Which Is a Better Buy: Complete Genomics or Pacific Biosciences?

Today's battle pits recent DNA sequencing IPOs Complete Genomics (Nasdaq: GNOM  ) against Pacific Biosciences of California (Nasdaq: PACB  ) . Which one is the better buy? Let's have a closer look.

What they do
Technically, Complete Genomics and PacBio aren't direct competitors, but they're close enough. Complete Genomics specializes in sequencing DNA for researchers; PacBio sells DNA sequencing equipment for researchers. It comes down to whether researchers will outsource their sequencing or do it themselves, so the two end up directly competing with the funds researchers have to carry out experiments.

And the two have plenty of additional competition. Illumina (Nasdaq: ILMN  ) , Life Technologies (Nasdaq: LIFE  ) , and Roche have been selling DNA sequencers for a while. Illumina also offers a sequencing service direct to patients.

Both Complete Genomics and PacBio are still in the ramping-up stage. Neither is turning a profit nor should you expect one soon. Fortunately, they have an influx of cash from their IPOs to keep things going for a while.

As of the end of September, Complete Genomics had sequenced 400 genomes to date, 300 of which were completed in the third quarter. At the time, the company had a backlog of more than 800 genomes.

PacBio had sold seven of its limited production models as of the middle of September and had orders for four more that were scheduled to ship by the end of the year. We should get an update on the commercial launch of its machine when PacBio has its earnings conference call tomorrow after the stock market closes.

What investors think
One of the things David Gardner looks for when picking stocks for the Motley Fool Rule Breakers newsletter is strong past price appreciation. This isn't technical analysis mumbo jumbo, but there's something to be said for a company that other investors have confidence in.

Complete Genomics and PacBio don't have a very long history, but so far their ability to catch the fancy of investors has been fairly limited.

Company

Expected IPO range

Actual IPO price

Price Close Nov. 26

Complete Genomics $12-$14 $9 $7.76
PacBio $15-$17 $16 $11.53

Source: Company releases and Yahoo! Finance.

What this Fool thinks
Investors are rightfully timid about the DNA sequencing hype. Remember how the Human Genome Project was going to save the world? Human Genome Sciences (Nasdaq: HGSI  ) was worth more than $100 on a split-adjusted basis in early 2000. Ten years later, with the company on the verge of getting its first drug approved, the stock is trading at only $25.

Famous last words or not, I think this time it's different. We know a lot more about what genes do now than we did 10 years ago, and the price of sequencing has come down considerably. At some point, getting a DNA sequence will be a routine part of a newborn's first checkup, and everyone who is already alive is going to have to catch up. There's a lot of DNA to be sequenced and therefore a lot of money to be made.

But investors do need to be careful. The market may be huge, but there's a diminishing size as more people get their genomes sequenced since your genome doesn't really change.

That's different than say the software market, where the potential customers remain constant since Microsoft can convince current customers to upgrade to newer software.

The best long-term hope for Complete Genomics and PacBio is probably to expand into other markets, just as Intuitive Surgical (Nasdaq: ISRG  ) has expanded the use of its robotic surgery machines into additional surgical procedures. Tumors often have genetic mutations, so they'll likely get sequenced to determine the best drugs to treat the cancer. And you could use DNA sequencing to identify viruses and bacteria.

Still, I think this is ultimately a boom-bust industry, albeit with the bust still many years away.

Which one?
If you're interested in trying to catch the boom and get out before the bust, both Complete Genomics and PacBio look like a good choice to benefit from an exponential increase in DNA sequencing.

It's too early to make a definitive call, but of the two, I like PacBio better because I'm not fond of the low-cost, high-volume business model. Sure, it's worked for Costco and Wal-Mart, but I like PacBio's razor and blade model -- sell the machine once and then continue to supply reagents year after year -- a little better.

Which one is your pick? Take the poll and let us know your reason in the comment box below.

Costco, Microsoft, and Wal-Mart are Motley Fool Inside Value picks. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Costco and Illumina are Motley Fool Stock Advisor selections. Wal-Mart is a Motley Fool Global Gains pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Costco, Microsoft, and Wal-Mart. 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.

