretty strongly.
And it really is dependent on when the reopening of the world, particularly in the U.S. and.
In Europe happens China.
Given that's where it started is actually.
Come back earlier than the rest of the world to us and so it's hard for us to give a meaningful forecast until we get a better says.
The U.S. and some other countries in Europe or stalling.
Slowly to we opened we can get a better handle or what the uptake timeline is going to be but right now that's really difficult I think for everybody around the world.
So then based on your commentary thinking about Q2, China may be turning into a deal then.
How should we talk a little bit indeed, as we think about updating our margins.
Well have to be less your guess is as good as hours at this point. It really is the water businesses, obviously in the US in Europe, China is an important customer for us, but we saw the impact of.
China first in the U.S.
Certainly on the reagents and we mentioned that in the last conference call.
But it's really been the downturn in the U.S. in Europe and other places in Asia.
That impacted.
What weve with what we're seeing now.
And it all depends on whether a light switch gets.
Yep.
Which.
Certainly doubtful.
The kind of slow uptick of people getting back into an operating mode.
And.
You know I.
I don't think the U.S. government understands that.
Enough to give good.
Projections and certainly we dealt.
Okay, if I might add.
I I just might add the.
Within the quarter.
Obviously, China was the first to get hit and we saw.
China's utilization of systems go down.
Sharpest in February.
But within the quarter trying to start coming back and maybe not exactly to where it was let's say in Q4, but you know it's come back.
The fair amount. So I think one of your questions was a particularly how we've seen things in China and.
And I think Mike alluded to before that it has just come back quite a bit.
Okay, that's encouraging and I have one locked up question as the pandemic. It you were just about too conservative with broader commercial efforts with presumably additional hiring and while managing cash makes sense on the other hand, you also want to be ready to flip and support instruments and things do get back to normal.
And ones.
Everything starts to look encouraging so any big time for new hires to become efficient so how do you balance within the.
In the conflicting dynamic.
You want to take that one them.
Sure.
So as we mentioned in our last call. We did set out in Q1 to hire some more folks in the field.
And in fact, we are pleased with our ability to hire some of those people over the past few months.
So we are making some progress there.
I think we also mentioned that it takes time to to actually bring those people onboard so it's probably going to be something that we're going to continue to work on.
Generally speaking in terms of.
Your point is watching expenses.
Some of the things that we can do right away is we're shipping less product and you know as just to balance out the.
Sort of supply and demand, we're also receiving less product.
So so that helps.
Obviously, we are currently saving on things like travel and utilities.
But but at this time, we have not instituted a you know anything draconian like.
Reducing head count, we've we maintain or head count.
Got it Thats helpful. Thank you guys.
The next question is from racial Vance Dol of Piper Sandler Your line is open.
Hi, guys. Thanks for taking the questions.
My first question is around the installed base. So can you talk about how placements are tracking relative to your expectations. Prior to the slowdown in March and then can you give us any incremental color on the orders received that you couldn't place those last few weeks due to the shutdowns and then what's your thoughts as well.
I can give any qualitative thing and that's necessary.
Ben can add to that so.
As has been pointed out we do as most instrument companies do tend to do a lot of there.
Instrument installs later in the quarter and.
I think that until.
Sort of the.
You know when the early part of March we were kind of tracking on what we expected to be able to do in that space even.
With the uncertainty that was growing at that point in China.
But there.
The minutes in particular, the U.S. countries started shutting down below the University started closing up.
The ability to just to get into sites to do installed just changed overnight.
And that kind of put itself and you can kind of see that a little bit, but the fact that where our inventory shot up.
More than it normally would.
And it.
It hits you in two ways. One is you can't get in and do installs the second is that.
Just arranging for those that you can winds up being slow aircraft, we got a little more confused.
The ability to even if somebody wanted the lab.
We'll have their lab open to get through the bureaucracy there to get somebody on site, who wasn't an employee of the site.
To become an issue and we certainly saw that in the last month to lot relative to new orders, we feel pretty confident about where were going there from a little pipeline.
But right now at all these places sensor effectively shut down you don't even have a purchasing operation there.
For all the things and so.
It's obviously been.
Struggle, but from everything that we've seen.
We haven't lost opportunities. It's just been that the process is either block the very very slow.
Yes, I don't have much to add to that Rachel I mean, we did end up.
With installed base, a sequel twos within the quarter 125, which means that we're actually only able to complete installs of 11 sequels, whose during the quarter.
You know that as Mike mentioned, we tend to to do a fair amount.
At the end of a quarter and and that's what ended up being a pretty small number for Q1.
Got it yet that will make sense. Thank you guys.
Thanks can you just kind of walk us through what you're seeing for customers upgrading from CECO on the sequel to obviously I'm sure that was disrupted given this in currencies such my first question, but in the first few weeks of the quarter, where things are more normalized I was at transition happening faster or slower than your expectations.
Well, we have the upgrades can come in to form their people, who who with limited budgets have.
A.
It's an old instrument upgrade where we go in and do.
You know apart replacement and so forth.
The bring a sequel, one up to a sequel to.
You might expect Thats, even more difficult in these times because that's a process that in a lab can take as much as a week.
And so that that has been.
Pretty well.
Stopped what we're doing this for mostly sites that don't have the option to get in there that wall and so.
The alternative people you know they they've had a sequel, one they've been happy with it but they want the increased performance strictly on throughput perspective of the sequel to have and they're they're buying additional sequel, twos and we still feel that happening in a limited way given the other constraints of a lot of people being shut down.
