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Gene Sequencing Has The Bulls Talking And The Numbers Will Turn Bears

|Includes: ICLR, Illumina, Inc. (ILMN), MYGN, PACB, QGEN, SYNH, WGBS

Round of applause to the analysts with buy ratings and calls on PACB. After a 300% rally, Bio-rad (NYSE:BIO) and Illumina (NASDAQ:ILMN) felt the outside pressure and decided to collab on a next gen sequencer for single cell analysis. These sequencers are expensive, so when research institutions buy them, they want to know its fast and will save them money compared to an alternate method, which is usually some sort of assay based model. A lot of the time this an expensive outsourcing operation. However, thanks to the introduction of PCR machines and on-chip sequencing thousands of cells can be analyzed in hours.

NVS Chart

NVS data by YCharts

One of the manufacturers of such systems that trades at ridiculously low relative valuation to the rest of the market is WaferGen Biosystems (NASDAQ:WGBS). The reason I can say that it has a cheap relative valuation is because of the high demand for their systems in their surrounding market environment (Pharmaceutical Discovery/Development). For example, Juno Therapeutics (NASDAQ:JUNO) bought a private company, AbVitro, that single cell sequencing technology for $78M in cash and 1.289M shares of Juno, which were above $40/shr at the time of the acquisition. So Juno paid well over $100M to acquire single cell sequencing tech.

WaferGen

Technicals on this Nasdaq titan, have it running to book value at about 50 cents a share. However, with strong European exposure and the Luxembourg Institute of Health (LIH) introducing their systems to new drug developers, expect system sales to soar. The ICell8 was developed with the Karolinska institute in Sweden and has already attracted buyers like Genentech, University of Texas MD Anderson Cancer Center and the Broad Institute of MIT and Harvard. With a full suite of options, WaferGen is bound to either get acquired for their tax incentives in the Netherlands or become the cheapest option for researchers and outsourcing solutions in Europe. After a wave of IPOs last year, large companies are just now pursuing drug discovery in Europe and researchers with big budgets are hungry for tools to gather information.

BIO Chart

BIO data by YCharts

So how much did research institutions and drug developers pay for gene sequencing last year? A little over $2B and that's expected to grow 10 fold to $20B by 2020. Expectations for 2016 are over $6.5B and expected CAGR after that is 17.5%. Welcome to the big leagues. With Cap Ex and investment in R&D sky high the only thing that can stop a rally in the industry would be huge losses in pharmaceutical and biologic sales. Both have crushed expectations, so I would expect the same going forward.

Disclosure: I am/we are long WGBS.