Pacific Biosciences: Boom In Genome Sequencing Technology With 35% Upside
Summary
- Recently launched proprietary HiFi and SMRT sequencing technology leading to 47% growth in revenues for 2021.
- Long-term growth potential secured with strategic R&D partnerships with Invitae and Asuragen aimed at reducing the cost of genome sequencing.
- Global commercial expansion goal attainable with backing from SoftBank and increased hiring.
- We valued the company based on a P/S multiple due to the expected increase in sales in the future by 27%.
Source: Pacific Biosciences
Pacific Biosciences of California, Inc. (NASDAQ:PACB) provides genomic analysis systems to pharmaceutical companies, academic institutions, hospitals, and other institutes that specialize in genomic analysis. In this analysis, we looked at the potential for the new Sequel IIe system to be the main driver of revenues. Next, we also looked at the long-term growth opportunities for the company with its R&D partnerships. Additionally, we explored the company's ability to globally expand its footprint in 2021. We also looked at the risk of losing out to competition in China which has been a significant market for the company in the past. Lastly, we valued the company based on a P/S valuation.
Pacific Biosciences provides an end-to-end solution in genome sequencing from preparing the sample to analyzing the data. Furthermore, the solutions developed can address all three aspects of genome sequencing such as human, plant and animal, and clinical molecular diagnosis. Overall, the company operates in a growing field with a total addressable market of more than $20 bln.
Source: Pacific Biosciences
The company sells its products through a global network of distributors with the North American market comprising 47% of the revenues in 2020. The APAC and EMEA markets are roughly equal contributors to revenue with 29% and 24%, respectively.
Source: Pacific Biosciences
Sequel IIe Product Aiding Short-Term Growth of the Company
The global genomics market is extremely fragmented with the market leader, Illumina (ILMN) having a 43% market share. In comparison, Pacific Biosciences currently has only 1% of the global market share. Illumina appears to be the dominant company solely due to its first-mover advantage. Major pharmaceutical companies also have products in this market however, it is an extremely small part of their business. For instance, the genomics business of Thermo Fisher Scientific (TMO) accounts for only 2% of their overall revenues. The global genomic sequencing market was valued at $7.05 bln in 2020 and forecasted to grow at a CAGR of 27% until 2025. The fast-growing nature of the market is fueled by higher government spending on genomic sequencing as a consequence of the COVID-19 pandemic.
Source: Bionano Genomics, Thermo Fisher Scientific, Illumina, 10x Genomics, Pacific Biosciences, Businesswire
The current market leader, Illumina focuses on short-read genome sequencing which provides high accuracy but minimal amount of data on the genomic sequence. While Illumina has the first-mover advantage, Pacific Biosciences has developed a proprietary single-molecule, real-time sequencing ('SMRT') and HiFi sequencing technology which provides long-read genomic sequencing with the same as traditional short-read sequencing. The technology developed by Pacific Biosciences provides the same 99.9% accuracy as short-read sequencing while also providing longer reads of genomic sequencing.
Source: Pacific Biosciences
With the launch of Sequel IIe, Pacific Biosciences has also reduced the operating costs related to using their genomic sequencing equipment. Sequel IIe can reduce 90% of the data storage cost and cut down 70% to 85% of the time it takes to analyze the data. Sequel IIe also provides $700 per human genome compute cost savings according to the company. These cost savings are enabled due to the system's ability to analyze data itself and sync the results to a cloud that scientists can access. This development in technology allowed the company to increase the accuracy of long reads while also significantly reducing costs.
Source: Pacific Biosciences
The increased capabilities and advantages of Sequel IIe have helped the company increase its customer base as well.
