Pacific Biosciences of California Inc (PACB)

[Paulieme]

yesterday at 8:21am

William Blair: Conclusions From Meetings at Large Genome Center
• We recently hosted a group of investors at a large genome center. In this note, we
provide our conclusions and our latest models for Illumina and Pacific Biosciences;
our Pacific Biosciences model includes our revised revenue build following the
company’s launch of the Sequel.
• Stock Thoughts. It is fairly clear that Illumina’s technology is not going anywhere
anytime soon, especially in these large production centers. The stock popped after it
replaced Sigma-Aldrich in the S&P 500 and is now trading at 50 times our 2016 EPS
estimate and seems on its way back to trading on total addressable market (TAM).
Estimates for 2016 look achievable, but we would like to see more conservatism
factored into 2017 and 2018 estimates to position the company better to beat
estimates and raise guidance. Illumina remains well positioned in a large addressable
market that is far from mature. Thus, we maintain our Outperform rating on the
stock. While it is possible that Illumina has a sizable product launch at the upcoming
JPMorgan conference, perhaps if the company focuses more on content development,
this would be a catalyst to drive a rebasing of longer-term estimates, offering
investors a better entry point to position long in the name into 2016.
• With regard to Pacific Biosciences, this center has not yet had any inbound projects
for long-read sequencing, but it sounds like a large project might be percolating. At a
minimum, it seems the center may bring a new Sequel into R&D. Our estimates
included below are a first guess of what product sales could look like over the next
two to three years. Demand could be higher or lower than our assumptions (e.g., we
assumed a doubling of annual placements of the Sequel relative to the RSII, but could
placements be as high as a NextSeq?), but we do not have enough data at this point to
see how far off we are. At roughly $10, the stock has reached where we believed it
could trade based on our revised income statement (revenue of about $150 million in
2018) and using appropriate multiples. Investors who have been in the stock since $4
to $5, however, could consider taking some off the table and leverage any volatility
around the launch (as it ramps up margins, etc.) to rebuild positions. PacBio’s stock
has a lot of momentum currently, however, and we have received increasing inbound
calls on the name. The demand picture remains quite strong and we believe the
price/specs of the Sequel fundamentally change the demand picture for PacBio’s
products; we reiterate our Outperform rating.
• Conclusions From the Genome Center Tour. The Genome Center’s X Tens are
primarily being used for human whole genome sequencing, although the center is
also sequencing a few other organisms’ genomes on the X since Illumina has opened
the platform to nonhuman species. While other service providers may be more
focused on price, this center has opted to compete on quality and service.
• As a service provider, the center’s instrument capital expenditure decisions are
usually based on project dynamics. The center has seen an influx of larger project
sizes and thus is not sample-limited. A lower per-genome price point should help
drive continued growth in large-scale projects that are funded. At present, the X
platforms are running close to full capacity. Thus, it seems feasible the center could
expand its X Ten fleet by a few machines over the next year or so.

• The center’s HiSeq 2500s are being used for exome sequencing, ChiP-seq, Rna-Seq, metagenomics, and epigenetics
(bisulfite sequencing). Given the center’s focus on larger-scale projects, the 2500s are running below capacity; thus, it is
unlikely the center will upgrade to HiSeq 3000/4000s.
• Given the ecosystem that has evolved to support Illumina technology (including sample prep, informatics and analysis
tools, application-specific workflows), Illumina is likely to continue to be the platform leveraged in production
environments—even if another platform is commercialized that is cheaper (while a platform that is 2 times cheaper with
the same specs might chip away at Illumina’s installed based, a platform would have to be at least 3 times cheaper with
similar specs to drive a meaningful replacement cycle).
• For some applications, there may be advantages to long-read/long-range technologies; however, this will ultimately
depend on the price of the sequence in aggregate compared with Illumina derived sequence only and depends on the
specific application. The center has yet to have meaningful inbound demand for these types of technologies. As the center
continues to ramp up resources, it may be able to shift more focus to R&D-type activities, which would most likely be
some sort of long-range/long-read technologies (i.e., PacBio’s Sequel and/or 10x Genomics’ GemCode Platform).
• One area that could be further addressed by the platform vendors is true sample-to-answer solutions (meaning
integration of DNA extraction and library prep); while the NeoPrep could help address some of this, current throughput of
16 samples may limit its use at a larger center.
• Ultimately, clinical continues to be considered a key future source of growth. To fuel a clinical market that is a factor of 10
times larger than the research market, however, would require distribution of platforms into smaller labs via true sampleto-
answer solutions. How do we get there? The most obvious way is microfluidics and miniaturization.






Read more: http://bridgeandtunnelinvestor.com/thread/2055/halts-revolocity-launch-complete-genomics?page=1#ixzz3sZf2HHi0