This article originally ran on January 12… the teaser pitch was still being circulated heavily last week, and the stock released earnings on February 3 that disappointed investors, bringing shares down about 15% (it was teased as a “$7 biotech,” and briefly $8, before then).
The original Jan. 14 “special event” catalyst teased by Lichtenfeld, their presentation at the JP Morgan healthcare conference, had no real impact on the stock at all. The ads still say it’s a current catalyst, though that conference is four months past — so it’s likely they didn’t revamp the ad much, it’s just catching more investor eyes at the moment (and driving more questions our way).
Other than that, we have not looked at the pitch other than to confirm that the “meat” of the argument and the stock pick are unchanged. What follows is unchanged from 1/12/15.
I thought I’d take a quick look at this one today, though a couple Irregulars have already identified the stock in their discussions — the pitch is that “Thanks to a Rare Deal With the CDC” there’s a “Tiny Biotech” that “Is Poised to Capture a $22.1 BILLION Market… Starting With a Special Event on January 14, 2015.”
So that sounds like a pretty standard spiel about the promise of biotech — huge rewards, a catalyst coming in just a couple days… plenty to get investors excited. What’s the stock?
We’ll get there in just a moment… first, let’s see how the Oxford Club folks pitch it. They’re trying to sell you on subscribing to what they call “Investment U Plus”, which is basically an enhanced version of their free Investment U site that includes some more stock picks and commentary from the analysts in the Oxford Club universe… here’s the potential they dangle in front of our eyes:
“On January 14, 2015, the world’s top biotech investors will meet in a private conference to reveal their best new ideas for the industry.
“This year, executives at a tiny biotech trading for only $7 will make one of the most important presentations.
“They will talk about a radical technology the company has developed that could dramatically change the way doctors and hospitals operate… and it could kick off a major run in the company stock.
“Yet, for the moment, most Americans have never heard of this company… it’s seemingly coming out of nowhere.”
So what is the company, and what’s their technology? Here’s the core of the spiel from the Oxford folks:
“In short, it’s developed a new gene-sequencing technology that could soon be used to tell you what disease you are likely to get months, or even years, in advance.
“Instead of all the tests, discussions of symptoms and guesswork that go into a diagnosis, this technology can analyze your specific genes and assist doctors in diagnosing possible health issues.
“I’m talking about health issues like…
- Heart disease
- Type 2 diabetes
- Alzheimer’s disease
- Breast cancer
- Crohn’s disease
- Celiac disease
- Colon cancer
- Heart attack
- Prostate cancer
- Rheumatoid arthritis
- Stomach cancer
“All of these diseases have a single factor in common: They are hard to stop once they reach later stages. But they can be very manageable when recognized early.
“This company is on its way to doing that… and it does it far better than anyone else.
“In fact, you get a 10 to 20 times longer sequence and 55% more genetic information using its product.”
So that’s it — a company that gives you more information from genetic sequencing. And apparently that means it’s about to start making a lot more money, from the ad:
“Right now, this company (at the forefront of it all) has annual sales of just $52 million.
“And thanks to the CDC’s plan to award this company its exclusive sole source contract, it is set to capture an unprecedented share of this growing market.
“Even better, the company recently partnered with Roche – one of the world’s largest pharmaceuticals – to develop new diagnostic products for everyday clinical use.”
So who is it? Pacific Biosciences (PACB)
The “sole source” thing is real, though it’s probably not particularly material to their immediate financial prospects. You can see one of the announcements about the “sole source” with PACB for the CDC here from 2013, and there are others — the government has to “sole source” for materials and supplies when there is only one source for those materials… as with the kits and supplies used in PacBio’s sequencing machines. All it means is that they won’t put a notice out for competitive bid for PacBio sequencing kits and the like… because they can’t, no one else makes them. They also have sole source contracts with Illumina, the giant in the sequencing space, because Illumina also has proprietary kids and supplies that the feds can’t do without or get from somewhere else. At least, that’s the way I read the situation.
Which is not to say that there aren’t unique things about PacBio’s technology — or ways in which it improves upon Illumina’s. I think the “sole source” deal with the CDC that they’re citing is probably a more recent one, for supplies to sequence some particular pathogens, and in that case it was because of PacBio’s ability to sequence longer strings of DNA than the other available sequencing technologies they tried. You can see a quick summary of that here.
