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Investors looking for a pure play on genetic sequencing are in luck since Pacific Biosciences (Nasdaq: PACB ) made its initial public offering earlier this week. The scientific-equipment maker priced its IPO at $16, smack in the middle of its proposed $15-$17. That's quite a feat given the haircuts biotech IPOs have taken recently.
Investors have been able to invest in DNA sequencing technology before, but the three major companies that make genetic sequencers -- Illumina (Nasdaq: ILMN ) , Life Technologies (Nasdaq: LIFE ) , and Roche -- also sell other lab equipment or drugs, so they aren't pure plays. Helicos BioSciences was the closest investors could get, but its technology was DOA and the shares have since reached penny-stock level.
With the big boys playing, PacBio's competition will be fierce. But the new public company looks to have a technology that should help it avoid the same fate as Helicos.
A smart technology (minus the a)
PacBio's system is single-molecule, real-time, or SMRT for short. The company's PacBio RS is able to stick one DNA molecule through a nanopore and read the individual sequence of that DNA molecule. That differs from current offerings where DNA has to be amplified and the sequence is determined by the combined signal of multiple identical DNA molecules.
Reading a single molecule also allows for longer read lengths, which cuts down on sequencing time and increases throughput.
Like any DNA sequencer or other instruments -- think Intuitive Surgical's (Nasdaq: ISRG ) da Vinci systems or Hewlett-Packard's printers -- the placement of the systems is key because it drives revenue growth from selling reagents that are used over and over in the system.
PacBio has placed seven limited production machines and expects the commercial launch of the PacBio RS to start early next year. First and foremost, investors will want to watch the system placement numbers as they'll dictate revenue far into the future.
The real risk
While there's a possibility that PacBio never gets the RS system launched commercially or that it's unable to get the cost down low enough that researchers buy it, I think the bigger risk comes if the company is successful.
If we get into a situation where price is the biggest factor in which technology researchers use, investors will end up being the biggest loser. Margin wars hardly ever produce money makers.
Plus you have the issue of what to do next. Sure, there's high demand for DNA sequencing now, but there are only so many humans and other organisms that need their DNA sequence read, and they generally only need it done once. We're many years away from a peak, but the industry clearly offers diminishing returns on the way down.
The real winners
The hype of the first genome being sequenced seemed promising, but the hysteria fizzled out about as quickly as it started. Knowing the sequence of one human was helpful for determining the targets for drugs, but it didn't harness the true power of DNA sequencing: associating genetic differences with the efficacy of drugs.
As the price of sequencing falls, it will become routine for everyone in a clinical trial to have their DNA sequenced. That'll allow drug companies such as Pfizer (NYSE: PFE ) , Merck (NYSE: MRK ) , and Eli Lilly (NYSE: LLY ) to determine the genetic makeup of patients that respond well to their drugs. Doctors will thus be able to personalize the patient's drug treatment based on their genetic makeup.
What do you think? Does PacBio have what it takes to succeed? Is it a good buy at this price? Let us know by giving the stock a green or red thumb in Motley Fool CAPS and post a pitch backing up your rating while you're there.