Why Pacific Biosciences of California Shares Scorched Higher

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Pacific Biosciences of California (NASDAQ: PACB  ) , a developer of genetic analysis technology, skyrocketed higher by as much as 66% after announcing a deal with Roche (NASDAQOTH: RHHBY  ) Diagnostics.

So what: Under the terms of the deal, Pacific Biosciences will develop sequencing systems based on its proprietary single-molecule, real-time technology, which it will develop and sell exclusively to Roche. Roche will then use it for various in vitro human research projects. Pacific Biosciences will receive $35 million up front in cash and has the potential to earn an additional $40 million in development-based milestones.

Now what: Obviously, this is a big win for Pacific Biosciences, which has landed a juggernaut in Roche. Being the No. 1 pharmaceutical company in R&D spending around the globe, the deal doesn't shock me from Roche's standpoint, and it could actually serve as the next step in personalizing cancer care for patients through genetic analysis. Of Roche's 113 ongoing clinical trials, 73 are based in the field of cancer, so it has a big interest in improving patient quality of life and overall drug efficacy. Pacific Biosciences' genetic analysis tools could be that answer.

For Pacific Biosciences, the real allure here is landing the big name in Roche and getting the sorely needed $35 million in cash. Although the company did have $91 million in net cash prior to the deal, it's burning through cash at a rate of around $60 million per year, so this will add a nice cushion to its balance sheet. Ultimately, though, Pacific Biosciences has yet to establish a recurring stream of cash flow through the sale of its diagnostic machines, and until such time as it does, I would probably suggest keeping a safe distance.

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