Pacific Biosciences Hit By Sentiment, But The Future Of Long-Read Sequencing Is Strong

The shift away from high-multiple growth names in life sciences has been brutal, with many names down 50% or more over the last year. This list includes Pacific Biosciences (NASDAQ:PACB) (“PacBio”), which has dropped another 60% or so since my last write-up on this sequencing company. Although I think PacBio is in even better shape now than a year ago from a long-term perspective, the reality is that sentiment has shifted and this is the risk that goes with owning shares valued at double-digit multiples of future revenue.

Between improvements to its long-read sequencing technology and the addition of a short-read technology platform, I believe PacBio has an even stronger long-term outlook, and while there is (and likely always will be) chatter about what competitors in the space are doing, so far none have come close to PacBio where accuracy is concerned. Long-term revenue growth of over 30% is hardly a humble assumption, but I do think PacBio shares look undervalued today.

 

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Pacific Biosciences Hit By Sentiment, But The Future Of Long-Read Sequencing Is Strong

The Pullback In Pacific Biosciences Makes For A Much More Interesting Opportunity

 

As the frenzy that drove many growth stocks, particularly in life sciences, to eye-watering multiples earlier this year has faded, Pacific Biosciences (PACB) (“PacBio”) shares are getting more interesting to me again. To be as clear as I can be right from the beginning, I think PacBio has great technology and growing use-cases in sequencing, and I think the company now has exceptional management and a good growth plan. My only major issue is valuation.

I’m modeling long-term revenue growth (2020-2030) of close to 30%/year on a compound basis, with operating profitability in 2026 and positive free cash flow in 2025, and I believe the company could exit 2030 with a FCF margin north of 30% - though a lot depends on the strategic decisions made between now and then and the implications those will have for R&D and SG&A spending. More to the point, I believe PacBio has the best long-read sequencing technology out there, and with significant improvements in throughput and cost, I believe the use of long-read technology is going to accelerate significantly in the coming decade.

PacBio isn’t conventionally cheap today, and I wouldn’t really expect it to be, as there is momentum in the business, strong partnerships, and good funding/liquidity. A continuation/reacceleration of this sell-off to $20 or below would make for an easy decision, but even in the mid-$20’s it’s a tempting name.

 

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The Pullback In Pacific Biosciences Makes For A Much More Interesting Opportunity

Pacific Biosciences Flying High On HiFi Enthusiasm

Long-read sequencing specialist Pacific Biosciences (PACB) (“PacBio”) may have come up a little short in the third quarter where revenue was concerned, but it hasn’t dented the Street’s renewed enthusiasm for this emerging sequencing story. With long-read sequencing finally “ready for primetime”, PacBio is well-placed to leverage growth through expanded instrument and consumables sales as the approach finally starts fulfilling some of its potential.

Execution remains a risk, particularly with management looking to dramatically expand the scale of the marketing effort. I believe this is absolutely the right call, but it will accelerate the cash burn, leaving PacBio somewhat more vulnerable to the whims of investor enthusiasm, as additional future capital raises seem almost certain.

 

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Pacific Biosciences Flying High On HiFi Enthusiasm

New Leadership Driving New Interest In Pacific Biosciences

It's been a little wild lately for Pacific Biosciences (PACB) ("PacBio"). While there have been several strong names in life sciences over the past three months and on a year-to-date basis, including companies like 10x Genomics (TXG), Berkeley Lights (BLI), and Nanostring (NSTG), PacBio has sprinted ahead about 125% since my last update, largely, I believe, on renewed optimism around the naming of Christian Henry as the company's new CEO.

PacBio's technology is solid - I believe it has the best technology and products for long-read sequencing - but the commercial execution has never been. With Henry previously having served as Illumina's (ILMN) Chief Commercial Officer, among other roles in a long career at that leading sequencing company, I believe he brings the experience and know-how to meaningfully improve PacBio's go-to-market efforts.

