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Here's Why Pacific Biosciences of California Is Getting Hammered Today

Cory Renauer, The Motley Fool

What happened

Shares of DNA-sequencing pioneer Pacific Biosciences of California (NASDAQ: PACB) fell as much as 21.6% this morning after the company missed third-quarter revenue estimates by a mile. While management pointed to several bright lights on the horizon, the stock is still down about 20.6% as of 12:37 p.m. EDT on Friday.

So what 

Third-quarter total revenue came in at $23.5 million. That was $1.6 million lower than third-quarter revenue last year, and $5.1 million less than Wall Street was expecting. Adjusting for contract revenue from Roche that PacBio will no longer receive following last year's fallout turns the year-to-year loss into a slight gain, but that didn't stop investors from worrying about the company's ability to eventually turn a profit. The third-quarter loss widened to $22.0 million from $17.5 million last year.

Frustrated person with hands on head facing a downward sloping chart.

Image source: Getty Images.

PacBio's future hinges on success for the Sequel brand sequencers it launched a couple years ago. Although uptake has been strong, the company made a tough decision to invest in upgrades for more than 100 installed systems earlier this year. The added expense, combined with the loss of high-margin contractual revenue from Roche, lowered the company's reported gross margin during the first nine months of the year to 36.7% from 50.4% during the prior-year period.

Now what

Although the headline figures aren't pretty, management did offer investors a few nuggets of encouragement. Incorporating a slew of adjustments for the loss of Roche contractual revenue reduces its gross profit margin to just 41% during the first nine months of 201 and a slightly higher 42% during the same period this year.

The adjusted gross margin expansion was relatively minor, but impressive when you consider the unexpectedly higher costs associated with Sequel upgrades, helping customers transition from older instruments, and relocating to a new facility earlier this year.

PacBio's balance sheet finished September with an $84 million cash balance and management has no plans to raise additional capital. If margins snap back as expected, the company probably won't need to.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Pacific Biosciences of California. The Motley Fool has a disclosure policy.