Pacific Biosciences of California (PacBio; PACB) investors could be forgiven for having questions about the company’s stock after it sank 26% between August 1–25, from $13.34 to $9.92 despite a flurry of developments that included the raising of its revenue forecast for this year and a growing challenge to longtime sequencing leader Illumina (ILMN).
But a longer-term look at PacBio shows a much brighter proverbial “big picture.” The company’s shares have more than doubled, zooming 101% year over year, to $11.21 in late Wednesday trading as of 3:08 p.m., from $5.57 at the closing bell on August 30, 2022.
This week PacBio shares climbed 13% during the first three trading days, buoyed in part by a favorable article in Simply Wall St.: “A bad month hasn’t completely ruined the past year.”
August began well enough with the release of PacBio’s second-quarter results. The company finished Q2 with a net loss of $69.8 million, slightly better than the net loss of $71.4 million it reported for last year’s second quarter.
However, PacBio could trumpet a 34% year-over-year jump in revenue, which soared to $47.6 million during April–June from $35.5 million in Q2 2022.
Key to that revenue jump was a near-doubling of instrument revenue, from $15.6 million to $29.9 million. PacBio recognized revenue on 47 long-read sequencing systems—including 45 newer Revio long-read platforms and two older Sequel IIe systems, compared to 36 Sequel II/IIe systems a year ago.
Big splash
PacBio launched Revio and the short-read Onso instrument last year at the American Society of Human Genetics (ASHG) conference, with a big-splash launch party highlighted by a performance by Maroon 5. As GEN noted at the time, the difference between Revio and Sequel IIe lies in a redesigned SMRT Cell.
Revio’s SMRT Cell is three times as dense as the eight million SMRT Cell in the Sequel IIe, with 25 million zero-mode waveguides, which allows looking at more single molecules simultaneously on the chip. But the Revio also allows for the use of four of those chips independently, but simultaneously (meaning that the runs are not truly independent of each other). In total, the instrument can run 100 million zero-mode waveguides (or one hundred million single molecules of DNA) simultaneously.
In addition to releasing Q2 results on August 2, PacBio also announced it had agreed to acquire Apton Biosystems for up to $110 million ($85 million of that upfront). PacBio president and CEO Christian Henry said the Apton purchase will accelerate development of a short-read sequencing system designed to enable the sequencing of billions of clusters of DNA on one flow cell by combining PacBio’s Sequencing by Binding (SBB™) short-read chemistry with Apton’s optics and imaging technologies within its high throughput instrument.
“Increasing density and throughput is one of the key development challenges in launching a high throughput sequencer and Apton will give us a significant head start in that development,” Henry told analysts August 2 on PacBio’s quarterly conference call.
Challenging Illumina
That puts PacBio further along a path of directly challenging the short-read leadership of Illumina, which had some good news of its own about the shipping of its NovaSeq X, also announced last year at ASHG.
During Q2, Illumina shipped 109 NovaSeq X systems (29 more than projected by Baird senior research analyst Catherine Ramsey Schulte), bringing its number of installed instruments to ~176, with customers placing more than 260 orders since the launch. Illumina raised its forecast for the number of instruments to be shipped this year to 390+, and Illumina interim CEO Charles Dadswell expressed confidence in its late-stage order pipeline.
However, Illumina disappointed investors earlier this month despite higher than expected revenues by slashing—from a range of 7% to 10% to just “approximately 1%”—its investor guidance for “consolidated” revenue growth, which combines revenues from core Illumina operations and its cancer blood test developer Grail.
Those results left investors and especially analysts far from reassured about the sequencing giant’s future given the reduced guidance, as well as challenges associated with rolling out its NovaSeq X sequencing system, China’s softening economy, and increasing federal scrutiny into its $7.1 billion purchase of Grail following activism by investor Carl C. Icahn.
By contrast, PacBio raised its guidance to investors on earnings, with the company increasing its forecast range to between $185 million and $190 million—up from its earlier projection of between $170 million and $185 million, and a 44% to 48% boost from 2022’s $128.3 million in revenue.
It’s a change of fortunes for PacBio, which in 2018 saw an opportunity to complement Illumina’s short-read leadership by agreeing to be acquired by Illumina for $1.2 billion. The companies scrapped their planned merger more than a year later in January 2020, after the U.S. Federal Trade Commission (FTC) and the U.K.’s Competition and Markets Authority (CMA) publicly opposed the deal.
Despite the revenue jump, the Apton purchase, and the increase in revenue guidance, PacBio’s Q2 didn’t appear to wow many analysts. Only one—Tejas Savant, executive director/senior healthcare equity analyst at Morgan Stanley—raised the firm’s 12-month price target on PacBio, and only by 8%, going from $12 to $13 a share. Morgan Stanley retained its “Equalweight” rating on the stock.