And that seems to be the real compelling argument for PacBio that I’ve seen — not that it’s faster or cheaper, (partly because all sequencers are inexorably moving toward faster and cheaper), but that it’s more detailed and can sequence longer sequences of DNA.
Pacific Biosciences is held by a fair number of hedge funds, including Lee Ainslie’s Maverick Capital (which has owned shares since at least 2011, but bought more in 2014), and there has been a bit of insider buying — but only from a single outside director.
Lichtenfeld argues that the company is going through a three phase process common to biotech stocks — a spurt on enthusiasm about a discovery or product, followed by a (sometimes long) lull before the product is commercially available or established, then a “rebirth” when they launch and see revenues climbing, causing the stock to surge. That is what PACB’s stock chart looks like, it IPO’d in 2010 at around $16 and then spent 2011 falling down to the $3 range and trading within a few dollars of that until it hit $7 in 2014 and, now, tickling $8 in the early days of 2015.
Does that mean we’re on the cusp of PACB booming? I have no idea — this is an area where there is substantial investment both by venture capital and by the existing companies, including the $30 billion Illumina. I certainly can’t tell you whether PACB’s technology will end up being the “next Illumina” and dominating the sequencing market someday, but it’s not going to happen overnight. These are not inexpensive machines to buy or operate, Illumina already has a huge installed base, and Roche and Illumina and others have been trying to develop machines that are feasible for small hospitals as they generate the data for the anticipated “new era of personalized medicine.”
All I can tell you is that analysts are not terrible excited about revenues over the next year or two — and there are only a couple analysts following this stock, so it may be that Lichtenfeld has some insight or perspective that they don’t have. The analyst estimates are for $60 million in revenue in 2015 (which would be about 5% growth from the anticipated 2014 numbers), and a continuing loss of about 90 cents per share. They also see the loss being cut in half in 2016, so presumably that means a substantial revenue increase by then… and they are modeling 30% earnings growth going forward. Illumina, which must be sort of a model for PacBio, spent many years earning a few cents or losing a few cents each quarter before they broke through a bit over a year ago and started to see substantial and impressive earnings growth, and the stock has almost quadrupled over the two years. ILMN now trades at about 100X trailing earnings, and about 50X anticipated 2016 earnings, so if PACB is about to eat its lunch that will be news to ILMN shareholders. ILMN could also, as you might have already thought in the back of your head, buy PACB pretty easily if they thought they couldn’t compete with them — the market cap for Pacific Biosciences is about what ILMN makes in a year in EBITDA.
And yes, PACB is presenting at the JP Morgan Healthcare conference which tends to be a news-generating event for biotechs — I don’t know whether they’ll be presenting anything markedly different than what’s in their November investor presentation here, and I haven’t confirmed that they’re definitely presenting on the 14th but that’s probably true (the conference started this morning, it runs through Thursday). Lichtenfeld’s chart shows a huge move for Illumina after the company presented at this same conference in 2004, but that big move is, of course, over the course of a decade (and most of it came in the last two years) — ILMN didn’t become a different company overnight eleven years ago, though it did work out well for folks who bought back then (at about $4) and held on… assuming that you were able to hold on through two periods during that decade when the stock dropped by at least 50% in a matter of months.
The industry is not, of course, made up of just the established Illumina and the upstart PacBio — there’s also Roche (with their 454 subsidiary) and Thermo Fisher (with their Life Technologies subsidiary, which itself bought Ion Torrent a few years ago) among established firms, and there have been some casualties along the way like Helicos and Affymetrix — and a new crop of venture-funded competitors always around the corner, including the well-publicized 10X Genomics, which will also be presenting (along with Illumina and Thermo Fisher and Pacific Biosciences) at JP Morgan this week.
So… do you agree with Marc Lichtenfeld? Think Pacific Biosciences will have a huge run and take leadership in the sequencing market with their next-generation machines and technology? If so, you doubtless understand the market far better than I do (which wouldn’t be very difficult), so please share your thoughts with a comment below.