With the shares so much higher now, I believe the story is more reliant on execution now than before. While I do believe Henry will lead the company to significant improvement here, it won't happen overnight, and I do still see quarter-to-quarter volatility risks. While I do still see the double-digit upside here, expectations are significantly higher.

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New Leadership Driving New Interest In Pacific Biosciences

Pacific Biosciences Still Can't Catch A Break

The way things have been going for a while with Pacific Biosciences (PACB) (“PacBio”), it seems as though any news is almost always bad news. PacBio saw its deal with Illumina (ILMN) collapse on antitrust worries in both the U.K. and U.S., saw an adverse patent decision back in March, and then saw investors go decidedly risk-averse as Covid-19 started sweeping around the world.

Although the breakup payments from Illumina can fund PacBio’s cash needs for over a year, including an assumed uptick in SG&A spending to support the ongoing launch of the Sequel II, the outbreak is likely to have a significant impact on near-term equipment orders and consumables usage. Maybe the world will get back closer to normal in the second half of the year and PacBio will exit 2020 with a strong backlog and order momentum … or maybe not.

Words like “could”, “presumed”, and “maybe” underline a lot of the risk in this story – while PacBio has good technology and has developed a good product for a high-potential market, staying solvent long enough to achieve a leverageable user base is no sure thing. I continue to believe that PacBio has speculative appeal, but I don’t want to underplay the risk that goes with the “speculative” part of that equation.

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Pacific Biosciences Still Can't Catch A Break

PacBio Now Officially On Its Own Again, But Still Has Potential

The writing was on the wall for a while, and now Illumina (ILMN) and Pacific Biosciences (PACB) (“PacBio”) have bowed to the inevitable and terminated their merger agreement. Illumina will no longer attempt to acquire PacBio’s long-read sequencing capabilities and PacBio will have to go it alone, for now, and try to drive higher placements and usage of its new Sequel II system to reach a sustainable level of business.

For Illumina, this is no worse than a moderate setback in the short run, with the long-term consequences dependent on both how important long-read sequencing becomes in the market and what they can accomplish with their own internal R&D. For PacBio, this is clearly a serious challenge – the payments from Illumina will certainly help tide them over, but long-term viability, let alone success, are far from assured. Even so, there is some appeal here for more aggressive investors given PacBio's solid long-read technology and Illumina's tacit validation of that technology through the attempted acquisition.

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PacBio Now Officially On Its Own Again, But Still Has Potential

The PacBio-Illumina Deal Looks More Tenuous Than Ever, But There May Be Alternatives

It’s increasingly clear that regulatory clearance for Illumina’s (ILMN) proposed acquisition of Pacific Biosciences (PACB) is, at best, only going to come at the cost of major concessions and it may well ultimately be the case that regulators will only approve the deal on terms that Illumina cannot afford to accept. PacBio certainly continues to trade as though the deal is highly unlikely, though I believe within that valuation there may be some undervaluation of the financial support Illumina will continue to provide, not to mention the prospect of alternative arrangements that come short of an acquisition but would still answer some of the strategic and financial needs of both parties.

I don’t know what sort of R&D partnerships and/or distribution deal the two companies could work out, but that now seems like a more likely outcome than the proposed merger. As I said in past articles, I no longer value PacBio with the merger in mind, but I do believe that the combination of the Sequel II ramp, cash from Illumina, and some sort of commercial relationship between the two companies can put PacBio on a path to viability (short term) and success (long term).

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The PacBio-Illumina Deal Looks More Tenuous Than Ever, But There May Be Alternatives

The U.K.'S Antitrust Regulator Seems Bent On Blocking The Pacific Biosciences - Illumina Deal

In new Phase 2 filings made public today (October 24), it seems clear that the U.K.’s Competition and Markets Authority (or CMA) remains hellbent on blocking Illumina’s (ILMN) acquisition of Pacific Biosciences (PACB), even though the information provided by the CMA itself seems to refute many of its core findings/concerns. While these discrepancies do undermine the CMA’s case and support those who believe there is no credible objection to the merger (myself included), it’s unclear to me if Illumina would be willing to pursue legal remedies to push this acquisition through, and of course also unclear whether such an option would work.

