PacBio (Still) Lags on This Crucial Metric

PacBio (Still) Lags on This Crucial Metric ...

It's simple to invest in lab-hardware companies.

It's primarily because the majority of genomics stocks from this niche industry don't make the cut, at least when weighed on one fundamental factor.

PacBio (PACB) is one of those companies.

During the liquidity bubble of 2021, the Menlo Park, Calif., company's stock climbed to new highs. Recent developments include a short squeeze and a meme-stock boost.

In the company's history, trading volumes in this August have been equaled only once before: when it was the target of a takeover by Illumina (ILMN). (That deal did not close.)

Despite the business's most important performance in the second quarter of 2022, it remains laggard on the most important factor for investors.

Consume!Consume!Consume!

Business models for labs are simple to understand and monitor.

The most profitable companies sell the most instruments, but rather the most chemicals and kits needed to operate the installed set of instruments. This is called consumables revenue. It is unavoidable, broad-margin, and high-volume revenue.

Biotech companies are facing a steep climb, according to me, as a rule of thumb. If a lab hardware company earns two-thirds of its income from consumables, this will not be considered in your portfolio.

10x Genomics (TXG), Illumina, and Oxford Nanopore (ONTTF) are among the few businesses that meet or exceed this standard. PacBio does not.

In Q2 2022, the DNA-sequencing company generated 41% of total revenue from consumables, compared with the 67% level investors should look for. The company hasn't exceeded 42% consumables in its revenue mix in the previous two years.

Why should investors demand that consumables account for two-thirds of revenue? Consider two figures from Q2 2022:

TheStreet Recommends

Stocks Rise On China Growth Worries; Retail Earnings In Focus

Oil prices fall below $88 a barrel as China's demand declines and US output rises.

After rejecting a $2.7 billion Rio Tinto buyout offer, Turquoise Hill's stock plummets.

When a lab-hardware business encounters challenges, failing to expand consumables revenue and gross margin can limit flexibility. Like right now.

PacBio expects revenue of about $141.5 million at the midpoint this year, representing a year-over-year increase of 8%, compared to the same rate in 2021.

Is This DNA Sequencing Platform on Track?

The news for those who go long stocks isn't all bad.

PacBio received $899 million in cash at the end of June, which could pay for roughly three years of operations at the current rate of cash burn.

The company reported an installed base of 460 instruments at the end of Q2 2022, up 63 percent from 282 at the end of the year-earlier period. That represents a lot of future potential consumables revenue.

PacBio cited several headwinds, including macroeconomic problems such as pandemic lockdowns, inflation, a strong US dollar, supply-chain issues, and customers preparing for an economic slowdown.

Any and all of these factors may affect the utilization rates of customers' lab machines. Customers will order less consumables if the instruments aren't being used consistently.

PacBio is sandwiched between Illumina and Oxford Nanopore, both of which are better equipped from a technology perspective and revenue mix perspective. In Q2 2022, Oxford Nanopore reached a magical 67% mark.

PacBio might face mid- and long-term competitive challenges due to the competitive landscape, especially considering the inherent advantages and higher technical ceiling of nanopore sequencing.

Ultima Genomics and Element Biosciences, privately held companies, are promising future-generation DNA sequencing platforms that will save significant money and data.

Investors should remain cautious and realistic when it comes to PacBio for the time being.

You may also like: