Pacific Biosciences (PACB) is having a solid month.
Shares of the DNA-sequencing pioneer have gained 34% through the market close on Oct. 21, including a 16% jump that day.
The move was triggered by expiring options that led to a short squeeze, which is likely to provide only short-term relief for shareholders. The stock remains down 62% this year.
At the same time, much of the decline was deserved and was not a sign that the company was suddenly undervalued.
PacBio sports a market capitalization of $1.75 billion, which is expensive for a business that reported a first-half operating loss of $145 million on $69 million of revenue.
Nonetheless, shareholders with a long-term mindset are eager to find relief. A slew of recent announcements provides some hope.
PacBio announced the launch of new tools from 10x Genomics (TXG) and Twist Bioscience (TWST) that now can be used on its flagship DNA sequencing instruments.
Although the new products from technology partners and peers is good news overall, it may not deliver much revenue growth for PacBio or relief for investors.
An Important, Albeit Niche, Technology
PacBio developed a portfolio of DNA-sequencing instruments called Sequel. The platform enables what's known as long-read sequencing, which enables scientists to read large segments of a genome without interruption. By contrast, market leader Illumina (ILMN) offers what's known as short-read sequencing, which chops up a genome into many small pieces before reading it.
What's the big deal? Only long-read sequencing can peer into certain important parts of the human genome, including those that code specific brain functions – literally what makes us human. It's also better equipped for reading the genomes of other organisms, especially plants, that are structured differently.
Let's put it this way: When the Human Genome Project was completed in the early 2000s, many championed the accomplishment of finally knowing the full sequence of a human genome.
In reality, though, we had read only about 92% of the human genome. That's because short-read technology was used. By chopping the human genome into tiny fragments, certain sequences simply couldn't be read by the machines because no one knew how they fit back together. It's the genomic equivalent of Humpty Dumpty.
It wasn't until early 2022 that scientists read the human genome in its entirety. Instruments from -- you guessed it -- PacBio were used to close the gaps.
Good for Thee, Not for Me
Even with the value provided by Sequel systems, the reality is they're used sparingly. PacBio has only recently begun selling larger volumes of machines, but it still has struggled to get customers to use them frequently. That's a problem because selling the chemicals and kits required to run a machine is what delivers a lab-hardware business to profitability. These products are known as consumables.
That's what makes recent announcements of new consumable tools potentially promising:
- PacBio announced new products from Twist Bioscience that enable Sequel customers to peer at 400 "dark genes" at once (these are parts of the genome inaccessible to short-read instruments) and up to 50 genes that determine how patients respond to specific drugs.
- PacBio announced a new product with 10x Genomics that enables Sequel customers to perform single-cell analysis and RNA sequencing. This could enable the same breakthroughs for RNA as long-read technology enabled for DNA. It's expected to be used in conjunction with 10x Genomics lab hardware, consumables, and software.
These products will no doubt provide revenue growth for PacBio. They expand the types of experiments and research that Sequel customers can conduct.
But the bulk of the benefits are likely to flow through to the technology peers.
- Twist Bioscience will generate the bulk of the revenue from its new high-throughput, next-generation sequencing tools. They're literally called Twist Alliance panels. In other words, the consumables revenue will be generated by the technology peer, not PacBio.
- The launch of single-cell RNA-sequencing tools from PacBio will help 10x Genomics expand its customer base to include Sequel customers. 10x Genomics provides single-cell analysis products that require DNA-sequencing steps, but the lion's share of consumables sales in these experimental workflows ends up in its coffers. Case in point: The business generated $416 million in gross profit in 2021 – more than double PacBio's revenue total – by piggybacking on Illumina's installed base of DNA-sequencing instruments.
Everything Has a Price
Many individuals became investors during 2020 and 2021. It sure was a lot of fun to see share prices shoot higher and higher on a nearly continuous trendline. Short squeezes and short-term hype cycles powered many genomics stocks skyward, sometimes by triple-digit percentages in only days or weeks.
Unfortunately for new investors, not many responsible voices were in the room and guiding them through the mayhem. Left largely undiscussed were proper allocations to investments, reasonable prices to pay, and other important investing basics. It didn't turn out well.
For example, PacBio ended 2019 with a market valuation of about $800 million then ascended to an all-time high of almost $10 billion in early 2021.
The business has lost significant sums in every year it's operated, has struggled to find durable growth, was lagging on the most important metric for a lab-hardware business model, and was the second-best technology platform in the industry.
The only things that have changed are the company wisely padded its balance sheet during the liquidity bubble – and is now arguably the third-best technology platform. It could fall further down the competitive rankings in the next few years.
The lesson here is that investors own businesses, not technologies. No one owns PacBio's long-read DNA-sequencing technology; they own PacBio the business with an operating margin of negative 200%. A lot of things have to go right for the business to get a solid footing.
So although welcoming new R&D tools will expand the offerings and capabilities of PacBio's DNA-sequencing instruments for customers, the expanded portfolio is likely to deliver greater benefit to 10x Genomics and Twist Bioscience.