Although Illumina has not yet abandoned the deal, I believe it makes more sense to value PacBio on the assumption of no deal. I still believe the standalone value of PacBio to be above $6, but the path forward without Illumina will be high-risk and suitable only for very aggressive investors who can accept the very real risk that PacBio ultimately goes bankrupt.

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The U.K.'S Antitrust Regulator Seems Bent On Blocking The Pacific Biosciences - Illumina Deal

The Latest Objections To The Illumina/Pacific Biosciences Tie-Up May Well Be Insurmountable

The United Kingdom's Competition and Markets Authority (that country's antitrust regulator, in essence) had already forwarded the Illumina (ILMN) - Pacific Biosciences (PACB) merger on to a Phase II review, but on July 19, investors got a look at the agency's reasoning, and it doesn't look good for the deal prospects. With the U.K.'s regulator insisting upon looking at short-read and long-read sequencing technology as effectively the same thing, the body has found that the deal would further consolidate a market already dominated by Illumina and potentially lock new entrants out of the market.

I do not agree with the CMA's assessment, but my opinion is beside the point. While the investigative process and hearings that are part of Phase 2 review will give Illumina and PacBio another chance to make their case that the two technologies are quite different, the tone of the report suggests an uphill climb. Consequently, while Illumina's $8/share offer to PacBio does still stand as a best-case near-term outcome, I believe it is more prudent to look at PacBio from a standalone perspective.

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The Latest Objections To The Illumina/Pacific Biosciences Tie-Up May Well Be Insurmountable

Pacific Biosciences Stumbles As The U.K. Raises Concerns About Illumina's Bid

While a quick look at their respective market caps would perhaps suggest that Illumina’s (ILMN) acquisition of Pacific Biosciences (PACB) (“PacBio”) is no big deal, regulators in the U.K. don’t seem to agree, as the country’s antitrust office (the Competition and Markets Authority, or CMA) has notified the companies that it will likely move to a Phase II review of the deal. At best, such an extension will delay the close of the deal. At worst, the deal will be rejected and PacBio will be forced to go it alone.

I highlighted this risk in my last article on PacBio, and I can’t say I’m that altogether surprised by it. The good news, such as it is, is that doubts about the deal reaching completion have already been priced in and the company does still have a worthwhile future on a standalone basis. While I believe that the CMA’s objections are off-base and that PacBio now trades below standalone fair value, this remains a situation with above-average risk and volatility.

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Pacific Biosciences Stumbles As The U.K. Raises Concerns About Illumina's Bid

PacBio Shares Reflect Some Ongoing Worries About The Illumina Deal

Although Illumina (ILMN) reiterated during its first-quarter conference call that it expects its acquisition of Pacific Biosciences (PACB) (“PacBio”) to close around midyear, clearly the market is not wholly sold on that outcome, with the shares trading below $7 as of this writing. While we know that the FTC had a second round of questions for the company on the deal (disclosed by Illumina in conjunction with Q4’18 earnings) and the end of the U.K.’s Competition and Markets Authority Phase I review is coming up, neither PacBio nor Illumina has expressed any real concern that the deal won’t go through, and due diligence has continued to support the idea that the two companies really aren’t competitive in any meaningful sense.

I still believe the deal goes through, but it is arguably prudent to address what happens if the deal doesn’t happen. Assuming that PacBio would be entitled to a full breakup fee, I believe PacBio’s cash would be just barely sufficient, though the launch of the Sequel II and SMRT Cell 8M chip complicates discussions of cash burn. Given that I believe PacBio would be worth around $6.50 on a standalone basis, it’s hard for me to reconcile today’s price with the likely Illumina buyout and even the worst-case scenario of the deal collapsing.