One likely reason: PacBio acknowledged year-over-year declines in consumable revenue (from $14.6 million to $13.7 million) and service and other revenue (from $5.3 million to $3.9 million). “The dismal bottom-line results were disappointing. The year-over-year fall in consumables revenues and service and other revenues was concerning,” Zacks Equity Research wrote.
Confidence, then partial rollback
Soon after the quarterly earnings came out, PacBio announced a long-read collaboration of undisclosed value with diagnostics developer GeneDx and the University of Washington. The partners agreed to study the capabilities of HiFi long-read whole genome sequencing (WGS), with the aim of increasing diagnostic rates in children with genetic conditions.
GeneDx agreed to use PacBio’s Revio to perform all long-read WGS sequencing and analysis, in a study designed to determine whether partners could potentially increase what they yielded from their diagnoses of pediatric patients through the system’s accuracy, read length, and methylation insights. GeneDx said it would perform the WGS sequencing and analysis of samples from 350 people including 120 enrolled in the SeqFirst WGS study at Seattle Children’s Hospital, as well as their biological parents.
“Through this work, we move closer to our vision of creating a world where no family spends years on a diagnostic odyssey trying to understand the underlying genetic cause of their child’s disease or wondering whether future children will also be afflicted,” Henry stated at the time.
The collaboration and Q2 results appeared to pay off for PacBio when it won a vote of confidence from ARK Genomic Revolution ETF (ARKG), an electronic transfer fund concentrating on healthcare and other sectors “expected to substantially benefit from extending and enhancing the quality of human and other life.” ARKG snapped up an additional 300,000 shares of the company’s stock between August 3 and 10, bringing its holdings to 11.6 million shares.
But over the two weeks that followed, ARKG quickly sold off about half that amount, bringing its holdings to 11.459 million shares as of August 25 (the latest date ARKG furnished data), with a market value of $115.28 million based on that day’s closing price.
The fund’s ownership stake in PacBio now stands at 4.57% with a “weight” (the dollar value of a stock divided by the total dollar value of the portfolio) of 5.83%. PacBio has the second highest weight percentage among the 41 companies in which ARKG holds shares, according to the website of parent ARK Investment Management (ARK Invest), whose chief investment officer and portfolio manager is Catherine D. (Cathie) Wood.
Leaders and laggards
- Mallinckrodt (MNK) shares tumbled 38% from $0.34 to $0.21 before trading was suspended Tuesday, a day after the company and subsidiaries began voluntary prepackaged Chapter 11 proceedings in U.S. Bankruptcy Court for the District of Delaware—the Dublin-based company’s second U.S bankruptcy in three years. Mallinckrodt blamed declining sales of several branded drugs for failing to meet repayment terms of a $1.7 billion agreement settling some 3,000 lawsuits accusing the company of increasing opioid sales through deceptive marketing (the company denied wrongdoing). Mallinckrodt aims to cut approximately $1.9 billion of debt by ceding ownership to lenders through the restructuring. Mallinckrodt insisted it was operating normally, and expects to complete the process in the fourth quarter. “Implementing this agreement will meaningfully enhance Mallinckrodt’s financial foundation and better position the business for the future,” president and CEO Siggi Olafsson stated.
- Outlook Therapeutics (OTLK) shares cratered 81% on Wednesday, from $1.41 to $0.27, after announcing that the FDA refused to approve the company’s Biologics License Agreement (BLA) for ONS-5010, a formulation of bevacizumab designed to treat wet age-related macular degeneration, and instead issued a Complete Response Letter. According to Outlook, the FDA could not approve the BLA due to “several” unspecified chemistry, manufacturing, and control (CMC) issues, as well as “open observations from pre-approval manufacturing inspections, and a lack of substantial evidence.” The company added that the FDA acknowledged the company’s pivotal Phase III NORSE TWO trial (NCT03834753) had met its safety and efficacy endpoints.
- Taysha Gene Therapies (TSHA) shares soared 42% on Tuesday, from $2.38 to $3.38, after the company disclosed in a regulatory filing that it had been told by the Nasdaq Stock Market that it has regained compliance with rules requiring listed companies to maintain at least $50 million in securities, and maintain a minimum bid price of $1 per share. Taysha regained compliance after entering into a private investment in public equity (PIPE) financing designed to raise about $150 million in gross proceeds. Taysha has said it expects to use net proceeds from the PIPE, together with existing cash and cash equivalents, to extend its cash runway into the third quarter of 2025, in order to primarily support clinical development of TSHA-102 in Rett syndrome, fund program activities for TSHA-120 in giant axonal neuropathy, provide working capital, and address other general corporate purposes.
