Pacific Biosciences Is Advancing Genomics – Seeking Alpha

Posted: August 22, 2017 at 2:44 am

Pacific Biosciences of California (PACB) is a $480 million market cap company focused on development of innovative technologies and systems that impact diagnosis and treatment of disease and improve the world's food and energy supply. The company developed the Single Molecule, Real-Time (SMRT) Sequencing genomics technology, which enables real-time analysis of DNA synthesis. The company's technology can be used in human biomedical research to resolve heritability and variant types across populations or disease states.

Applications in plant sciences and agriculture include crop and livestock research acceleration via sequencing and transcriptome analysis. PACB technologies can also be used to characterize viruses and microbes of infectious disease, enabling the design of better vaccines and treatments.

So why would the reader be interested in PACB? The market for gene therapy applications are increasing at a CAGR of more than 20%, according to an analysis at Global Market Insights. In 2015, the gene therapy market was reported at over $800 million, and is expected to rise to $1.4 billion by 2024. The following figure depicts what this 20% growth looks like for a potential successful long investor. Nice, isn't it?

But gene therapies alone don't tell the whole story of market applications for genetic research tools. Cell therapy is an industry that plays a large role in applications for genetic analysis. The combined markets for cell and gene therapies are expected to rise from approximately $8 billion in 2018 to $12 billion in 2020. Strong Bio hopes that these predictive trend models can be useful for investors, and rather than focus on a company's pipeline in every article, it is striving to meet the needs of investors by focusing on some backstage players that have immense potential in advancing medical and agricultural research, such as PACB.

The rise in markets for gene therapies and cell therapies is expected to be driven by rapid technological advancement and increased adoption of new genomic techniques. Obviously, the largest market space in cell therapy and gene therapy application is cancer, with inflammatory disease also comprising a significant component of these potential markets. The World Health Organization predicts the number of new cancer cases will rise by as much as 70% over the next 20 years.

That is a lot of patients, and will fuel industry growth. In addition, favorable FDA regulation stances will serve cancer genetics industry growth in a positively weighted manner. Cancer genetics programs will begin to mainstream infrastructure to provide assays, informatics, and gene testing education to patients at hospital sites. Cancer will become a treatment regime reminiscent of chronic disease models, targeting specific molecules involved in specific patient's pathology.

The company sells its SMRT technology as a package product called Sequel System. SMRT supports numerous sequencing applications, bringing unique and novel depth and quality to genetic research. It is applicable in whole genome analysis for total genetic composition data of organisms including microbes, humans, plants, and animals. For instance, the company recently reported improving existing sequencing information for the maize plant genome, including fixing mistakes, reducing gaps, increasing sequence contiguity up to 50-fold, and adding difficult to reach (centromere region) sequences.

SMRT can be applied to produce in-depth analysis of genetic variations in disease models, using targeted approaches. It provides true long read lengths and highest consensus accuracy available, revealing a full spectrum of genetic variation for microbes and virus, and heterologous cell populations such as escaping cancer cell genomes. PACB SMRT technology offers RNA isoform sequencing functions that can produce full-length transcripts (eliminating the need for assembly, useful in transcriptome analyses). Epigenetic characterization of DNA modifications in prokaryotic and eukaryotic models are also possible.

The company recently announced an agreement by Novogene (China) to purchase ten Sequel systems in addition to ten already purchased earlier this year. To date Novogene is the largest user of PACB Sequel systems, and the reordering of technology indicates customer satisfaction and increased productivity.

Novogene and PACB have agreed to co-market and promote genomic applications. The company cites high demand by Novogene as impetus to double its production capacity to meet the orders, driven by a Chinese precision medicine initiative to sequence variants in 1000 individuals. The company is also participating in other world genome discovery projects.

Net loss for 2Q 2017 was $25.5 million, compared to $18.5 million for the second quarter of 2016. Operating expenses for 2Q 2017 was $32.4 million, compared to $28.7 million for 2Q 2016. The company reported $20.1 million in 2Q 2017 product, service, and other revenue compared to $17.2 million for 2Q, 2016. Cash and cash equivalents at end Q2 2017 was $102.6 million, compared to $72.0 million at December 31, 2016. In June 2017, the company did an offering of approximately 15 million shares at $3.10 per share, raising approximately $46 million.

Strong Bio wants to emphasize that the era of gene therapy is upon us, and several candidates are likely to be approved as potential first gene therapy products approved by FDA later this year. Emerging supportive technologies stand to benefit as the medical system and biotechnology investment centers begin to realize the fruits of such endeavors.

PACB is right in there for the upcoming revolution. To give the reader an idea of the power of its technology on client bottom line, the Sequel system was able to do the maize genomic work at a cost of around $20,000 per maize line, compared to the nearly $30 million in cost for the original maize genome reference.

It is well-positioned in the industry, with its technology being referenced in over 35 presentations at annual AGBT 2017 conference, demonstrating customer value. Over 135 references to PACB technology were made in the 2017 annual PAG conference. The stock has jumped a bit after announcing the sale of 10 Sequel units, but would be attractive on a pullback into the gap to the $3.00 offering range, and is thus watchlisted as an exciting prospect. It is also possible that some consolidation in this space could occur, leading to potential merger and acquisition action. Yahoo consensus target of 4 analysts is $5.95 per share.

Risks for investment in PACB include industry dynamics that the high cost of developing new treatments impedes growth in the gene therapy industry. Moreover, no gene therapy products have yet been approved by the FDA. However, advancements in rare diseases using the gene therapy/genomic approach are coming soon. It is clear that cell therapies that involve genomic research will offset the slow-to-start gene therapy development costs impediment, and serve as a catalyst for profitable efforts to fund gene therapies as they enter the market over the coming months and years.

Another risk for investors is that the company is not yet close to a cash-neutral revenue stream, so further dilution could be possible. There is some competition in the genomics industry as well, but Strong Bio regards SMRT as a front-runner in the space. One could have argued 20 years ago that there is no obvious value in sequencing genomes, but given the breakthroughs that are upon us in the upcoming gene therapy era, the time to place investments is rapidly drawing near. The reward to risk ratio for PACB is compelling.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Originally posted here:
Pacific Biosciences Is Advancing Genomics - Seeking Alpha

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