JuSun
The final couple of years had been wild ones for lots of life sciences corporations, and as if usually the case after wild events, the hangover has been painful. On prime of momentum traders fleeing the area, Pacific Biosciences (NASDAQ:PACB) has needed to cope with operational challenges just like the affect of the pandemic in China (a big market), lengthening gross sales cycles, and a whole lot of noise out there that has compelled clients to pause and type out their actual wants and the actual capabilities of the long-read techniques obtainable out there.
Down lower than 10% since my final replace, PacBio has fared fairly a bit higher than rivals like Illumina (ILMN) and Oxford Nanopore (ONTFF) and different sequencing-adjacent corporations like 10x (TXG), however the two-year comparisons are nonetheless fairly brutal. I proceed to consider within the core know-how and long-term alternative at PacBio, however it’s taking longer and costing extra to construct the enterprise, resulting in a decrease honest worth, although I nonetheless see worthwhile upside from right here.
An Ugly Quarter Earlier than The Subsequent Wave Begins
PacBio’s fourth quarter wasn’t disappointing relative to latest expectations, although the complete yr was nicely in need of preliminary expectations a yr or so in the past, as the corporate noticed weaker demand for techniques and decrease pull-through, in addition to disruptions to the gross sales cycle from new merchandise launched late within the yr.
Income declined 24% within the fourth quarter (and declined about 2% for the complete yr), with instrument income plunging 62% forward of the launch of the brand new Revio and Onso sequencers. Consumables income improved 11% yr over yr about 4% sequentially, with pull by means of (consumables per put in system) down about 15% yr over yr however up about 2% sequentially and enhancing each quarter after an enormous reset within the first quarter of 2022 brought on by the pandemic and lowered demand from China.
Gross margin plunged virtually 28 factors, with the corporate seeing a lot weaker margins on devices forward of the launch (pre-launch prices, much less environment friendly manufacturing, and many others.).
Together with the post-quarter inventory providing, the corporate heads into 2023 with near $1B in money on the books ($973M), which needs to be about sufficient to get the corporate to money circulation breakeven.
Revio Ought to Be A Large Step Ahead For Advancing Native Lengthy-Learn Sequencing
The most important latest growth at PacBio is the disclosing of Revio, the corporate’s new long-read sequencer. Whereas harnessing the identical underlying technological method because the Sequel II, the Revio highlights one of many underappreciated benefits of PacBio’s method – because the know-how is underpinned by semiconductor know-how (nanophotonic gadgets known as zero-mode waveguides), the corporate can leverage enhancements in semiconductor capabilities to drive extra succesful techniques.
To that finish, the Revio is the primary sequencer to make use of Nvidia‘s (NVDA) GPUs and the throughput of its new SMRT cell is 15x increased than the Sequel II, with no compromises in accuracy, decrease consumables necessities (together with no exterior nitrogen), and an improved workflow.
To scale back it to extra comprehensible numbers, PacBio administration claims that the Revio permits a consumer to run 1,300 full human genomes per yr at 30x protection for a value of lower than $1,000, one thing PacBio administration claims would value round $1,200 with the Oxford Nano PromethION or greater than $1,200 with Illumina’s new artificial long-read sequencing. As you may think, these assumptions will not be universally agreed upon, and Illumina claims the price of their know-how is “nicely below $1,000” (although I am undecided at what protection degree).
As PacBio has improved their techniques, rising the throughput, enhancing the workflow, and reducing the fee per end result, the market has responded and long-read sequencing is rising strongly, underpinned by demand from a variety of markets together with agriculture, microbiology, and human genetics (together with diagnostic functions like oncology). It is nonetheless lower than 10% of the entire sequencing market, however it’s closing in on that threshold and more likely to speed up as extra checks harnessing the know-how come to the market.
PacBio’s Brief-Learn Entry Appears Like A Promising Diagnostics-Pushed Alternative
As soon as a long-read sequencing pure-play, PacBio has thrown its hat into the ring for next-gen short-read sequencing with its Onso platform (based mostly on know-how acquired within the Omniome deal). The essential gist of Omniome’s sequencing-by-binding (or SBB) know-how is that it has decrease limits of detection than competing applied sciences and extra sensitivity/accuracy at a decrease value.
PacBio is pricing the Onso at $259K, on par with different mid-range techniques, however it affords Q40 accuracy versus Q30 from competing techniques (that means a 1-in-10,000 error charge versus 1-in-1,000). Coupled with a quicker time-to-result, this could make Onso an interesting possibility for diagnostic functions like liquid biopsy and in analysis functions concentrating on uncommon single-nucleotide variations.
PacBio is providing engaging bundled pricing for labs who order each the Revio and Onso, and I consider Onso can succeed past diagnostic and uncommon mutation functions. The truth is that nearly any lab utilizing long-read sequencers just like the Sequel II can even be utilizing short-read sequencers, and PacBio has an opportunity right here to realize some incremental share-of-wallet with long-read clients.
The Outlook
The PacBio story has lengthy been a “hurry up and wait” type of state of affairs the place traders proceed to attend for the expansion of long-read sequencing to drive instrument and consumable demand to a degree the place PacBio can truly generate income.
Administration is concentrating on money circulation breakeven in FY’26 (together with gross margin above 55%), however I feel the corporate will not attain annualized FCF breakeven till FY’27 and full-year optimistic FCF in FY’28 (and I do not anticipate 55%+ gross margin till FY’27). This is not truly a lot of a change relative to my prior mannequin – whereas my FCF quantity for FY’28 is slightly smaller now (and my FCF loss in FY’27 is slightly bigger), the fundamental path to profitability and optimistic FCF hasn’t modified.
That is to not say that there have not been adjustments to my mannequin. I am anticipating an extended income ramp and I am anticipating the corporate to burn extra cash to get there. Coupled with a better low cost charge, that drives my DCF-based honest worth from round $20 to $13.50, although I am nonetheless searching for long-term annualized income development of round 30% and long-term FCF margins within the 30%’s.
The Backside Line
Each iteration of PacBio’s know-how has seen significant operational enchancment and has made long-read sequencing incrementally extra viable. I’ve by no means believed that long-read sequencing would be the proper method for every thing (there are lots of functions the place it is simply greater than is required to get the job performed), however I do consider it is a significant market and one which PacBio is best-placed to steer. It could be some time earlier than we see one other run in life sciences once more, however I do suppose PacBio continues to have optimistic funding deserves for aggressive/risk-tolerant traders.