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 (7) | Recommend This Article (9)

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 November 29, 2010, at 7:15 PM, ironyworks wrote:

    Seems to me to be investing in shifting ground.

    Both companies are vulnerable to technological advances that can appear out of left field overnight.

    They are motes without a moat.

  • Report this Comment On November 29, 2010, at 7:40 PM, immunoboy wrote:

    The PACBIO technology is distinct from Illumina and Roche. Illumina is the leader and specializes in millions of short reads. The appeal of PACBIO is the much longer reads (over 10X longer) and the much cheaper reagent costs than Illumina. Each new advance has not been extending the length of the read, just increasing the number of reads (many millions) with increased reagent costs. The excitement with PACBIO is changing this paradigm. As each Illumina lane gets bigger and more expensive, it gets harder and harder to justify smaller projects on their machines.

  • Report this Comment On November 30, 2010, at 9:50 AM, adam6393 wrote:

    Interesting article, yet peculiarly irrelevant I feel.

    Firstly, demand for sequencing will never be a limiting factor, or at least not for many, many years. The real investment question is regarding the new technology of 3rd Generation sequencing.

    Illumina, have sown up the marked place in 2nd (Next) Gen sequencing with their GAII product, but this will be replaced by the faster and more cost efficient 3rd Gen sequencing technologies.

    The 2 main technologies are these: Pacific's Taq single molecule read sequencing or the alternative Nanopore strand reading technology being developed by Oxford Nanopore (private company).

    Pacific seem slightly more advanced, but the length of the reads is as yet not sufficient to move scientist away from the GAII.

    Oxford Nanopore are Illumina's big bet, with 2 huge rounds of investment from the market leaders putting themselves in line for buy-out or in-licensing of the technology. Recent recruitment at ON suggest they are in the final stages of development (bioinformaticians to develop the software for aligning the genomic reads).

    I'm putting my money in Illumina and the Nanopore technology.

    Whichever 3rd gen technology wins, will be being used at Complete Genomics within 6 months as it will bring the cost of sequencing to a fraction of the cost. But my feeling is that hospitals, labs and the Sanger centre will continue as before and do all their sequencing in house.

  • Report this Comment On November 30, 2010, at 1:53 PM, mkellehe wrote:

    If Complete genomics can get their lab to function in a regulated environment (CLIA FDA etc) then I think that would a be an advantage of Pac bio.

  • Report this Comment On November 30, 2010, at 2:30 PM, redflower345 wrote:

    Two comments:

    (1) 11 boxes is not a lot of boxes. The throughput of Complete might be equal to the actual (not at full operating capacity) of Pac Bio Boxes. Interesting to note who the customers of Complete are which are not typically your academic disease research lab.

    (2) I think they have two different long term growth trajectories. Pac Bio, fully integrated company. Complete, could be a takeover target once consistent volume is established with its customers. Therefore if you are a street investor you have to balance what kind of company you are interested in putting your money in. Personally, I think they should have different Betas even though they look like comps.

  • Report this Comment On December 01, 2010, at 2:59 PM, cdubay wrote:

    Complete Genomics is more immune to revolutionary sequencing advances (i.e. obsolete razors that can't take new blades) which are expected. They can change their in-house platforms, and the customers benefit. PacBio customers need to buy new sequencers.

    Also, the idea that once a genome is sequenced it is done, is wrong. Epigenetic and other modifications and rearrangements in specific cell types need to be monitored by sequencing using tissue/organ specific diagnostics.

    I like Complete Genomics.

  • Report this Comment On March 17, 2011, at 2:40 AM, Nicko86 wrote:

    Complete Genomics has out performed all of these companies combined sequencing the higest quality complete sequences. They are somewhere over 1400 completes. They have also dropped their cost even more, truly on the cutting edge.Thats a great point about being immune to revolutionary sequencing advances i know this was a primary concern of theirs. They continue to push the envelope and progress daily. The proof is in their data.

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