Roughly one-quarter of Sequel IIes placed in the first quarter were new PacBio customers. - Christian Henry, President and CEO of Pacific Biosciences
The product is also extremely versatile as the product is used by researchers at Queen's University Belfast for human, plant and animal genome research. Another customer is a pharmaceutical company in Taiwan developing gene therapy. The Sequel system is also used at Labcorp which is contracted by CDC in the US to conduct genomic sequencing on positive COVID-19 cases. Overall, the Sequel IIe system has a wide range of applications. The graph below shows the forecasted growth in revenue and install base of the Sequel system until the end of 2021.
Source: Pacific Biosciences, Khaveen Investments
Unlocking Long-Term Growth with Strategic R&D Partnerships to Lower Costs
Pacific Biosciences recently signed a multi-year partnership with Invitae (NVTA) to provide significantly reduce the cost of genome sequencing for individuals. With the global genetic testing market set to grow at a CAGR of 10.1%, the partnership with Invitae will help increase the customer base as the cost of diagnosis is lowered. Both companies will share the R&D costs of the project to develop a cost-effective diagnosis. The global genome sequencing cost has been significantly reduced since the early 2000s. The objective of the partnership is to reduce whole-genome sequencing costs below the $1,000 mark.
Source: Gowing Life
The partnership is split into various phases with the first phase focused on Epilepsy. This is in line with Invitae's Behind the Seizure program that is focused on pediatric epilepsy by genomic sequencing and suggesting precision medicine on a case-to-case basis. According to Invitae, more than 50% of Epilepsy cases are genetic.
It is estimated that nearly 50 million people are living with diagnosed epilepsy worldwide, but the underlying cause remains unknown for approximately half of these individuals. - Robert L. Nussbaum, MD, Chief Medical Officer at Invitae
That presents a total addressable market of 25 mln potential customers. While the companies have not disclosed the exact financial split of the partnership, "both companies will commit significant resources", according to a press release by Pacific Biosciences. This could provide a significant opportunity for Pacific Biosciences as their 2020 revenue was only $79 mln.
Source: Pacific Biosciences
The multi-year partnership is expected to heavily benefit Pacific Biosciences as the first phase alone can add billions to its revenue. Furthermore, Pacific Biosciences also announced a research collaboration with Asuragen in August 2020. The collaboration will combine Asuragen's AmplideX PCR technology that enriches isolated parts of the gene with PacBio SMRT sequencing for an accurate long-read sequence of the genome. Overall, the collaboration will allow both companies to accurately read parts of the genome that were previously extremely difficult to read. This collaboration will allow diagnosis of rare diseases which were previously not possible with the short-read sequencing technology available in the market. The global rare disease genetic testing market was valued at $900 mln in 2020 and is forecasted to grow at a CAGR of 9.7%.
Source: Asuragen
Positive Cash and Capital Injection from SoftBank for Commercialization and Global Expansion
In January 2021, Pacific Biosciences announced plans to expand its global presence and double its commercial footprint. This led to the recent appointment of Neil Ward as Vice President and General Manager of the company's EMEA region. He is tasked to expand the company's footprint in the region with his expertise and deep relations within the genomics industry. Furthermore, the company also plans on increasing its headcount by 24% in 2021 to help with the expansion. A significant portion of this will be in Europe as the company is underpenetrated in the region.
Source: Pacific Biosciences
The expansion will also be helped with the increased cash currently available. In 2020, the company had a negative net debt which improves its cash position. This is an improvement from the past 5 years when the company had higher debt than cash. Currently, the company has roughly $1.16 bln in cash that was organically generated.
Source: Pacific Biosciences, Khaveen Investments
In addition to the cash the company has, they recently received a $900 mln investment from SB Management, a subsidiary of SoftBank Group (OTCPK:SFTBY). The investment is intended to support the company's growth initiatives.
We believe that PacBio's HiFi sequencing will be the de facto standard tool for population genomics fundamentally altering the practice of healthcare. - Akshay Naheta, Chief Executive Officer, SB Management.
SoftBank also has a 6% equity stake in the company. Pacific Biosciences will have to pay $52 mln from the $900 mln to Illumina based on an agreement to settle the breakup of acquisition talks that were previously held. Overall, the investment from SoftBank and their positive cash position provide $2 bln to utilize for global commercial expansion with a significant focus on the EMEA region.
