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William Blair Upgrades PacBio Shares on Technology Improvements, Expanded Applications

NEW YORK(GenomeWeb) – William Blair today upgraded shares of Pacific Biosciences to Outperform, citing improvements to the company's technology, expanded application for its instruments, and its deal with Roche.

The investment bank previously had a Market Perform rating on the Menlo Park, California-based next-generation sequencing company.

In a research note, analyst Amanda Murphy upgraded PacBio's shares in spite of a 34 percent decline in its share price since reaching a 52-week high of $8.78 in January, a drop that she attributed to the lack of a new platform announcement at the Advances in Genome Biology & Technology conference in February, and a new synthetic short-read technology platform from startup 10X Genomics that was unveiled at that conference.

Murphy noted that PacBio has made "significant and impressive progress" in recent years to improve the throughput and read length on its technology, and with the company's newest chemistry, researchers can generate 10,000 to 15,000 kilobases in read length and 500 million to 1 billion bases per single-molecule, real-time cell. In comparison, at its initial launch, the RS II platform could generate 5,000 base pairs and 200 megabases to 300 megabases per SMRT cell.

PacBio is targeting another fourfold increase in throughput during the next year and an increase in read length to 15,000 to 20,000 bases, Murphy added.

She also noted that in a recent survey conducted with GenomeWeb, long-read/nanopore-based sequencing technology was "by far" the technology that generated the most interest among respondents.

She said that SMRT sequencing is now widely used in microbial and plant/agricultural sequencing, and PacBio's improved performance and improved software has allowed the firm to move into new applications and analysis of more complex genomes, such as the de novo assembly of large genomes, epigenetic analysis, structural variation analysis in humans, and complex gene family analysis.

Researchers are also using the RS II instrument in conjunction with Illumina's HiSeq X Ten technology to investigate difficult areas of the genome, large structural variants, and provide phasing data, among other applications, Murphy said. The focus on whole human genome sequencing "generated by Illumina's whole-genome-focused platform launches could drive incremental demand for PacBio's platform over time," she said.

While competition in the long-read sequencing space is heating up, "PacBio's true long reads add value in addition to synthetic long-read technology," she said, adding that the long-read technology market represents about a $400 million opportunity, "suggesting PacBio has room to gain further share."

She also said that a new PacBio instrument may be coming in 2016. In September 2013, PacBio reached a deal with Roche to develop diagnostic products, including sequencing systems and consumables, based on PacBio's technology. Any products with human in vitro applications would be exclusively distributed by Roche, and as part of the deal, PacBio is eligible to receive up to $40 million if certain development and commercialization milestones are reached.

PacBio has reiterated that it remains on track to develop a system that would target the regulated diagnostic market within a three-year period originally included in the Roche deal, which would add to PacBio's revenue stream starting in 2017.

Lastly, Murphy said that valuation of PacBio has become "more reasonable," and a 30 percent to 40 percent upside to its stock from current levels is possible. 

In morning trading on the Nasdaq, PacBio's shares increased more than 13 percent to $5.86.