Pacific Biosciences Inching Closer To A Key Event

The summer has been good to Pacific Biosciences (PACB) (or "PacBio"), as the shares have risen from $2.50 in late May to a recent high of just over $5 a share. I attribute some of this positive momentum to a strong market overall for more speculative med-tech stocks, but also to the approaching launch of PacBio's ZMW 8M cell - a major step forward for the productivity of the company's systems that should drive a significant step-up in the utility and popularity of the system, particularly for more advanced applications like structural variant analysis.

PacBio's just announced financing is unlikely to get the company through to cash flow breakeven, but it takes liquidity off the table as a risk through the launch of the ZMW 8M - long enough, I believe, to see the start of a meaningful inflection in demand that could allow for a "top off" financing on better terms ahead of cash flow breakeven (which I estimate in 2022). Valuation is complicated by the sluggish recent pace of revenue growth, but if PacBio can scale up towards $125 million in revenue in 2019 and $160 million in 2020, forward revenue multiples north of 6x could (if not should) come into play and drive further gains, but executing on the ZMW 8M opportunity is absolutely critical.

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Pacific Biosciences Inching Closer To A Key Event

PacBio Not Back To Square One, But Definitely Back To A "Show Me" Story

Good news has been hard to find at Pacific Biosciences (NASDAQ:PACB) for a while. Roche's (OTCQX:RHHBY) decision to terminate its agreement with PacBio to develop and market PacBio's technology for the clinical diagnostics market was a major setback in terms of both near-term cash flow prospects and public perception around the value of the technology platform. What's more, with the launch of the Sequel and subsequent reports on its real-world performance, PacBio has once again shown that it struggles to develop and launch systems that deliver the hoped-for performance from Day One.

PacBio shares have fallen close to 60% since my last update on the company, and it I believe the Street has soured too much on the company's prospects in core genomics research. The ongoing improvements in the performance of PacBio's systems should continue to drive adoption, but my fair value estimate of around $6 assumes mid-term revenue growth in the mid-to-high 20%'s and longer-term growth in the mid-20%'s, as well as the ability to earn strong free cash flow on revenue in the $500 million to $600 million range (similar to my expectations for diagnostics company GenMark (NASDAQ:GNMK)). There are absolutely no guarantees that PacBio can hit those targets, nor any guarantees that the markets will grow as hoped or that PacBio's technology won't be supplanted by its rivals. As a high-risk show-me story in an expensive market, though, it is at least worth a look again.

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PacBio Not Back To Square One, But Definitely Back To A "Show Me" Story