At the end of March, the entire human genome was finally fully sequenced -- all 3.1 billion bonded pairs of chemical bases. Until recently, about 8% of the blueprint was missing from the effort celebrated as a full sequence in 2003. The completion could open the door to new medical breakthroughs and answer important questions about how we evolved.
The three purest plays on the science are Illumina (ILMN 0.23%), Pacific Biosciences of California (PACB -3.63%) -- also known as PacBio -- and Oxford Nanopore Technologies (ONT -6.21%). Despite the promise, investors are steering clear of PacBio. Here's what they know and how some of their key metrics compared with those competitors.
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1. It's nothing new for the stock to spike, or get crushed
For shareholders of PacBio, it has never been about sales and profit. Historically, they have been a poor measure of the company's stock performance. Instead, during times of market mania or lofty scientific promises, the stock peaks, only to wane as reality falls short of expectations.
2. The company is spending like crazy
In April 2019, the company launched its Sequel II genome sequencing system. The new product offered eight times the data output of an older model and brought accuracy in line with traditional sequencing methods. It followed that up with the Sequel IIe in the fourth quarter of 2020.
That development cost a lot of money. And the company spent between $45 million and $60 million annually on research and development (R&D) every year before 2021. Last year it spent $113 million. Ultimately, PacBio has spent most what it has ever generated in revenue on R&D. It is a much higher percentage than its competitors do.
ONTTF Research and Development Expense (% of Annual Revenues) data by YCharts
3. It isn't getting any closer to profitability
It does have significant product advances and growing sales to show for the spending. There are now 374 systems at customers -- a number that grew 84% last year. Revenue grew 65%. Despite the expansion, the financial picture hasn't changed much.
PacBio hasn't shown any indication it is moving toward profitability. Even ignoring accounting profits, earnings before interest, taxes, depreciation and amortization (EBITDA) is negative. As a percentage of sales, it's gotten worse, driven by operating expenses climbing faster than revenue last year.
ONTTF EBITDA Margin (TTM) data by YCharts
Is it worth the risk?
It's tempting to roll the dice on a company with technology that could prove to be transformational. The company has spent to develop competitive products and the organizational infrastructure to sell and support them. Ultimately, there has to be an underlying business that works financially. Until the company can show it has one, the risk/reward ratio remains unappealing.
Management is probing new areas to shift that equation. It recently announced a partnership with Corteva Agriscience. The two plan to create custom workflows to use genetic sequencing in crop production and protection. With war, inflation, and supply-chain issues driving talk of food shortages, perhaps this use case could fuel the next wave of investor exuberance for PacBio.
