New Leadership And Additional Capital Could Help Pacific Biosciences Deliver Major Revenue Growth

For gene sequencing company Pacific Biosciences (PACB), also known as PacBio, regulators’ refusal to allow Illumina (ILMN) to buy the company may have been a blessing in disguise. Since Illumina abandoned its bid early in 2020, PacBio has changed up its senior management team, secured its funding needs from SoftBank Group (SFTBF), announced a major partnership with Invitae (NVTA), and seen the share price rise from under $5 to over $50, before settling down at $32.16.

PacBio has always had good technology, but the company has struggled in the past to execute and deliver on the potential of that technology. With the latest iteration of the technology (the Sequel II system), former Illumina executive Christian Henry running the company, and increasing awareness of the potential of long-read genetic sequencing, the company now looks well-positioned to leverage that technology and deliver considerable revenue growth in the coming years.

Funding Worries Have Faded

Given its long-running string of operating losses and the fact that PacBio has never generated $100 million of revenue in a year, cash and liquidity have been an ongoing issue for PacBio, and were likely part of the reason why the company initially agreed to the Illumina deal. With few financing options outside of highly dilutive equity offerings, PacBio was essentially forced to underspend on R&D and SG&A, effectively undermining its own efforts to drive wider adoption of its systems and technology.

The breakup agreement with Illumina helped ease some of the cash crunch and the appointment of Henry as CEO did improve sentiment, but the turning point was SoftBank’s decision to invest $900 million in the company through a convertible debt offering in February of this year. With an effective conversion price of $43.50/share (or around 20.7 million shares), PacBio was able to secure very cost-effective funding from a committed investor that will almost certainly see it through to positive free cash flow.

Funding in hand, management intends to significantly expand the company, looking to “at least” double the number of sales representatives during 2021 and advancing a host of R&D projects ranging from future system development to refinements in sample prep and the core chemistry for the sequencing systems.

The Invitae Partnership Could Unlock Major Long-Term Potential

Back in January of this year, PacBio announced that it had agreed to a multi-year partnership with Invitae to take its core long-read sequencing technology and develop an ultra-high-throughput sequencing system, with the stated target of producing medically relevant whole genome sequences for less than $1,000.

Long-read sequencing has long held great potential for diagnostic applications like oncology and rare diseases, but the cost of the technology has prevented the realization of that potential. If PacBio can deliver a system that generates below $1,000 whole genomes without compromising accuracy, it will be a major step forward in unlocking the full potential of long-read sequency and it will significantly expand PacBio’s long-term addressable market opportunities (adding several billions of dollars of possible revenue).

Invitae will be subsidizing the R&D costs for this system, with the company getting preferential pricing in return. Importantly, PacBio will be able to sell the systems to other buyers, and it is not precluded from developing systems or related products for other diagnostic opportunities.

A Large, Growing Opportunity

Illumina has built a $3 billion-plus/year business on short-read sequencing, and while this technology is not going to go away, there are multiple markets where long-read sequencing could become the preferred option.

Plant genomes, for instance, are full of long sequences of repeating genetic data that trip up short-read sequencing, but that’s not an issue for long-read sequencing. Likewise, there are meaningful accuracy advantages to long-read sequencing in animal genomics and bacterial sequencing – relevant to both food production and pharmaceutical research.

In addition to the diagnostic opportunities in areas like oncology and rare diseases, long-read sequencing can also be used to detect and identify epigenetic modifications in DNA, which opens up major new areas of disease and treatment research.

Between the improvements in the Sequel II platform and expanding investments in R&D and marketing, PacBio has a very real chance of increasing its market share to double-digits over the next five to six years and possibly to 20% or more by the end of the decade. That, in turn, could push revenue to $1 billion or more in 2030, with free cash flow margins in the 20% range.

Wall Street’s Take

Pacific Biosciences’ Moderate Buy consensus rating breaks down into 2 Buys and 1 Hold. Given the $53 average analyst price target, shares could surge 65% in the year ahead. (See Pacific Biosciences stock analysis on TipRanks)

The Bottom Line

PacBio has completely transformed itself in only a little over a year. The top-notch long-read sequencing technology was always there, but now, the company also has the executive leadership and the capital to maximize the potential of the technology, putting the company on a whole new competitive level.

The shares do reflect that now, though, as the stock trades at around 25x 2023 sell-side revenue estimates. While there are other names with similar or higher multiples, the reality is that this is now a growth/momentum story driven by excitement over the long-term potential of long-read sequencing.

Disclosure: On the date of publication, Stephen Simpson did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.