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.
Expected IPO range
Actual IPO price
Price Close Nov. 26
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.
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.
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Which is the better buy: Complete Genomics or PacBio?