Illumina & PacBio Throw In The Towel

I had planned to post this morning a "preview of 2020" piece I had drafted in my head on the ski slopes the previous two days, but never got around to actually committing it to bits and bytes.  Today's announcement that the Pacific Biosciences acquisition from Illumina is officially dead means the first item of that piece is mostly going uncaptured.
So despite the original cheery front they put up after the FTC announced its intention to block the deal, the companies have chosen to mutually terminate the deal.  Certainly this saves them from twisting in the wind until this summer when the FTC would formally prosecute the case.  That would certainly be lost time for PacBio, tied loosely to Illumina (and hence in a poor position to talk to anyone else) but not able to access any benefits of that linkage beyond a cash line of support.

Curiously, the press release today left out an important detail.  Perhaps it was very hastily assembled.  Mentioned is the $98M breakup fee, but almost as important is, as disclosed in an SEC filing, that Illumina will make the $6M continuation payments for January and March as well as the $22M payment for February.  That big one covers a loan obligation that comes due then.  So, roughly, PacBio will exist in April as a company with around $140M in the bank (the $98M breakup fee plus a guestimate of what's left -- the continuation payments are assumed here to purely cover losses and the loan obligation).  Burning about $6M a month (again, the amount of the continuation payment), that works out to roughly two years of burn at current rates.  So in about a year it would become very important for PacBio to enter into a longer term financing arrangement, if not sooner.

The $98M breakup fee is free and clear, but the $58M $52M in continuation payments (if I've done my sums correctly) must be repaid if either the company raises $100M in a single go or is acquired.  Whether this will prove to be a neck-mounted millstone or not will play out of the next two years. 
[note: see link in corrections below for a number of complexities I failed to capture when I wrote this]

So what should PacBio do?  As I've written before, trying to get into the clinic should be a major priority.  It would also be important to review whether new sales channels are likely to be a substantial benefit.  Also, a truly honest appraisal of the opportunities to push the system forward is required; one of the regulatory responses had a gloom-and-doom scenario that further Sequel development is hindered by how bleeding edge it is. Was that deliberate sandbagging or is it really the case?

PacBio also needs to take a hard look at all the applications it is used for and assess which are likely to yield serious growth and also which are most vulnerable to being upended by competition.  For example, Iso-Seq mRNA sequencing has been quite popular and generating publications -- but it also is at huge risk of being taken over by Oxford Nanopore, as it is an application in which base perfect accuracy may be very secondary.  Any company in this space is in a Red Queen's Race, and so that current burn may need to be strategically increased to generate the applications to keep the company going long-term -- but of course higher burn brings a day of reckoning closer.

Of course, PacBio might decide not to wait and to go seek another suitor.  ThermoFisher is a very obvious candidate: existing sequencing assets, experience in the clinic, broad molecular portfolio.  They also are believed to be in an acquisitive mood, having probably made a run at QIAGEN -- which announced they will stay independent.  That's the bull case; the bear case says they are a bloated conglomerate which has squandered opportunities with their sequencing technologies.  

One would hope that the other companies that passed on PacBio in 2018 have reconsidered their position, but it's unclear there's a white knight in that bunch either.  I'll reiterate that I consider BGI/MGI a non-starter due to U.S.-China trade relations.  Danaher has heft but a reputation for dismembering acquisitions.  BioRad seems on the road to being an IP law firm that sells reagents.  Everybody likes to dump on Roche for previous missteps, plus they bailed on PacBio before.  And so on.

JP Morgan Healthcare Conference is soon and Illumina always presents -- with a webcast later.  So we may get some idea of what their strategy is going forward, though probably very little.  I would expect that Illumina will look for one or more startups in the long read space to target for some sort of relationship -- that might be a strategic partnership or could be outright acquisition.  Which means I'd better get more serious with a planned post on that space.   Companies with no sales would appear to not trigger any antitrust regulatory tripwires.  Illumina also has, in my view, a need to tend to the bottom of their sequencing product line -- but that's a discussion for another post.

By the way, Varro Analytics has a Twitter poll running on the fate of PacBio -- still live as I write this. Please vote there if you'd like, but of course I'm greedy for comments on this piece so please fire away!

** correction on 2020-01-05 Someone inquired on my $58M number for continuation payments & I realized I gave an extra one of $6M -- I should have shown my work and re-checked when they started.

Also, there's a good piece on this in SeekingAlpha by Stephen Simpson, and apparently he read the documents more carefully than I did and there is a potential repayment of the termination fee under some acquisition scenarios and the continuation payment repayment terms are a bit more complex than I had figured.