Tearing Up Contract

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What happened

Shares of Pacific Biosciences of California (NASDAQ:PACB), a small-cap healthcare company focused on genomic sequencing, fell by more than 38% as of 10:40 a.m. EST on Thursday. The decline is directly attributable to the news that healthcare giant Roche Holdings (NASDAQOTH:RHHBY) has decided to terminate its partnership agreement with the company. 

So what

Roche and Pacific Biosciences' agreement was originally signed in 2013. The deal allowed Roche to develop diagnostic products based on Pacific Biosciences' SMRT technology and sell them worldwide. Meanwhile, Pacific Biosciences maintained its right to market its products for all fields outside of human in vitro diagnostics. 

This agreement also granted Roche the right to walk away from the deal for any reason. News broke today that Roche's management team has decided to exercise that option.

Here's what Dr. Michael Hunkapiller, Pacific Biosciences' CEO, had to say about the news: 

The clinical research and sequencing market and regulatory environment have evolved during the three years since we entered into this agreement with Roche. While we are disappointed with Roche's decision to terminate the agreement, we are already familiar with this market and Roche's decision does not significantly change our near-term plans for expanding our business to address this market.

Shares of Pacific Biosciences tumbled in early-morning trading on the news.

Now what

There's no doubt that Roche's decision to walk away from Pacific Biosciences raises huge questions about the company's future. After all, Roche is a massive company with resources that far exceed that of Pacific Biosciences, and many investors believed that this relationship would bear fruit for years to come. Roche's decision to terminate the deal pours cold water on that thesis.

If you are looking for a bright side here, it is worth pointing out that Pacific Biosciences continues to believe that its near-term outlook is looking bright. Management reaffirmed that its product and service revenue is on pace to grow more than 55% in 2016. What's more, Pacific Biosciences believes that its revenue will grow by another 40% to 60% in 2017.

That's all great, but since this news raises new questions about the company's long-term future, I think approaching this stock with caution is likely to be the right way to go.

Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.

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