The company's plans to globally expand with a focus on the European region may help significantly increase revenues as well. Currently, the EMEA region is forecasted to grow at a CAGR of 21%. Hence, increasing footprint in a market that is growing faster than the home market could help the company grow with increased growth in revenue as well.
Pacific Biosciences' EMEA revenues have increased by 145% YoY in Q1 2021. Furthermore, the company's objectives for 2021 include a 2x global expansion and increased global hiring efforts as well. Hence, based on this objective of the company and growth evidenced in the first quarter of 2021, we projected a 100% growth rate in revenues within the EMEA region for the company. For 2022 and 2023, we forecasted the revenue growth in EMEA by the market CAGR of 21%. Overall, this could increase the company's share of revenues from the region to increase from 24% in 2020 to 33% in 2021.
EMEA Growth | 2020 | 2021F | 2022F | 2023F |
EMEA Revenue | 19.1 | 38 | 46 | 56 |
Growth (%) | 100% | 21% | 21% |
Source: Pacific Biosciences, Markets and Markets
Losing China Revenue to Competitors
China is the fastest-growing genomics market at a CAGR of 25%. However, Pacific Biosciences appear to be losing revenue generated from China sales over the past 3 years. In 2019 and 2020 the company lost 24% and 29%, respectively. This led also led to the overall percentage of company revenues dropping from 26% of 2018 total revenues to just 14% in 2020. A plausible reason is the ongoing patent infringement lawsuit filed against the company by Personal Genomics in China. Furthermore, the company has also not mentioned any recent investments or efforts to grow the business in China.
At the same time, competitors have been able to grow their revenues in China with 10x Genomics growing at an astronomical pace. The main driver for this growth is their relationship with the Beijing Institute of Genomics. We believe Illumina will also grow in China due to its collaboration with Sequoia Capital China to support the genomic start-up ecosystem in China. Bionano Genomics recently made progress with WeHealth Shanghai as they adopt their system for genome mapping in reproductive health. The progress was announced at the Structural Variation Symposium hosted by the Shanghai Society of Genomics. This marks significant publicity for Bionano Genomics in China as well due to the prominence of the event within the genomics market of China. Lastly, the Chinese government has also been investing in Chinese genome companies such as BGI Genomics to support local businesses as opposed to international players.
China Revenue ('mln') | 2018 | 2019 | 2020 |
Pacific Biosciences | 20 | 15 | 11 |
Growth (%) | -24.4% | -28.5% | |
Illumina (ILMN) | 365 | 372 | 342 |
Growth (%) | 1.9% | -8.1% | |
10x Genomics (TXG) | 15 | 30 | 42 |
Growth (%) | 98.0% | 39.5% | |
Bionano Genomics (BNGO) | 2 | 1 | 1 |
Growth (%) | -75.2% | 34.7% |
Source: Pacific Biosciences, Illumina, 10x Genomics, Bionano Genomics
Valuation
Pacific Biosciences 5-year average revenue growth is -2.53%. In comparison to competitors, this is extremely low. The competitors experienced positive revenue growth in the past 5 years. However, we expect Pacific Biosciences to grow rapidly in the next few years as mentioned previously.
Company | 5-year Average Revenue Growth (%) |
Pacific Biosciences | -2.53% |
Illumina | 9.18% |
10x Genomics | 63% |
Bionano Genomics | 6.58% |
Source: Seeking Alpha
In 2020, the company had positive net earnings due to the payment Pacific Biosciences received from Illumina due to the breakup of the potential acquisition. The total payment amounted to $132 mln which was recorded as other income in the income statement. The 5-year average gross and net margins of the company are 39% and -73%, respectively.
