Buy Into Pacific Biosciences IPO?

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.

Your turn
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.

Motley Fool Rule Breakers is always on the hunt for hot drug stocks and other cutting-edge picks. Click here to see all of our latest discoveries with a free 30-day trial subscription.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2010, at 2:48 PM, 1OBNA wrote:

    Insufficient information is given to assess the value of the stock with regard to a future income stream based on single molecule evaluation. If you get the right molecule the first time to hit the bullseye for the malady being suffered - that's great! But, many ills are not molecularly that specific, at least at this point in time. So, if the cost to do each run is $1,000 and you have to test multiple molecules ... the numbers add up quite rapidly. Maybe the large research companies can take that bite but few individuals with significant health problems, likely, can not.

    So, the question boils down to cost/molecule run multiplied by the number of different runs needed to find the answer specific to the disease and patient combination.

  • Report this Comment On October 29, 2010, at 3:23 PM, KCChiefton wrote:

    Don't forget the Helicos is suing PacBio (and Illumina and LIFE Tech) for patent infringement.

    Helicos was the first to invent and market the technology known as single molecule sequencing, and PacBio’s subsequent technology violates Helicos patents that extend to as far as 2028.

    http://www.xconomy.com/boston/2010/09/08/helicos-files-suit-...

  • Report this Comment On October 29, 2010, at 4:19 PM, Y2KPlus10 wrote:

    The article assumes each individual in a species has the same sequence. Ever person has a different sequence set. To make it even more intriguing every cell will have a slightly different sequence. The rapid and affordable sequencing (ala PacBio) will allow for genetic profiling at the cellular and organism level that has only been imagined in the movies. The origional promise was to sequence 30 human genomes per hour at a cost of 1K dollars (the whole genome not just 1 molecule). If this comes true we are talking about consumer genomics. Market size for first pass sequencing is ~8billion and growing.

  • Report this Comment On October 29, 2010, at 5:19 PM, TMFBiologyFool wrote:

    2010,

    That wasn't my assumption. Every individual will need their genome sequenced once. Yes, some cells, from a tumor for instance, will also be sequenced. But my point is that there's a finite number of things to be sequenced which will create a peak (albeit well in the future).

    -Brian

  • Report this Comment On October 29, 2010, at 5:36 PM, KCChiefton wrote:

    Anybody have thoughts on the lawsuit? How badly could this hurt PacBio if they're found to be infringing?

  • Report this Comment On October 29, 2010, at 11:09 PM, Y2KPlus10 wrote:

    After rereading the article I do see that you did not suggest that each person's genome was identical, oops. Yet the potential for sequencing and comparative genomics is still not in focus. If we look at cancer alone there is the potential to sequence the different regions of the tumor, or the same region over time to track the genomic changes plus the metastasis would likely be sequenced and compared with the individuals non cancerous cells, wich would also be sequenced. Even in healthy tissue there is the potential to track sequence changes over time (say every 10 years) to monitor for the genesis of mutations that may cause disease. While I am impressed with the fundamentals of PacBios technology It is likely that more powerful, simple and cost effective means will be developed (think nanopores and Raman spectroscopy) that eventually take over. Who knows, but it should be fun to follow over the next decade.

  • Report this Comment On November 03, 2010, at 10:48 AM, jargonsays wrote:

    On the helicose patent infringement. Im not a lawyer but I am a biologist who understands the technology. Helicose and PACB technology both operate at the single molecule level (sometimes referred to as 3rd generation sequencing), but the actual technology is very different. The PACB sequencers fix proteins onto nanopore light guide plates and flows DNA over this, whereas helicose fixes the DNA onto flat plates and flows proteins over it. Both get sequence but by very different means. This appears to be a huge technology difference to me when examined closely. In addition, the PACB sequencers read much longer sequences per molecule (thousands I think) wheras helicose is just 35 DNA bases. This difference is huge for many reasons I wont get into. And still one more thing: the PACB system appears capable of reading epigenetic information directly along with the genetic data. Epigenetic information is based on specific DNA chemical modifications that are known to regulate genes involved in cancer and development. Helicos can not do this.

  • Report this Comment On November 03, 2010, at 11:12 AM, jargonsays wrote:

    I think 10BNA is misinterpreting what "single-molecule" means. It is not about testing or looking for a single molecule in a run. It is really just a description of how the genomic sequence is generated (ie. directly, as opposed to indirectly after clonal amplification). This allows, apparently, for more rapid sequence generation and in the case of PACB, the potential to read more complex chemical information that resides on your DNA, and which becomes nullified during the clonal amplification process used in 1st and 2nd generation sequencing.

  • Report this Comment On November 03, 2010, at 11:26 AM, jargonsays wrote:

    The Helicos lawsuits are understandable but it seems driven mostly by desperation. Its stock price has dropped more than 20-fold since 2008 highs.

  • Report this Comment On November 03, 2010, at 4:33 PM, erranthero wrote:

    Several posts mentioned $1K per run (times the number of runs for complete genome sequencing). Any idea on the gross margin per run?

  • Report this Comment On November 09, 2010, at 7:05 PM, whomonkyoulus wrote:

    Jargonsays and Brian,

    Great job! Very thoughtful and informed analysis. I could not have said any of it better myself, though of course I can still try.

    Eventually consumer demand will emerge, it already has for cancer patients. If you are going to do it, you might as well do it right, which will require epi-geneitic information. I truly believe that this is a winning company.

    Oh, one other thing: there may be a theoretical finite limit to the number of organisms that can be sequenced, but that number is NOT fixed. It will only be a matter of several years before humans, using DNA vocabulary, begin rapidly expanding the species list. Also, like x-rays from the dentist, new sequences could be useful, as by definition our "epi"-genetics are constantly in flux, and may even someday call for medical treatment.

  • Report this Comment On November 15, 2010, at 1:09 PM, ate50eggs wrote:

    Another point about running out of things to sequence: This technology can be used to get the sequence of the transcriptome - the genes that are actually "turned on" at any given time.

    The transcriptome can be very dynamic and it has a lot of information that the genome doesn't have by itself - for example, information about how a cell is responding to a drug or a pathogen.

    There's no limit to how often someone might want to get transcriptome sequence. If it could be done cheaply every minute for 24 hours, someone would do it.

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