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William Blair Initiates Coverage of PacBio, Complete Genomics

By a GenomeWeb staff reporter

NEW YORK (GenomeWeb News) – Investment house William Blair on Monday initiated coverage of Pacific Biosciences and Complete Genomics.

Analyst Amanda Murphy gave PacBio a "Market Perform" rating and an "Aggressive Growth" profile, and in a research note, said that the Menlo Park, Calif.-based firm is "on track to be the first company to successfully commercialize third-generation sequencing technology."

The company, whose platform has not yet reached the market, will not report any product revenue in the first quarter, but for the second quarter, Murphy gave revenue estimates of $5.9 million. Loss per share for the first quarter on a GAAP basis is estimated at $.62, or $.55 on an adjusted basis, while loss per share in the second quarter is estimated at $.53 on a GAAP basis, or $.46 on a non-GAAP basis.

For full-year 2011, Murphy estimated revenues to be $31.7 million, with a GAAP loss per share of $2.41, or $2.12 on a non-GAAP basis.

Though bullish on PacBio's near-term possibilities, Murphy was more tempered in her longer-term forecast and said that while researchers will initially use PacBio's RS instrument for niche applications, "the pace of its longer-term adoption is somewhat uncertain and dependent on the validation of incremental research applications and the company's ability to improve specifications over time."

According to Murphy, the platform has three differentiated capabilities: rapid turnaround time, long sequencing read lengths, and kinetic analysis.

On the first point, she said that beta testers of the platform, which is targeted for a second quarter launch, have achieved turnaround times of between 30 and 45 minutes, a substantial improvement from the typical seven to eight days with other instruments. This could have interesting implications, Murphy said, and noted PacBio's ability to sequence and identify the origins of the recent cholera outbreak in Haiti in two days, "suggesting the potential for applications in rapid global infectious disease monitoring."

Another key advantage of the RS system is its longer read lengths. Beta users have obtained on average 1,200 to 1,500 base-pair reads, compared to no more than 150 base-pair reads generated on second-generation platforms. The long read lengths, Murphy said, enable sequencing of DNA that can't be done or is difficult to do with shorter-read platforms.

She added that PacBio's third-generation system "yields a distribution of read lengths," which unlike second-generation platforms yield read lengths all of the same length.

"Moreover, despite concern in the investor community about single-molecule error rates … [based on discussions William Blair has had] it is well accepted in the scientific community that through the use of redundancy … one can generate consensus accuracy that is higher than many of the second-generation platforms on the market today," Murphy said.

Lastly, she said that the RS system allows for kinetic analysis, or the measurement of how long it takes the polymerase to incorporate each base. This ability allows investigations into epigenetics, which has been implicated in cancer and other diseases.

PacBio has demonstrated a proof-of-concept for use of its platform to concurrently determine the primary nucleotide sequence and base methylation. "While still quite early in the development of this application, this usage has generated the most excitement in the research community, given the difficulty in studying epigenetic modifications today and the hypothesis that epigenetics play a critical role in disease," Murphy said.

The company has installed 11 beta systems and said it had a backlog of 38 instruments as of the end of 2010. With a list price of $695,000 for the platform, Murphy estimated PacBio will ship 46 machines in 2011, 125 in 2012, and 170 in 2013.

Assuming the next-generation sequencing space now is at 1,500 instruments and growing at 20 percent compounded annually, she estimated PacBio will have a 10 percent share of the market by the end of 2012.

She expressed uncertainty over the company's longer-term prospects, though, based on PacBio's status as an early-stage technology firm and "the uncertainty around longer-term adoption of the RS system."

Instrument ramp-up, Murphy said, will be determined by successful rollout of system specifications —such as the introduction of software functionality that will allow for easier analysis of kinetic properties, as well as improvements to throughput — and continued expansion into research and clinical applications.

In afternoon trading, shares of PacBio were at $12.53 on the Nasdaq, down about 3 percent.

Complete Genomics

For Complete Genomics, Murphy provided a first-quarter 2011 revenue estimate of $4.5 million with a loss per share of $.52 on a GAAP basis, or $.50 on a non-GAAP basis. For full-year 2011, she estimated revenues at $34.2 million with a loss per share of $1.97 on a GAAP basis, and $1.86 on an adjusted basis.

Murphy noted several reasons for her positive outlook on the Mountain View, Calif., company, including its focus on whole-genome sequencing, "which has enabled the company to build instruments and workflows that are relatively inflexible but highly economical, driving down [average sales price] while providing accuracy levels in line with or better than competing instruments."

Because Complete Genomics is a service provider and its sequencing platforms are built in-house, it has not had to invest in its technology to miniaturize it, develop self-contained automation, or make it user-friendly. Instead, Murphy said the company has been able to spend its R&D on optimizing and enhancing its platform, enabling it to build a platform that is "highly economical in terms of reagent use and instrument efficiency," and is as accurate as, if not more accurate than, other instruments on the market.

Because it is a service provider, it can run multiple genomes in batches, driving operating efficiencies "and leverage from increased sample flow given the high fixed-cost nature of its business model," and thus, Complete Genomics can lower its production cost per genome and ultimately its average sales price, Murphy continued.

Its reagent cost per genome is about $1,000, compared to $5,000 at Illumina, which established the Illumina Genome Network in 2010, according to Murphy. Illumina Genome Network offers whole-genome sequencing and other services.

Complete Genomics' average sales price per genome is less than $10,000, on par with what BGI and Illumina Genome Network charge for their sequencing services. By the end of the year, improvements in Complete Genomics' arrays are expected to drive down the cost to $5,000 per genome.

Murphy added that she anticipates the company will be able to snag 22 percent of the whole-genome sequencing market by 2015, and said that Complete Genomics is developing a second generation of its platform with the capacity to capture signals 10 times faster than is currently possible. In theory, the increase in throughput would drive down the instrument cost from $1,000 today to $100 per genome, she said, and added that the company is targeting completion of the prototype of the instruments sometime this year. Next year, the instruments are expected to be ready for commercial use.

Murphy also noted a growing body of scientific support for its technology, citing peer-reviewed data from early adopters "and with a building customer list and backlog, the company's platform has been increasingly validated and endorsed by the research community."

There have been more than 350 downloads of the 60 genomes that Complete Genomics has made publicly available since January, "thus we would not be surprised to see more presentations, abstracts, and publications evaluating Complete Genomics' data quality over the next year," Murphy said.

Last week, investment firm Jefferies raised revenue estimates for Complete Genomics for the first quarter as well as for full-year 2011, and increased its share price target for the firm.

Shares of Complete Genomics were down 5 percent at $13.99 in afternoon trading on the Nasdaq.

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