Source: Pacific Biosciences
The 5-year average free cash flow margin of the company is -114%. The overall genomics industry is nascent leading to most competitors also having negative free cash flow. There are vast differences between companies in this market. Illumina is the only company with a positive 5-year average free cash flow margin of 23%. This is likely due to the company's first-mover advantage in the market. The high capex in 2020 was due to the purchase of marketable securities for $218 mln.
Source: Pacific Biosciences
To value the company, we used a P/S valuation method. Although the company's sales have been stagnant in the past decade, we believe the Sequel IIe system launched in 2020 will drive high sales growth in the future. We also determined the P/S multiple by using direct competitors to gain an industry average of 60.97x.
Company | P/S |
Pacific Biosciences | 60.78x |
Illumina | 20.15x |
10x Genomics | 59.58x |
Bionano Genomics | 103.38x |
Average | 60.97x |
Source: Seeking Alpha
For the revenue projections, we annualized the 2021 forecast based on Q1 2021 results. For 2022 and 2023, we projected the growth based on the market CAGR of 27%. We used the same market CAGR for all three revenue segments as the consumable and services segment is directly affected by the sales within the instrument segment. The consumable sales are expected to increase as instrument sales increase due to the direct link between the products. Similarly, the services revenue is based on the servicing performed on the instruments sold. Overall, we forecasted 2021 revenues to increase by 47%. This is based on the expectation of high sales from Sequel IIe systems and increased commercial presence as well. For 2022 and 2023, we forecast the revenue to grow at 27% which is the market CAGR.
Revenue Segments | 2020 | 2021F | 2022F | 2023F |
Instrument | 34 | 60 | 76 | 96 |
Growth (%) | -24% | 74% | 27% | 27% |
Consumable | 31 | 41 | 53 | 67 |
Growth (%) | -5% | 33% | 27% | 27% |
Services and Others | 13 | 15 | 19 | 24 |
Growth (%) | 2% | 10% | 27% | 27% |
Total Revenue | 79 | 116 | 147 | 187 |
Growth (%) | -13% | 47% | 27% | 27% |
Source: Pacific Biosciences, Businesswire, Khaveen Investments
Based on the revenue growth forecast for 2021 and the industry average P/S multiple, we see an upside of 35% for Pacific Biosciences.
P/S Valuation | 2021F | 2022F | 2023F |
Revenue ($ mln) | 116 | 147 | 187 |
P/S Multiple | 60.97 | 60.97 | 60.97 |
Valuation ($ mln) | 7,074 | 8,983 | 11,409 |
Shares Outstanding ('mln') | 198 | 198 | 198 |
Target Price ($) | 35.66 | 45.29 | 57.51 |
Current Price ($) | 26.48 | 26.48 | 26.48 |
Upside (%) | 35% | 71% | 117% |
Source: Khaveen Investments
Verdict
Pacific Biosciences proprietary HiFi and SMRT sequencing provide the same accuracy as short reads while delivering long reads of genome sequencing. These unique characteristics of the product are expected to see high demand from customers. The management highlighted the increase in install base since the launch of the product in late 2020. Furthermore, they also expect to gain new customers as a result of the Sequel IIe product. The company's plans to globally expand its presence can also aid in improving sales of its product. Expanding beyond their current reach of customers with new technology and increased cash of $2 bln is expected to help the company grow its business at a faster rate than before.
For long-term growth, Pacific Biosciences has signed multi-year partnerships with Invitae and Asuragen. The objective of these partnerships is to conduct research and development to reduce the cost of genome sequencing for customers. The reduction of cost to below $1,000 will be a significant achievement in the market as it will be accessible to more patients worldwide. While the growth drivers of the company appear to be promising, they are also experiencing shrinking revenues in China. Local and international competitors have been investing and growing within China while Pacific Biosciences has faced some patent infringement issues in the country. We believe this could be one of the reasons for the shrinking revenues in China. In conclusion, factoring all these factors along with the P/S valuation we rate Pacific Biosciences of California Inc. as a Buy with a target price of $35.66.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PACB over the next 72 hours. 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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