Pacific Biosciences Stock Falls While Revenue Rises
One of Warren Buffett’s many notable quotes is that “if you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” In the investing world, these people are called bag holders. They’ll buy a stock when it’s close to peaking and then hold it stubbornly until it becomes worthless. You can avoid most of these situations by not investing in companies unless they have revenues. That’s because companies with strong revenue growth have intrinsic value that supports the share price.
One thing bag holders like to do is make excuses for the companies they’re holding. They’ll focus more on remedying losses than realizing gains. This stems from a psychological concept called “loss aversion” where we feel the pain of loss twice as much as the joy of gains. Being in the red on any stock you’re holding is psychologically painful, particularly when a company is doing well. One life sciences stock that probably has many investors in the red right now is Pacific Biosciences (PACB).
Another thing that Warren Buffet said was that people who are net buyers of stocks ought to be happy when prices fall. And fall they have. Just over a year ago, we published a piece titled Why is Pacific Biosciences Stock Dropping? at a time when shares were trading above the $40 mark. As for the title of our article, it was meant to be an indicator of what was to come:
We’ve titled this article appropriately because when this stock starts falling, this article will start popping up, and people will realize that it probably wasn’t wise to buy a stock solely based on future promises.Nanalyze, Feb 2021
Since we said that, shares of Pacific Biosciences have fallen 82% while revenues have suddenly sprung to life. The red bars in the below chart show the last four quarters of revenue growth for the company.
The increase in revenues might be related to the Sequel IIe System that was launched in October of 2020 and led to 171 installs during 2021 leading to a total install base of 374 machines. Consumables already make up nearly 40% of the company’s 2021 revenues which are up 65% over the prior year.
A big event for PACB in 2021 was the acquisition of Omniome which brought them short-read sequencing capabilities allowing them to directly compete with Illumina. Six of the ten leadership profiles at PACB are ex-Illumina executives so they’re going to have the experience needed to compete with a company that’s 27X their size. PACB also pulled together a decent amount of cash last year – $1 billion in their coffers at the end of 2021 – most of which came from $900 million worth of 2028 notes they sold SoftBank.
The Pacific Biosciences 10-K is rather sparse and doesn’t talk much about who their customers are or how much money they’re spending. We’re told that the only customer exceeding 10% of total revenues is their primary distributor for China and Hong Kong which accounted for 13% of 2021 revenues, a percentage that’s been dropping over time. The Invitae (NVTA) deal is mentioned without much detail provided other than saying the two companies will work on a system “to deliver the most clinically relevant whole genome at substantially less than $1,000 which we believe is a critical price threshold needed to expand adoption in routine medical care.”
PACB vs. ILMN vs. ONT.L
When a stock price plummets while revenues soar, it’s the perfect storm for our simple valuation ratio which has now settled to a more reasonable number for Pacific Biosciences stock.
|Company Name||Market Cap|
|Oxford Nanopore||4.07||0.175 (2021)||23|
Investors following the gene sequencing pick-and-shovel thesis now have three companies to choose from for long-read exposure, something we recently discussed in our piece on An Update on Long-Read Sequencing Stocks.
- Illumina – short-read and synthetic long-read
- Oxford Nanopore – true long-read
- Pacific Biosciences – true long-read and short-read
We don’t know how formidable Illumina’s offering is until the community has a chance to kick the tires a bit. As for a technology comparison between Oxford Nanopore and Pacific Biosciences, a recent article by Engadget talked about how both technologies were used to finally complete sequencing the entire human genome:
Then, they used a technique called Oxford Nanopore to complete assemblies of centromeres, which are dense knobs in the middle of chromosomes. Oxford Nanopore has a relatively high error rate, however, making it less than ideal for sequencing sections with repetitive DNA. For those regions, the team used another technique called PacBio HiFi, which can sequence shorter sections with 99.9 percent accuracy.Credit: Engadget
Accuracy and low error rates are something Pacific Biosciences highlighted in a recent investor presentation as seen below:
We’ve already placed our bets on Illumina and Oxford Nanopore, the latter being a decision that was made when Pacific Biosciences was extremely overpriced and revenue growth wasn’t apparent. Were we to make the same decision today, Pacific Biosciences would be more appealing because of their lower valuation, their attempted acquisition by Illumina (a big vote of confidence in their technology), and their offering of both short-read and long-read technology. Given Illumina – one of our largest positions right now – has recently announced their own long-read offering, Infinity, we’re going to wait and see how that’s received by the market before doing anything else.
Long-read technology is relatively new so we don’t know how the three types on offer today will complement existing use cases or address new use cases that haven’t been dreamed up yet. The market leader usually ends up sorting things out so we have confidence that Illumina’s offering can successfully compete with “true” long-read technology like that being offered by PACB and Oxford Nanopore. If you’re a PACB shareholder that’s underwater right now, don’t worry. You’re probably not the patsy at the table.
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