Yeah.
So there.
Either either upgrade path has been slow down in the same way that are completely new customers and slowdown.
I mean, I mean that said, we have had individual sites who.
If they were really actively involved in.
Good night Teen research.
Maybe push forward a little bit their purchase or an upgrade.
Oh the system.
Great and then last question for me I'm. So I appreciate all the comments on try not to some of the first questions, but so looking at their consumable. These are starting to come back given they had a earlier onsite at the cobot breakout can you tell us about any of the trends you're seeing consumable usage in the U.S. in Europe.
The transfer late March to now April in early May and we started to see it rebounded all for example, thank you.
Olive.
Ben handle that one but I think in general the certainly this month last month has been.
Much slower in the U.S. in Europe, and it would it be I mean thats where.
The impact.
Really start to get felt in those areas, it's right at the beginning of.
Of April.
Yeah, the only thing I would add is.
It dropped fairly rapidly.
In the U.S. in Europe, but I would say it's stabilized you know in terms of the utilization, we're able to kind of monitor that it has been fairly stable on the sites that are still open.
Throughout the.
Really.
Most of April.
So we're looking forward to when the the other sites are actually able to reopen.
But but it doesn't look like we have any sort of continuing trend of say more people shutting down.
Yes, it pretty quickly and what you saw is that people.
A lot on the who continue to operate were ones who were switching what they were working on in terms of the samples labor sequencing because.
People were doing other things.
On the system and they once they got back up even.
Working on on their systems it was to.
Use projects that are focused around the a pandemic response to the large degree not completely but in the U.S. in Europe, mostly.
Great. That's it for me thank you.
Again, ladies and gentlemen, if you have questions at this time. Please press star one on your telephone again, that's far one to ask your question.
The next question is from Carl mixing Kenner sits journals. Your line is open.
Hi, Thanks for David questions I'm. So lastly, you guys mentioned plants or at least chemistry and software upgrade throughout the year I just given the near term uncertainty due the the pandemic well those upgrades pizza later, maybe adoption is going to be.
A little bit more muted just kind of trying to understand how cold it can affect timelines going forward. Thanks.
Well, we were we were ready for I a software release.
At the beginning of this quarter, which we.
Have ready to go but we delayed doing it's in so many people are shut down and the other love the ones that we're.
We're still going we're obviously doing critical.
Projects and didn't want to interrupt that in a short term.
So that in the census from a development perspective ready to go but.
We will.
Look at what the right time to get that out there is the bigger issue for us is getting the throughput up and our goal for the year has been to get and still is.
To get the point, where.
A single cell one.
It is enough for a quite good.
Human genome level.
Look at variation in the genome structure of an individual.
To get that down from the sort of two sales. It takes now down to one particularly for looking for structural variants and that's still our goal for this year.
Maybe a little.
Little bit later in.
Q4, then right.
Yes.
Total first date, but we're still.
Targeting that.
And we're starting to get back a little bit more in the lab to continue working on that people have been able to do a lot of the planning to get ready for that.
Well were shut down.
But I think they're pretty much planned out at this point with video conferences and so.
We've begun to open up the labs, just in the last week, a little bit more.
To get people going to make sure that we meet those timelines.
Okay perfect. Thank you.
But also wondering like you know how much inventory if customers are holding.
And what's the shelf life of the consumable products, just I'm I'm trying to understand how long customer's going to have a fleet at the start reordering and how that's going to affect consumables throughout the year.
On the will take that one Ben.
Sure.
I would say, even though it varies.
Plus or minus customers, usually try to target around a months worth of inventory and our shelf lives on our products are.
Typically we shoot for six months or a little bit more than that so.
There shouldn't be that much of a let's say delay when people are back up and running for people to kind of run through whatever inventory they have and need to reorder.
Okay that makes sense and then just one housekeeping question can you break out the consumables revenue in the quarter for sequel wanting to.
So we broke that out in the fourth quarter and actually in the first quarter. It was kind of similar so sequel to represented.
At least 50% little more than half and sequel one.
Was.
A ramp.
Yes, we do expect that to continue to to evolve that a lot of the.
Some of the diagnostic labs that we're using the.
The system to do Goldeneye teamwork.
We're on sequel ones.
And so there was probably a disproportionate from a normal perspective.
Uptick in the sales there for consumables.
But were even there were starting to see as people start to switch over to the higher throughput.
Sequel to system, they just take longer than a research lab, because they have to go back and validate.
Any new instruments that are going to use the testing.
Answer I should have said that the the remainder big it was Rs two and there are two component is less than 10%.
Then what you safest equal one.
I think I missed that.
So in the first quarters sequel, one comprised or.
Around 40%, maybe a little bit more than 40% of the total consumables.
Okay perfect.
Thank you.
There are no further questions at this time I would now like to turn the conference back to Mr., Mike Hunkapiller sorry.
Okay.
Entity.
I believe in smart sequencing provides the industry's most complete an accurate picture genomes due to its superior performance and sequencing accuracy universe quality of coverage long read lengths and ability to characterize DNA based modifications.
These attributes can be particularly important to understanding the complicated mutation patterns in evolving borrow populations as well as the genetic characteristics of host immune response to viral infection.
I'd like to acknowledge the team and pack bio who despite the challenging environment brought about where the co with 19 pandemic have responded and fantastic fashion to assist in the global pandemic response.
Thank you for joining us and we look forward to talking again in three months time.
Ladies and gentlemen, this concludes todays conference call. Thank you for.
Now disconnect.
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