Why Stephens, Inc., Upgraded Price Target on Pacific Biosciences of California (NASDAQ:PACB) from $7 to $8

Equity Analysts Drew Jones and associate Garrett Phelps of Stephens, Inc., issued a report on Pacific Biosciences of California (NASDAQ:PACB) titled ”Upgrading to OW/Vol: Improved Technology, Costs Decrease, Roche Relationship” and upgraded their price target from $7 to $8.

According to the analysts ”We are upgrading PACB to Overweight/Vol. from Equal-Weight (Vol) given an increasingly favorable outlook for 2016 and beyond. We expect substantial costs reductions for the customer using the new Sequel system—sequencing costs per genome have decreased by a factor of four upon launch. In addition the Roche (RHHBY, NR – $33.22) partnership timeline has moved forward (all milestone pmts. expected this year). Better technology, lower costs, and a strengthening of the Roche relationship make us believe now is the right time to step into PACB. We are increasing our price target to $8 from $7, ~6x our 2016 revenue estimate ex-milestone payments (in line with historical multiple).”

Pacific Biosciences of California (NASDAQ:PACB) offers sequencing systems to help scientists resolve genetically complex problems. Based on its novel Single Molecule, Real-Time (SMRT®) Technology, Pacific Biosciences’ products enable: de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and DNA base modification identification to help characterize epigenetic regulation and DNA damage.

Pacific Biosciences’ technology provides the industry’s highest consensus accuracy over the longest read lengths in combination with the ability to detect real-time kinetic information. The Sequel System, including consumables and software, provides a simple, fast, end-to-end workflow for SMRT Sequencing.

On October 1 PACB announced that its technology will be featured in 36 presentations at next week’s American Society of Human Genetics (ASHG) 2015 annual meeting taking place in Baltimore, Maryland.

The company will also display its new instrument, the Sequel™ System, which was launched yesterday. The Sequel System provides higher throughput, more scalability, a reduced footprint and lower sequencing project costs compared to the PacBio® RS II System, while maintaining the existing benefits of the company’s SMRT Technology.

Chief Scientific Officer of Pacific Biosciences, Jonas Korlach said “We are excited to support the human genetics community as they pursue the generation of higher-quality whole human genomes, and move beyond SNPs to sequence the full size-spectrum of human genetic variation. With the introduction of our Sequel platform, SMRT Sequencing will be available to more scientists seeking to find the underlying heritability of genetic diseases.”

Key points raised by Equity Analysts Drew Jones and associate Garrett Phelps concluded with ”We are raising our 2015 revenue to $97.3 mil. from our previous estimate of $83.4 mil. Note that this accounts for an incremental $10 mil. in milestone payments from Roche which were previously expected to occur in 1H16.

Estimates for 2015 EPS of ($0.84) vs. ($0.81) estimate previously are $83.1 mil. in revenue and ($0.91) in EPS, vs. prior estimates of $88.7 mil. and ($0.77) respectively. Note that revised revenue estimate is net of a $10 mil. decrease due to a milestone payment from Roche being pulled forward into 4Q15.

PACB has announced the launch of its new Sequel system based upon the Company’s SMRT sequencing technology as a research use only product. Importantly, the Sequel system will be offered for approximately half the cost of the Company’s RSII sequencer ($350K for Sequel vs. $700K for RSII). In addition, this new sequencer will occupy one-third of the space of the legacy system at one-third of its weight. Mgmt. noted that historically the upfront cost of PACB’s product offering has been a barrier to adoption of the technology. As such the expectation is that the system will now be within the price range of significantly more customers, especially in the academic market, where PACB already has a good deal of support.

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