Pacific Biosciences of California, Inc. (PACB) is the developer of the PacBio RS II, a next-generation sequencing system expanding the field of science. The company develops, manufactures, and markets the high-end sequencing platform. This places the company in the same industry as more recognizable names such as Illumina (ILMN) and Thermo Fisher (formerly Life Technologies Corporation). The system utilizes Single Molecule, Real-Time DNA sequencing technology which provides the highest consensus accuracy and longest read lengths in the gene-sequencing industry.
The company remains a lesser known name despite its significant advances in technology. Initially plagued by high error run rates, the original PacBio system was largely dismissed by the industry early on. Yet critical software patches and other improvements have since resulted in near flawless results. This prompted the company to re-launch its brand with the PacBio RS II. The accelerating recovery of the company's stock remains a symbolic testament to this growing market acceptance of the company's platform in recent months as witnessed in the chart below.
A Look At The Financial Results.
On February 4, Pacific Biosciences released its Q4 2013 earnings results. By the day's end, the company's stock had fallen over 11% to $6.37 from the prior close of $7.20. Despite beating analyst estimates to the upside, investors remained far from satisfied over the length of time Pacific Biosciences will need to achieve profitability. At the end of Q4 2013, Pacific Biosciences maintained a net loss of $17.23 million for the quarter while carrying cash and investments of $112.53 million.
While the company's losses continue to be stemmed year-over-year, impatient traders appear less willing to endure the wait. Annual net losses for Pacific Biosciences have been $140.16 million, $109.39 million, $94.47 million, and $79.29 million for the years 2010, 2011, 2012, and 2013 respectively. With this multi-year trend in mind, it appears that the company may require many more quarters before it becomes profitable.
Nevertheless, there were several significant achievements that may have been glossed over by some investors. Little attention appears to have been given to the 54% increase in revenue as the company raised its Q4 results to $9.1 million versus the prior year of $5.9 million. Indeed, even less recognition may have been attributed to the 226% increase in margins as the company increased its gross profit margin from 10.7% to 34.9% year-over-year. Several additional highlights can be derived from the quarterly conference call found here.
Q4 2013 Earnings Highlights.
- Bookings. Pacific Biosciences booked orders for 9 PacBio RS II systems in Q4 2013. With 25 bookings for 2013, this represents a more than 100% increase over bookings for 2012.
- Installations. After installing 5 systems this last quarter, Pacific Biosciences now has a total of 88 systems installed. It's important to remember that each installed system helps to contribute to the company's consumable revenue when they're put to use by clients.
- Consumables. Consumable revenues grew 84% year-over-year. Much of this was due to a 25% increase in the installed system base. However, there was also a 50% increase in average revenue derived on a per-system basis.
- Government Shutdown. Although this last quarter was initially forecasted to be a slower period due to the U.S. government shutdown, business with the U.S. government customers actually experienced strong growth due to a quick recovery.
- Product Enhancements. Over the past year, several product enhancements quadrupled the throughput of the PacBio RS II system. The latest releases have enabled some customers to report average read lengths that surpass 8,500 base pairs. The longest reads have exceeded 40,000 bases.
A Look At Insider Purchases.
One interesting aspect of Pacific Biosciences which should continue to be highlighted for investors is the growing confidence seen by the company's leading officer. CEO Michael Hunkapiller has significantly added to his position in recent months. On November 21, the officer added 200,000 shares of the company at $3.61. Within a month, he added another 100,000 shares at a higher price of $4.13. With no other insiders selling any shares, these latest purchases continue to represent a rather strong conviction by the head officer who now owns 1.8 million shares. This thought is fortified by the fact that Hunkapiller only had 100,000 shares prior to August 2012.
(Chart information derived from the site found here)
Now supporting a market capitalization of $430.79 million as of the last price of $6.50, Pacific Biosciences appears to be a significantly undervalued company when compared to its competitors, Illumina and Life Technologies. Each of these companies carry valuations of $19.88 billion and $13.14 billion respectively. While each of these companies support sequencing systems that sell for a much lower cost, the high-end systems offered by Pacific Biosciences is rapidly proving to be the performance standard throughout the industry.
Most recently, the company showcased several conference videos on its company blog. Representatives from the Salk Institute for Biological Studies, Solazyme Inc. (SZYM), UC Davis, and the USDA Agricultural Research Service all vouched for the significant advancements made due to the PacBio RS II when contrasted against platforms made by the competition. When combined with the increasing number of system sales, the testimonies appear to add more weight when it comes to monitoring the market acceptance of the PacBio RS II.
While the performance of Pacific Biosciences may appear to be slow for many investors, the ability of the company to grow both its bookings and its margins remains an impressive feat. With every newly installed machine and product upgrade, Pacific Biosciences continues to generate additional consumable revenue as its installed base is put to use by its existing clients. Investors may be concerned about ongoing losses to date, but the trajectory of the trend suggests that Pacific Biosciences is gaining significant traction against its competition.