Shares of Pacific Biosciences of California Inc. (PACB Quick QuotePACB - Free Report) surged 16.1% in after hour trading on Aug 5, following company’s impressive second quarter of 2016 results. The company reported a loss of 21 cents per share, a penny narrower than the Zacks Consensus Estimate. However, the figure was wider than the loss of 16 cents reported in the year-ago quarter.

Nevertheless, Pacific Biosciences guidance was encouraging. The company expects booking rate to increase in the second half of 2016 compared with the first half.

Pacific Biosciences also declared that it has released a set of key updates for the Sequel System. These include updated sequencing chemistry, optimized sample clean-up protocols, and associated software. The combination further enhances read lengths, throughput and accuracy of the system.

Moreover, customers upgrading their Sequel Systems with the new chemistry and software update will not be hurt by the supply-constraint of the Single Molecule, Real-Time (SMRT) cells for the Sequel system, which was felt in the first half.
 

Pacific Biosciences stated that it has already started procuring SMRT Cells for the Sequel System from its high-volume supplier.

Quarter Details

Revenues of $21 million were in line with the Zacks Consensus Estimate but decreased 16.8% on a year-over-year basis. Product revenues were up 54% to $13.6 million. Service revenues grew 41.5% from the year-ago quarter to $3.6 million.

Instrument revenues surged 100% year over year to $8.6 million driven by growing Sequel instrument shipments. Consumable revenues totaled $4.6 million, up 11% on a year-over-year basis. Consumable comprises proprietary single molecule, real-time (SMRT) Cells and reagent kits, which are required to be used in combination with the PacBio RS II instrument to attain the desired results.
 

During the quarter, Pacific Biosciences received orders for 25 PacBio instruments across the U.S., Europe and Asia. The company shipped 26 instruments and the backlog is currently more than 50.

Gross profit came in at $10.6 million (gross margin was 51%) as compared with $14.5 million in the year-ago quarter, which included a $10 million revenue milestone payment from Roche at 100% margin. Excluding the milestone payment, gross margin would have been 30% in the second quarter of 2016.

Improving product margins continues to drive gross margin expansion which in turn is driven by increasing sales of the Sequel systems. Notably, these systems are higher margin products as compared to the legacy RS II systems.

Research & development (R&D) expenses increased 16.5% year over year to $17.5 million, while selling, general & administrative (SG&A) expenses were up 3.4% to $11.2 million. The increase in expenses can be primarily attributed to higher non-cash stock based expense.

Operating loss of $18.1 million was wider than $11.4 million in the year-ago quarter.

Guidance

Pacific Biosciences reiterated its revenue forecast at approximately $93 million for full-year 2016. Product and service revenues are expected to increase almost 70% year over year.

The company expects third quarter revenues to grow sequentially as compared with the second quarter. Gross margin for the current quarter is anticipated to remain in the same range as of the reported quarter. However, for the fourth quarter gross margin is forecasted to decline due to the absence of the contractual revenue.

Management expects total operating expenses increase of approximately 12% (up from 10%) in full-year 2016, driven by higher stock-based compensation expenses. The company forecasts net loss of approximately $74 million in full-year 2016, which will include over $23 million of non-cash expense.

Our Take

Pacific Biosciences second quarter results reflected growing momentum for the company’s Sequel system. The eventual resolution of the SMRT cell supply constraint through software and chemistry update as well as procurement of cells from both the legacy supplier and new high volume supplier is a significant development in our view.

Moreover, the anticipated full transition to the high volume supplier by the year-end is a positive development. Pacific Biosciences expect to report sequential revenue growth throughout the year, which will encourage investors.

Further, the company has considerable growth prospects in China which management highlighted during the conference call. Moreover, the growing interest over the Chinese genome project and the government’s personal medicine initiative presents significant growth opportunity for the company.

Management noted that the Chinese government has committed to spend approximately $10 billion over the next several years on these programs.

Further, the increasing adoption of PacBio systems by the likes of HistoGenetics and growing clinical evidence of the systems utility will further drive top-line growth.

Zacks Rank & Key Picks

Currently, Pacific Biosciences has a Zacks Rank #3 (Hold).

Better-ranked stocks in the same space are Masimo Corp (MASI Quick QuoteMASI - Free Report) , Natus Medical and Mesa Laboratories (MLAB Quick QuoteMLAB - Free Report) . All the three stocks carry a Zacks Rank #1 (Strong Buy).

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