Pacific Biosciences of California Inc (PACB)

[Paulieme]

PacBio Is A DNA Sequencing Standout!!!!

With this disruptive possibility, PacBio has taken smart steps to compete in the sequencing market, which will be worth an estimated $10.6 billion by 2021. With the sequencing market looking for something new and new methods for solving complex problems that Illumina can't, PacBio is the answer that researchers are increasingly turning to. Their ability to support RNA-seq, HIV analysis, complex genome rearrangements and support rapid de novo genome assembly suggests that their position within the field will continue to strengthen over the next years. To that end, PacBio has begun entering critical markets in Asia, a region which is expected to demonstrate some of the most rapid growth in sequencing over the next few years. They have also continued to support their products with regular chemistry upgrades, which also increase yield and lower costs.

As the sequencing market continues to shift away from Illumina for questions that short-read technologies still cannot answer, PacBio serves as a strong option for competition. If they are increase their platform's use to 10% of the NGS market by 2021 (from 3% in 2013) they could see revenues of $1 billion. With a gross profit margin from last quarter of 39.9%, PacBio could see gross annual profits of around $400 million in less than 5 years. With this growth in profit the operating expenses are not expected to increase nearly as rapidly, as the adoption of the technology will provide support for further adoption - once researchers see what's being done, they will follow up with their own complex projects. PacBio's placement of multiple Sequels and maintenance of their RS II at other locations over the past year supports this continued adoption, and the replacement of RS II platforms with Sequels suggest that users are satisfied with the offerings. If operating expenses were maintained slightly higher than this past quarter ($32.4 million - $129.6 million annual rate) and reached $150 million, PacBio would be able to generate a net profit of $250 million, with 115.59 million shares, that would equate to a per-share profit of $2.16. We do not expect the operating expenses and R&D to advance more rapidly over the next few years, as the company is now in support mode for it's Sequel, instead of trying to develop a new platform, they are working on perfecting the sequencing offerings, which are much cheaper to develop.

In looking at Illumina's forward PE ratio for 2017 at 36, we can calculate the value of PacBio in 2020 if their market share improves, and continues on its current upward trajectory towards earnings of $250 million in 2021. Based on a more conservative forward PE of 25, due to its continued competition with industry leader Illumina, PacBio would be expected to be worth $54 in 2020. In a pessimistic scenario, if PacBio were to only achieve around 5% of the market in 2021, the potential share price would drop to $10.75, while achieving 12% of the market would see the shares valued at $71.25. With Friday's close of $4.47 this would represent a 2.4X to 15.9X multiple as the potential share price range within 3 years.

Conclusion:

With Next Generation Sequencing continuing to grow rapidly over the next few years, the key players in the field make for strong investment opportunities. Although Illumina is the market leader and provides positive cash-flow while waiting for further growth, PacBio is a rapidly growing disruptor who doesn't have to wait for the market to grow to improve their position. As they offer a technology drastically different from the current leader, which also provides solutions to previously complex problems, they will continue to siphon market share away from Illumina over the next few years. Increasing market share while the markets are rapidly growing will shift PacBio from a cash-burning company to a rapidly growing profitable competitor to Illumina. As soon as profitability is demonstrated we expect a re-rating of the shares, which we expect to see move into the double digits within the year, placing a price target of $10 for the end of 2018. By 2020 we expect that the shares will be valued at $54 as they continue to account for the exciting growth prospects and rapid increases in profits that PacBio can achieve as the disruptive sequencing technology of the next 5 years. https://seekingalpha.com/article/4114022-pacbio-dna-sequencing-standout