What happened

Ahead of improvements to its gene sequencers that could allow it to win more market share, Pacific Biosciences of California (NASDAQ:PACB) plans to bolster its balance sheet by selling more shares to the public. The company announced its proposed offering after the closing bell on Monday, and investors reacted to the news by sending shares as much as 10.6% lower on Tuesday morning. As of 2:15 p.m. EDT, Pacific Biosciences shares are trading down 3.1%.

So what

Pacific Biosciences markets Sequel, a gene-sequencing machine that provides researchers with "long-read" genetic insight.

A woman shrugging her shoulders is standing in front of a chalkboard covered in question marks.

IMAGE SOURCE: GETTY IMAGES.

Earlier this year, management unveiled new tools that will decrease the cost of long-read sequencing; during the company's second-quarter conference call in August, they suggested upcoming products will make the cost of long-read sequencing more competitive to the cost of short-read gene sequencing offered by its much bigger competitor, Illumina (NASDAQ:ILMN).

Currently, Sequel's higher cost means it's mostly used for individual projects where there's a greater need to map a genome completely. In the future, next-generation upgrades could help it carve away business from customers using Illumina's sequencers in large-scale human population studies.

Pacific Biosciences estimates opening Sequel's use up to more opportunities will increase its addressable market to $2.5 billion in 2022, from about $660 million in 2017. Optimism that that will translate into meaningful sales growth has boosted the company's share price from below $4 in early August to about $4.50 as of this writing.

On Monday, management said it will use the recent rally in its shares to firm up its financial position. It didn't say how many shares it plans to sell in its offering, but it only had $63 million in cash exiting Q2, so any additional cushion that helps it capitalize on its upcoming opportunity could come in handy.

Now what

The stock offering will dilute existing investors; however, they should recognize this could be the company's best shot at closing the gap between its sales and Illumina's. This is not the time for management to be cash-strapped.

Since Illumina's sales were $830 million in Q2 and Pacific Biosciences' sales were just $21.58 million, there's clearly a big market opportunity here. It remains to be seen whether Pacific Biosciences can deliver on its optimistic outlook, but given the shot at substantial revenue increases in the next couple of years, it's better to look beyond the short-term dilution from this offering, and focus instead on the long-term potential to profit from growing demand for gene sequencing.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends Pacific Biosciences of California. The Motley Fool has a disclosure policy.