Is Pacific Biosciences A Possible Takeover Target?

| About: Pacific Biosciences (PACB)

On December 18, I wrote an article found here warning investors to keep an eye on the following three biotechnology stocks: Pacific Biosciences of California (PACB), Opko Health (OPK), and Solazyme (SZYM). Each of these companies appeared to be positioning themselves for an upcoming rise in market value for the reasons entailed in the previous article. As of today, less than a month later, PACB is up 53.6%, OPK is up 12.7%, and SZYM is down 6.7%. The following details are written in order to analyze the developments that have since occurred for Pacific Biosciences of California.

Pacific Biosciences of California, Inc. is a leading technology platform when it comes to DNA sequencing. The company boasts the highest number of read lengths and some of the fastest sequencing run times. PACB competes against some of the more well-known sequencing companies such as Illumina (ILMN), Life Technologies (LIFE), and Roche (RHHBY.OB). The company's novel approach to studying the synthesis and regulation of DNA, RNA and protein allowed for the creation of the PacBio RS system. As shown in the graphic below, this new commercial product breaks open a new generation of sequencing technologies. Also seen below is a useful comparison table taken from Wikipedia which shows the advantages and disadvantages of the competition. It's important to remember that a recent press release found here also updates that table information making note that the PacBio RS has managed to increase its average read lengths to 5,000 bases.

In my previous article, I noted that the tone of management has appeared to shift in recent months. Based on the latest earnings conference call from 3Q 2012, it seems that the company has now recovered from its initial woes that once clouded over the PacBio RS platform after its commercial launch in 2011. Additionally, the company has boosted its product backlog, found increasing praise in academic research, and had several promising updates that were set to be released in the near future. All of this positive sentiment was backed by a convincing series of insider purchases by the CEO. It was also reinforced by the rare voluntary salary reduction by both CEO Michael Hunkapiller and CFO Susan Barnes.

On Sunday, January 6, Roche Chairman Franz Humer made a definitive statement in an article found here regarding its prior takeover attempt for Illumina. Roche wrote off its bid stating that Illumina was now "definitely off the table." In April, Roche had previously bid $6.8 billion for Illumina. In a follow up statement, Humer was also quoted to ambiguously say: "Illumina was a 'nice to have' and not a 'must have' for us. There are several alternatives to get hold of gene-sequencing technology."

The fact that "alternatives" exist should bode well for shareholders of PACB. In one respect, this remains indicative of the fact that Roche continues to actively consider other targets for gene-sequencing technology. In another regard, PACB now trades at a mere $141 million market capitalization as of January 10. The potential takeover price for a 3rd generation sequencer found in PACB remains quite attractive. This is especially the case as PACB makes greats strives to establish itself in its target markets.

On Tuesday, January 8, PACB announced that the PacBio RS would play an active role in the 100K Pathogen Project. As a part of this project, the company's technology would be used to sequence the genomes of at least 1,000 foodborne pathogen samples. The project was founded by the U.S. Food & Drug Administration, Agilent Technologies (A), and UC Davis.

The project serves two purposes for PACB. On the one hand, its role as a technology partner allows for increased revenues. However, more importantly the project has the potential to significantly increase the exposure of the PacBio RS. The high-profile project can have a significant effect of proving that the PacBio RS can advance the field of research through its findings. It can serve to further highlight PACB's unique capabilities to an academic audience, one of its primary client bases.

Pacific Biosciences has taken a significant hit in recent months. As seen in the graphic above, the company's revenues have largely declined in light of the bugs that plagued the PacBio RS after commercial launch. Yet the company has begun to turn itself around as announced in the prior quarter even if the effect won't be seen until the coming quarters. The indications for the company's future are beginning look favorable. The company still has over $119 million in cash and short-term assets despite its hefty cash burn. Yet the company's product is beginning to gain wider acceptance. This leads to an open possibility for a timely bidder to consider a takeover.

PACB Chart

PACB data by YCharts

If one thing is for sure, it's that the company CEO is more than ready for a higher share price. His large insider purchases made in the last month remain a convincing rationale that the company's future remains bright. The company's stock has taken off in the past week and a possible pullback may lay in store. Yet Pacific Biosciences remains an interesting biotechnology play that continues to merit investor interest going forward.

Disclosure: I am long OPK, PACB, SZYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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