Hype and biotech go hand in hand, but genomics takes exaggeration up a few extra notches. When genomics companies fail, they tend to crash especially hard. Yet every now and then, a company that is monumentally hyped falls flat and then figures out a way to become a solid, if not spectacular, player.
That's the storyline that's slowly taken shape at Pacific Biosciences (NASDAQ:PACB).
The Menlo Park, Calif., company had a few minutes of fame on Wall Street. Backed by big-name venture capitalists such as Kleiner Perkins Caufield & Byers, it debuted with an $800 million market valuation on its IPO day in fall 2010.
Of course, PacBio seduced investors with a promise of a technological revolution. Forecasts claimed that by 2013 it would sequence whole human genomes for $100, in about 15 minutes. The "third-generation" of sequencing had arrived. Medicine, we were told, would be transformed.
That was 2010. None of those predictions came true. Not even close. Few scientists bought the $700,000, 1-ton instrument. The few who did let it gather dust. Competitors sprinted ahead. Layoffs were made. New management was summoned. Two years after the IPO, PacBio had a market valuation of less than $70 million and a technology value of $0. Investors appeared to have flushed $600 million of cash down the toilet.
When I visited newly installed CEO Mike Hunkapiller in his office in fall 2012, I knew he was a historically important figure in the development of genomics. I also thought he was an understated, down-to-earth guy with the kind of experience necessary to execute a turnaround. But cash was running low, and so was confidence in the community of genomics researchers. I thought it was time to get the company obituary ready.
Turns out, PacBio didn't die. It may never threaten the dominance of Illumina (NASDAQ:ILMN) in genomics, and may never become profitable. But in Hunkapiller's do-what-you-say-you're-going-to-do-and-grind-it-out way, PacBio has improved. Its instrument now has a niche. Illumina is miles ahead on the factors that count most for customers -- speed, cost, and sequencing throughput (bandwidth). But PacBio is making a name for its high-accuracy genomes, its ability to detect structural genetic variations (like RNA transcripts) that other tools can't, and for creating high-quality genomes of small organisms such as bacteria, viruses, and worms. Last fall, PacBio's stock surged when it struck a deal with Roche to develop technology for the lucrative market to come in genomic diagnostics, where some of PacBio's technical advantages might be more highly valued.
"It's going to be very, very hard for anybody to take on Illumina," says Keith Robison, a computational biologist with Cambridge, Mass.-based Warp Drive Bio, who uses the various sequencing instruments and writes the Omics! Omics! blog. "But PacBio is a pioneer in finding applications that don't work well on Illumina." If you are a scientist working in one of those areas, this is a big deal. Robison added, "In my world, the microbial world, we want high-quality genomes, and PacBio is almost the only game in town."
Microbial genomes aren't what investors had in mind in 2010, but applications like that have given PacBio a pulse. By improving some unglamorous sample prep procedures, the chemistry, and engineering in some new optical enhancements for reading the DNA that passes through, PacBio has found a way deliver on some of its promise with "long reads" of DNA. By reading stretches of DNA that are an average of 8,000 to 9,000 bases long, PacBio can see subtle variations that are overlooked by Illumina and other technologies that read shorter stretches of DNA before assembling them into a genome.
During its frothier moments, PacBio touted its advantage in getting long reads of DNA, but couldn't always deliver. Earlier versions might get a few strands that were thousands of bases long, mixed in with DNA stretches as short as 500 bases. Recent upgrades have made it possible for PacBio to get true long reads -- in one reported case, as long as 54,000 bases -- that have wowed researchers, Robison said. More importantly, PacBio has found a way to consistently get the 8,000 to 9,000 base stretches that researchers crave when they think about assembling really high quality, accurate genomes, he added.
One effort ongoing at PacBio, with collaborators at Washington University in St. Louis and the University of Washington, has been focused on creating a "platinum genome" that will serve as a new, more accurate reference that all others use when they sequence a new genome and look for what's new. It may not mean much in a business sense, but if nothing else it helps with mindshare when customers do a run on a competing machine and have to compare the data with what came from a PacBio instrument.
Investors, by this point, are probably wondering: who cares? Where's the progress?
There are some modest developments to report on this front. PacBio had an order backlog of five instruments when I profiled the company in fall 2012; it now it has 13. Total revenue grew by a modest 8% last year, but the company grew its installed base of instruments by 25% in 2013. Utilization of its instruments grew by 50% -- meaning they are no longer gathering dust. More papers are getting published by scientists using the PacBio machine. Genomics commentators at the recent Advances in Genome Biology & Technology (AGBT) conference in Florida had nice things to say about PacBio, even while shaking their heads at the vaporware offered by others such as Oxford Nanopore.
At this point in the game, if PacBio were a baseball player, it would be a "post-hype sleeper." It's like the hot prospect who disappointed everybody his first couple years, tarnishing his reputation before finally starting to fulfill some of his potential. The baseball analogy would be Alex Gordon, the heralded Kansas City Royals outfielder. In basketball, it would be Washington Wizards guard John Wall.
Whether PacBio can ever reach its Hall of Fame potential is still very much in doubt. History indicates that a big instrument maker needs to generate $100 million to $125 million in annual revenue to turn profitable, Hunkapiller said. PacBio has a long, long way to go -- it pulled in $28.2 million in revenue last year. But PacBio delivered a fourfold improvement in its instrument's throughput in 2012, did it again in 2013, and has a goal to do it again in 2014, Hunkapiller says. That kind of improvement adds up.
Tim Hunkapiller, a veteran genomics consultant (and brother of the PacBio CEO), said the company still has its limitations. It isn't in the same league as Illumina on speed, cost, and throughput. It probably costs $30,000 to do a human genome on the PacBio instrument, while Illumina recently announced it has finally achieved the $1,000 genome. Robison noted that even when PacBio has a clear technical advantage, in something like microbial genomes, it has a hard time convincing many customers who have become accustomed to doing everything on an Illumina sequencer.
While scientists and engineers tend to fixate on the technical side of the machines, there's a human element here. What's the old cliche? Something about once bitten, twice shy.
"Clearly PacBio had overpromised a lot in the early going," said Tim Hunkapiller. "It got a lot of investments early by seriously, seriously overpromising. Some of it was hubris. I don't think it was dishonest. I remember when they said, 'By 2014, we'll have the whole human genome in 15 minutes.' At the time, you had to say, 'No, you're not, of course you're not.' They lost their way."
But just because a company lost its way once doesn't mean it's toast. If PacBio can hang around a few more years, and keep steadily improving in its own low-key way, it would be worth celebrating. Not only would it keep Illumina on its toes as a near-monopoly market leader, but it would also be able to catalyze a lot science that can't currently be done on the rival machines. That might even atone for some of the sins from a few years ago.
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Luke Timmerman has no position in any stocks mentioned. The Motley Fool recommends Illumina and Pacific Biosciences of California. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.