Pacific Biosciences Rockets on Roche Diagnostics Deal

Surf's up yet again for Pacific Biosciences of California (NASDAQ: PACB  ) . Shares of the maker of DNA sequencing systems jumped more than 60% today following the company's announcement of a new deal with Swiss pharmaceutical and diagnostics firm Roche (NASDAQOTH: RHHBY  ) . Here are the highlights.

Viva in vitro
Under the terms of the arrangement, Roche will gain worldwide exclusive rights to market human in vitro diagnostics products based on Pacific Biosciences' Single Molecule, Real-Time -- or SMRT -- technology. These products will include sequencing systems and consumables, fitting right into Pacific Biosciences' razor-and-blades business model.

In return, Pacific Biosciences gets $35 million upfront and potential milestone payments of $40 million. More importantly, the company benefits from the large sales machine that Roche brings to the table. Roche is considered to be the world leader in in vitro diagnostics and tissue-based cancer diagnostics.

There's another key aspect of this deal that shouldn't be overlooked. Roche only gains exclusive rights to market human in vitro diagnostics products. Pacific Biosciences retained its ability to sell diagnostics products for all other markets, including sequencing technology for animals, plants, and research uses.

Spillover impact
Earlier this year, Roche walked away from a potential acquisition of Illumina (NASDAQ: ILMN  ) , another maker of DNA sequencing systems. At the time, Roche's chairman Franz Humer commented that "there are several alternatives to get hold of gene-sequencing technology."

Some speculated that Roche could turn to another buyout target. Pacific Biosciences was one possible candidate mentioned, along with Affymetrix (NASDAQ: AFFX  ) , Life Technologies and Luminex. How were these companies affected by today's news?

Illumina announced a deal of its own this morning related to a new partnership with Global Genomics to perform whole genomic sequencing for a large cardiovascular study. However, that partnership was overshadowed by Roche's arrangement with Pacific Biosciences. Illumina shares were around 1% lower in early trading.

Affymetrix, on the other hand, saw shares get a bump of nearly 3%. That might or might not be related to any positive spillover from the Pacific Biosciences news, though. Affymetrix has been on a roll since the end of July after it beat analysts' expectations for the second quarter.

The market appears to have taken a ho-hum reaction with respect to Luminex. Shares didn't move much from yesterday's close. Life Technologies was purchased by Thermo Fisher earlier this year. Thermo Fisher shares saw little change.

Looking ahead
Pacific Biosciences clearly comes out as a winner. An exclusive licensing deal with a big player like Roche could easily be a game-changer for the sequencing company. This stock was one of the worst performing health-care stocks of 2012, but Pacific Biosciences could be on track to be one of the best stocks for this year.

I think Roche wins also. Franz Humer was right when he said that the company had multiple ways to get sequencing technology. The deal with Pacific Biosciences sounds better than spending $6.8 billion for Illumina.

And the biggest winners, of course, are Pacific Biosciences shareholders. Thanks to today's news, their stock is worth a lot more than it was yesterday. That's a nice wave to catch.

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Editor's note: An earlier version of this article did not refer to Thermo Fisher's acquisition of Life Technologies. The Fool regrets the error.


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