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PacBio Shares Reflect Some Ongoing Worries About The Illumina Deal

Pacific Biosciences Bows Out Gracefully

After many frustrating years of commercial execution lagging the potential of the technology, Pacific Biosciences (PACB) (“PacBio”) investors have a reason to be a little more cheerful this Friday. After the close on Thursday, the company and Illumina (ILMN) announced that Illumina would buy the company in a cash deal for $8/share, a roughly 75% premium to Thursday’s close and the highest price for the shares since late 2016.

I expect at least some PacBio shareholders to be disappointed with this sale, as there certainly are arguments supporting a much larger market down the road for long-read sequencing, and PacBio has been making progress on commercial execution. Even so, I think this is a decent exit valuation, but also a good opportunity for Illumina to add long-read sequencing technology to complement its very strong position in short-read sequencing.

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Pacific Biosciences Bows Out Gracefully

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

The Clock Is Ticking Louder As PacBio Must Generate More Revenue And Shrink Its Cash Burn Rate

If you want to know what the market thinks about Pacific Biosciences (PACB) consider this – the sell-side revenue expectations for 2018 are now about 15% lower than they were three months ago, and the share price is more or less flat. It’s not quite that simple, as there have been some large moves (in percentage terms) in that time, but the shares continue to reflect what I regard as a “we’ll believe when we see it” attitude on the part of many investors.

I’ve said in the past that I now regard PacBio as a very speculative stock, and that remains the case. I do believe the company’s technology is valuable and important, but it is clear that commercializing that technology is no easy task. While I would not be at all surprised to see PacBio acquired within the next 12 months, I likewise wouldn’t be surprised if the company is forced to pursue highly dilutive financings to keep the lights on and is eventually strangled by a lack of access to funds and its inability to reach cash-flow breakeven.

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The Clock Is Ticking Louder As PacBio Must Generate More Revenue And Shrink Its Cash Burn Rate

Battered Back Below $3, PacBio's Shares Offer High-Risk Upside

If you like to trade, Pacific Biosciences (or “PacBio”) (PACB) may be right up your alley. If you’re an investor looking to play the ongoing growth in sequencing with a company that has brought differentiated technology to lab, well, this stock may well give you grey hair and some sleepless nights. These shares were at $2.50 in the spring of 2013, over $6 in the spring of 2014, in the $5-$6 range in the spring of 2015, close to $10 in the spring of 2016, in the $5’s again in the spring of 2017, and now back in the $2’s (albeit with a higher share count than in 2013).

This volatility has not come without good reasons, as PacBio has yet to really break through with its technology and products. The installed base does continue to grow, as does usage, but the adoption curve has been very unpredictable due to company missteps, budget uncertainties, and competitive offerings. While this is a very high-risk stock, I continue to believe that there are legitimate, meaningful uses for PacBio’s technology and that ongoing improvements will help reliability and drive a more consistent adoption curve. With a fair value in the $5 range, this very speculative name is worth another look today.

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Battered Back Below $3, PacBio's Shares Offer High-Risk Upside

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

Seeking Alpha: Pacific Biosciences Looking More Interesting Once Again

If you're a fan of The Simpsons, the performance of Pacific Biosciences (NASDAQ:PACB) (or "PacBio") may at times remind you of the Homer Simpson "bed goes up, bed goes down" scene. While the company continues to make steady progress in improving its systems and adoption and usage are both increasing, the market has batted the stock around in response to anticipated launch numbers, rumors of a buyout, and concerns over competing systems.

My core thesis on PacBio remains the same. This company has developed a sequencing technology that is very good at doing a limited (but important and significant) number of things within the overall sequencing opportunity. PacBio will never be another Illumina (NASDAQ:ILMN) or Thermo Fisher/Ion Torrent (NYSE:TMO), but it can grow to over $1 billion in revenue over time on the strength of opportunities in areas like microbial/viral genetics, plant/animal genetics, and human genetics and diagnostics (particularly oncology). With that, I still believe a low double-digit fair value is reasonable. Given the pullback in the shares since my last write-up, this looks like it may be a good time for some due diligence on the name.

