Illumina Throws PacBio An Extension and a Lifeline

Interesting news today on the PacBio front: as reported by GenomeWeb, Illumina announced that their walkaway date for the acquisition has been extended to March 31 of next year and that Illumina will be pumping significant cash into PacBio until either the merger occurs or is terminated.  In addition to publicly reinforcing Illumina's determination to get the deal done, the terms of the arrangement have interesting consequences should the deal fall through

Illumina originally hoped to close the acquisition of PacBio several months ago, but regulatory uncertainty has prevented that.  The U.K.'s CMA issued a preliminary opinion against the merger this summer and the U.S.'s FTC has simply not made any public decision yet.  The CMA isn't obligated to issue a decision until late December, though could act sooner.  I've heard all sorts of rumors, but little that is backed by evidence.  In the meantime, investors have voted with their wallets that the deal is uncertain to close, as PacBio has been trading at a sizable discount to the offered price, in the mid $6s versus the $8 offer.  

In addition to extending the deadline for closing the deal to the end of March, Illumina is going to keep PacBio afloat.  Reading SEC filings is not my forte - and it doesn't help that a new accounting rule makes comparing the numbers even more complicated (operating leases are in the numbers for this year), but it looks like PacBio is bleeding cash at an effective rate of around $16 per quarter, which leaves them around 4 quarters of cash.  That is based on a stupid simple linear model, so climbing revenue might stretch that out.  Still, not a comfortable amount; it would suggest they would be down to about a quarter's cash should they say "et tu Francis" next Ides of March.  Illumina will now be sending $6 million on or before the beginning of each month, starting with October, with February's payment goosed to $22 million for unspecified reasons.  That's potentially $52 million total versus PacBio's reported cash of $67 million at the end of Q2.  In other words, Illumina is going to put into PacBio about what PacBio currently has in their accounts (we're a month away or so from finding out publicly the state of PacBio's finances).

For Illumina $42 million over 6 months is small money: at the end of Q2 they were sitting on nearly $2 billion in cash based on over $800 million in revenue for the quarter and a net income of almost $300 million.  But their largess is not without strings: should the deal fall through Illumina will still pay $98 million for a breakup fee but if in the two years following a merger termination should PacBio be acquired or raise $100 million in a single go, then Illumina's apparently can demand repayment of these cash infusions.

PacBio's management has therefore all but agreed that the company won't exist as an independent company.  Pick your deep pocket acquirer such as ThermoFisher or Agilent, and paying back the $52 million is just a small bump on a likely deal price.  When PacBio shopped themselves a year ago they had few nibbles, but the launch of Sequel II may have changed some minds.  But if you're going out to raise serious money to keep PacBio running beyond what the breakup fee will buy, and either you must undershoot and raise too little money to give a comfortable runway or raise a boatload so that you get decent cash while paying back Illumina.  The dilution required for that is probably going to be far too painful.

Illumina's redoubling urge-to-merge will be filtered through whatever opinion one has as to why they are so eager.  Grab the next big thing?  Stifle a potential competitor?  Lock down an IP estate cudgel against Oxford Nanopore?

Personally, I favor the opinion that Illumina sees PacBio as a viable commercial product that complements their existing line but would not supplant it.  After all, they have successfully placed 80 instruments in the field, suggesting robust demand.  The UK's CMA sees it very differently, imagining that Sequel II can steal significant business from NovaSeq, a position I disagree with.

Illumina's main risk in sticking with this is the potential distraction of management from other tasks.  For the rest of us, there's the potential distraction watching this saga play out over many months.  Now it looks like we may not be freed until the spring, and nothing precludes further extensions should the regulatory muddle not be fully resolved.  Stay tuned!