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Class Action Lawsuit Filed Against Pacific Biosciences

NEW YORK (GenomeWeb News) – A class action lawsuit has been filed against Pacific Biosciences alleging the next-generation sequencing technology firm failed to disclose materially important information, which resulted in the artificial inflation of its stock price.

In a lawsuit filed in US District Court for the Northern District of California, the plaintiff Thomas Primo alleges PacBio hid problems related to its third-generation sequencing technology, which rendered statements made by the company about its finances and future outlook "materially false and misleading."

Specifically, Primo said that claims made by the Palo Alto, Calif.-based firm in its prospectus for its initial public offering — PacBio went public on Oct. 27, 2010 — turned out to be untrue. The lawsuit says, for example, that a claim from PacBio that "'The circular consensus sequencing protocol uses a circular DNA template which enables multiple reads across the same sequence to achieve 99.99 [percent] accuracy at single molecule resolution from a single DNA strand,'" is "materially false and misleading" as the PacBio RS sequencing platform did not have this capability when it was made and still doesn't.

In reporting its earnings for the first time as a publicly traded company in November 2010, PacBio said in a press release that its platform achieved 80 percent to 85 percent single molecule raw read accuracy. The lawsuit alleges this performance offered no improvement over sequencing technologies from PacBio's competitors, and moreover, rendered its claim that its technology "'enables multiple reads across the same sequence to achieve 99.99 [percent] accuracy at single molecule resolution from a single DNA strand,'" to be "materially false and misleading."

During that earnings call President and CEO Hugh Martin also made statements that either contradicted what had been presented in the company's IPO prospectus, or which were omitted and were materially significant, the lawsuit claims.

Included was a "new revelation" during the conference call that the PacBio RS was undergoing "'a beta test program.'" The lawsuit claims that not calling the initial "limited production release program" a beta test program in its prospectus was done so in order to avoid making statements that would be ultimately false and misleading.

This past August, PacBio announced its second quarter 2011 earnings results, in which new orders for the PacBio RS failed to meet investment analyst expectations. Investment bank JP Morgan reacted by downgrading its rating for PacBio due to lower order projections for 2012, and said that it did not expect the firm to become profitable before 2015. The target price for PacBio's stock also was lowered.

Then, in September, PacBio announced a layoff of about 130 employees, or 28 percent of its workforce, with its operations and R&D function most effected by the changes. The announcement caused PacBio's stock to drop by about 31 percent in one day, and by more than 75 percent since the company went public on Oct. 27, 2010.

The lawsuit cites an e-mail that was sent by Martin to PacBio employees concerning the layoffs in which he said, "'Our current infrastructure was staffed to support a faster adoption rate for our products.'" He added that the company had "'higher expectations as to the rate with which adoption would occur. Our internal infrastructure was therefore built to handle a faster generation transition.'"

"The company thus admitted what was apparent to its analysts: its product were not selling at the rate it had projected," the complaint said. "Moreover, with the cuts to its research and development department, the prospects for needed improvement in the company's new and still developing technology were dim."

The lawsuit is being brought on behalf of individuals and entities that purchased PacBio stock between Oct. 27, 2010 and Sept. 20, 2011. The decline in the company's share price during this period, "was a direct result of the nature and extent of Defendants' fraud being revealed to investors and to the market," the complaint said, adding that the drop in PacBio's stock during the period cannot be explained by larger macroeconomic factors, market conditions, or company-specific reasons "unrelated to Defendants' fraudulent conduct. On the same day PacBio's share price fell almost 24 percent as a result of Defendants fraud being revealed, the Standard & Poor's 500 securities index declined by less than 3 [percent]."

In addition to PacBio, Martin and other executives and directors of the firm are named as defendants. The lawsuit seeks damages of an unspecified amount as well as attorneys' and other costs.

A spokesperson for PacBio decline to comment on the suit.

In early morning trading on Nasdaq, shares of PacBio were unchanged at $2.63.