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Pacific Biosciences Looking More Interesting Once Again

Seeking Alpha: Pacific Biosciences Has Taken Some Big Steps Forward

It has been a while since I've written about next-gen sequencing company Pacific Biosciences (NASDAQ:PACB), but this is definitely a case where absence has made the heart grow fonder. The shares are up more than 75% from that last piece in March of this year, and up a solid 260% from my June 2013 Top Idea call.

What has changed? Well, for starters, PacBio has done a very good job of addressing the prior shortcomings (both real and perceived) of its technology, rolling out a series of improvements that have made the system more useful and economical for researchers. That has, in turn, supported management's goal of significant improvements in system utilization as measured by consumable sales relative to the installed base. The company also scored a significant deal with Roche (OTCQX:RHHBY), a major player in clinical diagnostics, to develop a platform suitable for human in vitro diagnostics.

More recently, PacBio launched a new platform called Sequel. The underlying technology has remained the same, but the company now offers a smaller, cheaper machine with a significantly improved throughput. While PacBio is never going to threaten Illumina (NASDAQ:ILMN) for rulership in next-gen sequencing, PacBio has strengthened its case that it has a very particular set of skills that ought not be underestimated.

I believe Sequel can take PacBio to a new level of system placement, utilization, and revenue, but then so too does the market. I had already expected a lot from this company and while there have been some aspects of outperformance, my refreshed fair value range of $10 to $11 doesn't leave huge obvious upside. I may yet be underestimating PacBio, but this currently looks more like a "consider on a pullback" opportunity than a "buy it all you can today" situation.

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Pacific Biosciences Has Taken Some Big Steps Forward

Seeking Alpha: Pacific Biosciences Still Trying To Claw Out Its Own Niche

When it comes to sequencing, it's still pretty much Illumina (NASDAQ:ILMN) and then everybody else. Illumina has earned this place of prominence through consistent R&D productivity and opportunistic M&A, and it makes life difficult for would-be challengers to the throne like Pacific Biosciences (NASDAQ:PACB). That said, PacBio has continued to make solid progress, with the shares up more than 100% from when I first wrote on them as a Top Idea and up about 20% from my last update.

The challenge for PacBio remains what it has been for some time - build upon what is currently the best available technology for long DNA sequences and make it faster, cheaper, and easier to use. Wrapped within that, the company needs to continue to develop new systems and new technologies, as well as develop opportunities in areas like plant genomics, clinical diagnostics, and epigenetics where its technology can really stand out.

As a stock, PacBio remains highly speculative. It's partner Roche (OTCQX:RHHBY) has continued to pursue its own alternatives in sequencing (while remaining at least outwardly committed to its PacBio partnership) and major rivals like Illumina, Thermo Fisher (NYSE:TMO), Oxford Nanopore, and 10X Genomics continue to work on technologies and systems that could ultimately capture some or all of PacBio's targeted markets. Still, 10% of the sequencing market and success with its Roche partnership could still support close to $1 billion in revenue well down the road and an $8 fair value today.

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Pacific Biosciences Still Trying To Claw Out Its Own Niche

Seeking Alpha: Volatile Pacific Biosciences Continues To Make Progress

Early-stage next-gen sequencing company Pacific Biosciences (NASDAQ:PACB) continues to make progress both with its system specs and its end-market development, but the path is not smooth or easy. The shares are still up about 80% from my initial Top Idea write-up, but down about a quarter from my last piece as investors fret over the progress and competitive risks of Illumina (NASDAQ:ILMN), Thermo Fisher (NYSE:TMO), and Oxford Nanopore, as well as questions as to whether the company's development partnership with Roche (OTCQX:RHHBY) will deliver the hoped-for revenue and profits.

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Volatile Pacific Biosciences Continues To Make Progress