PACB - Pacific Biosciences: New Products Set To Drive Strong Growth And Margin Improvement

Summary

• PacBio has recently introduced new products that are expected to drive strong growth and improve gross margins over the next four to five years.
• The new products are the materialization of the company’s long-read technology, and can unlock revenue growth and gross margins improvements.
• If the company is successful, the investment case offers interesting returns.

Pacific Biosciences ( PACB ) has recently introduced new products that it expects will drive strong growth over the next four to five years. In addition to driving revenue, these products are expected to lower costs and enable the company to improve gross margins. These technologies are a key part of PacBio's strategy to sustainably grow and expand its business in the coming years.

At the core of PacBio's technology is the development and commercialization of single molecule, real-time ('SMRT') technology for genetic analysis. This groundbreaking technique allows for the detection and analysis of individual molecules in real-time, providing highly accurate and detailed information about the sequence and structure of DNA and RNA. PacBio's SMRT technology has a wide range of applications, including genomics, epigenomics, transcriptomics, and metagenomics, and is particularly well-suited for analyzing large, complex genomes and for studying rare genetic variations. Some examples of the various applications of PacBio's SMRT technology include:

Genomics: This technology can be used to analyze the entire genome of an organism, providing detailed information about its structure and function and helping researchers to identify genes and understand their role in various biological processes.

Epigenomics: PacBio's SMRT technology can be used to study the chemical modifications that occur on DNA and how these modifications affect gene expression, offering insights into the underlying causes of certain diseases and helping to develop new treatments.

Transcriptomics: This technology can be used to study the expression of genes and how it is regulated, helping researchers to understand the mechanisms behind gene expression and how it is controlled in different cells and tissues.

Metagenomics: PacBio's SMRT technology can be used to study the genetic makeup of complex microbial communities, such as those found in soil or the human gut, aiding researchers in understanding the role of microbes in various ecological and physiological processes.

PacBio has made significant investments in product development and has acquired Omniome and Circulomics. These acquisitions and investments have positioned PacBio to be one of the first companies to commercialize both highly accurate long-read and short-read technologies, providing customers with the right product for their specific application and serving the entire genomic sequencing landscape. The company has also continued to improve its highly accurate Sequel IIe platform and has launched the ability for customers to examine epigenetic markers with each sequencing run at no additional cost.

PacBio's new products: Revio and Onso

PacBio has unveiled the Revio long-read sequencing system, which will allow customers to scale their use of PacBio's highly regarded HiFi sequencing technology.

The main benefits of the Revio long-read sequencing system are its ability to sequence up to 1,300 human whole genomes per year at 30-fold coverage for less than $1,000 per genome, its high throughput and affordability, and its use of the innovative HiFi chemistry, which produces accurate native long reads with uniform coverage, exceptional application performance for variant calling and assembly, and accurate DNA methylation detection. The system also features state-of-the-art NVIDIA GPUs, providing a 20-fold increase in computing power compared to PacBio's Sequel IIe system, and requires 50 percent fewer consumables than the Sequel IIe.

In addition to its efficiency and cost-effectiveness, the Revio long-read sequencing system includes significant improvements in workflow and convenience, such as the ability to set up a subsequent run while the current run is in progress, providing increased schedule flexibility for operators and maximizing system throughput.

PacBio has also announced the start of external beta testing for its Onso benchtop short-read DNA sequencing platform. Onso is expected to offer an extraordinary level of accuracy through the use of PacBio's unique sequencing by binding ((SBB)) technology. The company plans to begin taking orders for Onso in the first quarter of 2023 and expects to begin shipments of the system in the first half of the year.

The main advantages of the Onso benchtop short-read DNA sequencing platform are its accuracy, achieved through the use of PacBio's unique SBB technology, and its high throughput and flexibility. The system is designed for compatibility with a wide range of library preparation types, single-cell analysis solutions, and whole-genome sequencing and other targeted methods. It is also expected to offer improved workflow and efficiency, allowing scientists to process many more samples with the same output as other available short-read sequencing platforms.

PacBio has selected three beta testing sites for Onso: The Broad Institute of MIT and Harvard, Corteva Agriscience, and Weill Cornell Medicine. Scientists at these institutions will have the opportunity to test Onso's specifications through the beta testing process.

PacBio's growth strategy

PacBio's commercial strategy is focused on driving rapid adoption of its Revio long-read sequencing system by converting existing Sequel II/IIe customers and attracting new PacBio customers. The company plans to demonstrate the level of accuracy of its Onso benchtop short-read DNA sequencing platform in the field and showcase how it can transform research in needle-in-haystack applications.

In order to drive toward positive cash flow, PacBio will leverage its current infrastructure and expand partnerships across the ecosystem and workflow to increase customer adoption of its sequencing by binding ((SBB)) and HiFi technologies. The company is also focused on the development of ultra high-throughput and benchtop long-read sequencers and the next generation of SBB sequencers.

Risks for investors to consider when evaluating PacBio

PacBio's single molecule, real-time technology may have some significant disadvantages that investors should be aware of. One major concern is the high cost of this technology, which may limit its accessibility to some researchers and institutions. Additionally, the data generated by PacBio's SMRT technology can be very large and may require specialized software and computational resources for analysis, which can also be a limiting factor for some researchers.

Another potential issue is that PacBio's SMRT technology may not be suitable for all types of genetic analysis, and there may be cases where alternative technologies may be more appropriate.

On the broader macro level, PacBio is facing a number of challenges that could impact its business. These include longer purchasing cycles, foreign exchange headwinds, increased competition, and slower-than-anticipated ramping of utilization by some larger customers in the EMEA region. The COVID lockdowns in China have had a greater impact on the company's business than expected, and it may take longer for customers to return to pre-lockdown levels. Additionally, there is a risk of localized lockdowns being reintroduced, which could further impact PacBio's business. Investors should carefully consider these and other factors.

Investment case

PacBio estimates the sequencing market to be close to $14 billion by 2026. The company has announced its intention to increase revenue at a compound annual rate of 40-50% through 2026, with the ultimate goal of generating over $500 million in revenue by that time. To accomplish this, PacBio will be focused on disciplined capital allocation, including investments in research and development, as well as strategic acquisitions and partnerships. Additionally, PacBio will work to improve gross margins by increasing efficiency and reducing costs, with a target range of 55-60% or higher by 2026. The company also aims to achieve positive cash flow in 2026 through careful management of expenses and capital investments.

If PacBio is successful in achieving its growth and efficiency targets, I think it is likely to be valued at more than twenty times its revenues by 2026, assuming a normalized macroeconomic scenario. Two possible scenarios can be considered: a "bull" scenario, in which the company reaches $500 million in sales and approaches break-even cash flow, and a "bear" scenario, in which the company reaches only $200 million in sales and falls short of being cash flow positive.

If the bull scenario plays out, the market may assign PacBio a multiple of 20 times revenue per share, recognizing its strong performance. In the bear scenario, the market may assign a lower multiple of 10 times revenue per share, reflecting the company's lower sales and cash flow. The results of these scenarios are as follows:

Based on the probabilities in this model, it appears that the likelihood of PacBio achieving the bull scenario may be underestimated. In my opinion, the probability of this scenario occurring is closer to 40%, which would value the company at $14 or more than 50% its current price. Overall, I believe that the risk-reward ratio is positive for this investment, and the new product launches seem to support it.

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