Facility Agreement

On February 5, 2013, Pacific Biosciences of California, Inc. (the "Company") entered into a Facility Agreement (the "Facility Agreement") with entities affiliated with Deerfield Management Company, L.P. (collectively, "Deerfield"), pursuant to which Deerfield agreed to provide $20.5 million in funding to the Company (the "Facility"). Under the terms of the Facility Agreement, the Company issued to Deerfield promissory notes in the aggregate principal amount of $20.5 million (the "Notes"). The Notes bear simple interest at a rate of 8.75% per annum, payable quarterly in arrears commencing on April 1, 2013 and on the first business day of each January, April, July and October thereafter. The Company received net proceeds of $20.0 million, representing $20.5 million of gross proceeds, less a $500,000 facility fee, before deducting other expenses of the transaction.

The Facility has a maximum term of seven years from the date of the Facility Agreement. The Facility Agreement provides for an early repayment of principal in the event the Company has Net Sales (as defined in the Facility Agreement) of less than $41 million for the twelve-month period from the beginning of the second calendar quarter of 2014 through the first calendar quarter of 2015 (the "Milestone"). If the Milestone is not achieved, at Deerfield's option, one-third of the original principal balance of the Facility will become due, on each of the third, fourth and fifth anniversaries of the date of the Facility Agreement.

From and after the date of the Facility Agreement, at the election of the holders of Notes representing a majority of the aggregate principal amount of the outstanding Notes, the Company shall apply 25% of the net proceeds from any financing that includes an equity component, including without limitation, the sale or issuance of the Company's common stock (the "Common Stock"), options, warrants or other securities convertible or exchangeable for shares of Common Stock, to the payment of the Notes. This right is subject to certain exceptions set forth in the Facility Agreement, including that the right will not apply until the Company has issued 15,000,000 shares (as adjusted for any stock split or reverse stock split) of its Common Stock or rights to acquire its capital stock following the date of the Facility Agreement.

Deerfield has the option to require the Company to repay the Notes if the Company completes a Major Transaction (as defined in the Facility Agreement), including a change of control of the Company or a sale of all or substantially all of the assets of the Company. Additionally, the principal balance of the Facility may become immediately due and payable upon an "Event of Default," as defined in the Facility Agreement, in which case Deerfield would have the right to require the Company to repay 100% of the principal amount of the loan, plus any accrued and unpaid interest thereon. The Facility Agreement does not provide for a prepayment of the Facility at the Company's option.

The Facility Agreement also contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type, including restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness or liens on its assets, except as permitted under the Facility Agreement. In addition, the Company is required to maintain consolidated cash and cash equivalents on the last day of each calendar quarter of not less than $2.0 million.

Warrant

In connection with the execution of the Facility Agreement, on February 5, 2013, the Company issued to Deerfield warrants to purchase an aggregate of 5,500,000 shares of Common Stock immediately exercisable at an exercise price initially equal to $2.63 (the "Warrants"). The number of shares of Common Stock into which the Warrants are exercisable and the exercise price will be adjusted to reflect any stock splits, payment of stock dividends, recapitalizations, reclassifications or other similar adjustments in the number of outstanding shares of Common Stock. The exercise price may also be adjusted to reflect certain dividends or other distributions, including distributions of stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or similar transaction.

If the Company declares and pays dividends or makes other distributions to the holders of the Common Stock, the holders of the Warrants are entitled to receive the dividends or distributions as if the holders had exercised the Warrants and held Common Stock. The Warrants expire on the seventh anniversary of the date of issuance and contain certain limitations that prevent a holder from acquiring shares upon exercise of a Warrant that would result in the number of shares beneficially owned by such holder to exceed 9.985% of the total number of shares of Common Stock then issued and outstanding. The maximum number of shares of Common Stock that may be issued under the Warrants may not exceed 19.9% of the Company's outstanding capital stock at the time of issuance of the Warrants.

The exercise price may be paid, at the election of the holder, in cash, by a reduction of the principal amount of the holder's Note outstanding under the Facility Agreement or pursuant to certain cashless exercise provisions. In connection with certain Major Transactions (as defined in the Warrant) and certain Events of Default (as defined in the Warrant) including a change of control of the Company, the sale of all or substantially all of the Company's assets, liquidation, bankruptcy, or in the event the Common Stock ceases to be registered under Section 12 of the Securities Exchange Act of 1934, as amended, the holder may have the option to receive, in exchange for the Warrant, a number of shares of Common Stock equal to the Black-Scholes value of the Warrant (as defined in the Warrant), divided by the closing price of the Common Stock on the trading day immediately preceding the date on which the applicable Major Transaction is consummated or Event of Default is triggered. In certain circumstances in which cash is paid to common stockholders in connection with a Major Transaction, a portion of such payment may be made in cash rather than in shares of Common Stock.

In connection with the Facility, the Company entered into a Registration Rights Agreement with Deerfield (the "Registration Rights Agreement") obligating the Company to register for resale the shares of Common Stock issuable upon the exercise of the Warrants on a registration statement on Form S-3 to be filed with the Securities and Exchange Commission within 45 days after the date the Warrants were issued. The Company is required to file additional registration . . .

The disclosure set forth above under Item 1.01 relating to the Facility Agreement is hereby incorporated by reference into this Item 2.03.

The Warrants described in Item 1.01 above were offered and sold in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act. The Facility Agreement contains representations to support the Company's reasonable belief that Deerfield had access to information concerning its operations and financial condition, that Deerfield is acquiring the Warrants for its own account and not with a view to the distribution thereof, and that Deerfield is an "accredited investor" as defined by Rule 501 promulgated under the Securities Act.

(d) Exhibits.

 4.1    Form of Warrant to purchase shares of common stock of Pacific Biosciences
        of California, Inc.

10.1    Facility Agreement, dated February 5, 2013 by and among Pacific
        Biosciences of California, Inc. and the entities listed on the signature
        pages thereof.

10.2    Registration Rights Agreement, dated February 5, 2013, by and among
        Pacific Biosciences of California, Inc. and the entities listed on the
        signature pages thereof.

10.3    Security Agreement, dated February 5, 2013 by and among Pacific
        Biosciences of California, Inc. and the entities listed on the signature
        pages thereof.

99.1    Press Release dated February 5, 2013 titled "Pacific Biosciences Completes
        $20.5 Million Debt Financing."