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Cowen Initiates Coverage of PacBio at Outperform

NEW YORK (GenomeWeb) – Investment bank Cowen today initiated coverage of Pacific Biosciences with a rating of Outperform and a price target of $6.50 per share.

In a note, analyst Doug Schenkel said that the company has several attributes that would make its stock attractive to investors, and which could position the firm for growth that could exceed expectations. In particular, Schenkel noted that the launch in 2019 of the 8M chip for PacBio's Sequel instrument will allow the company to compete with other sequencing instrument providers at a comparable price and throughput but without having to change any of the attributes that differentiate it from the competition.

"PacBio sequencing has always had attractive attributes compared to traditional NGS 'shotgun' sequencing approaches from companies such as Illumina. Areas of differentiation include PacBio's much longer read lengths, better and more consistent coverage across genomes, no amplification bias, and simultaneous base calling and modification detection," Schenkel wrote. "Unfortunately, PacBio sequencing has been slower and more expensive than Illumina and other 'shotgun' sequencing approaches in most instances, which has narrowed demand for PacBio sequencing to a small number of niches where the limitations of shotgun sequencing approaches are unacceptable."

In the last year, however, PacBio has made changes to overcome those challenges. "This is a material step in the right direction considering meeting timelines and performance targets has not been a consistent characteristic of PacBio," Schenkel noted.

The firm now seems on target to launch the 8M chip in the Sequel instrument in 2019. The 8M is expected to lower the price per gigabase of data to a range of $7 to $10 from $37.50, which is around the same price as Illumina's NovaSeq and would allow for a sub-$1,000 human genome. The amount of data generated per run would also be comparable to the NovaSeq's low- and mid-range chips, Schenkel said, adding, "All this with longer reads, comparably high consensus accuracy, and the other attractive attributes that have always been associated with PacBio."

Cowen is currently forecasting that PacBio will place around 110 Sequels in 2019 and around 140 Sequels in 2020. This is not a big step up from placements of about 110 instruments in 2017 and 2018, and doesn't come close to what other major sequencing companies place annually, Schenkel said. However, he added that if the improvements work, it shouldn't be hard for PacBio to beat Wall Street's expectations for revenues in 2019 and 2020, even if the Sequel remains a niche product.

"We see a clear path to upside relative to current expectations," Schenkel concluded. "Given the attractiveness of the sequencing market and the scarcity of alternative assets to Illumina, we believe solid execution will lead to a premium valuation."

PacBio's shares rose more than 6 percent to $4.79 in morning trading on the Nasdaq.