db: PACB presents additional oppty to invest in high-growth sequencing market
We are initiating coverage of PACB with a Buy and $18 PT. PACB is a 3rd-gen sequencing company and is launching the RS based on its SMRT (single molecule
in real-time) technology. The RS is priced at ~$700K, with a reagent cost of $100/chip and initial throughput in the 20-25 MB (million base) range. The RS promises long readlength and short run-time, major shortcomings of current NGS technologies, Given these factors, we expect the RS to garner 15-20% NGS market share, which is expected to grow at 20% CAGR over next 3 years.
Disruptive single molecule technology to be complementary to NGS
The RS is based on PACB’s SMRT (Single Molecule Real Time) technology
platform, and boasts of long readlength (average of 1,000 bases) and short run-
time (30-45 minutes), major shortcomings of current NGS platforms. Given this, we expect the RS to be complementary to current next-gen (NGS) platforms. On a
cost per million base (MB) metric, we expect the RS to be 2-3x cheaper than
current long read platforms such as the Roche GS FLX and Sanger CE. Therefore,
we expect the RS to garner about 15-20% market share in the NGS market (~$750 million, growing at 20% CAGR) over the next 12-24 months. The initial drivers of RS’ uptake will include validation of NGS data, cancer and de novo sequencing. Novel applications, applied markets, new users to drive RS uptake in LT
In the medium term, PACB has a pathway to improve system throughput that could reduce costs by 45x, making the RS comparable to current NGS
technologies. These improvements, along with low cost per experiment ($100/chip) will allow for novel users to harness sequencing technology. We also
expect PACB’s technology to enable direct RNA / methylation studies, which is an advantage over NGS techniques (that require modification which could introduce
biases). Finally, the long reads and low cost per experiment will also expand usage into applied AgBio markets, providing additional growth opportunities. Valuation appears attractive; Key risks include technology innovation
Our $18.00 price target is based on two methodologies, DCF & peer comparables, but equates to a EV/Rev multiple of 4.00x our FY12 revenue estimate of $156.0 MM and 2.00x our FY13 estimate of $300.0 MM, with $18.00 representing the midpoint of our DCF range. Key risks include an inability of technology to achieve commercial specs, a downturn in global research budgets for instrumentation, and
potential competition from novel third-gen technologies. |
