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Pacific Biosciences Hurt by Competition in Niche Markets


On Jan 9, we issued an updated research report on Pacific Biosciences of California Inc. PACB. Solid contribution from the Instrument and Consumable revenue platforms have been boosting Pacific Biosciences' growth trajectory. However, cutthroat competition in the niche space has been hampering Pacific Biosciences revenues. The stock has a Zacks Rank #4 (Sell).

Pacific Biosciences is a leading player in the DNA sequencing market. However, the niche space is highly competitive owing to the presence of established players like Illumina ILMN and Thermo Fisher Scientific Inc. TMO. Low-cost sequencing products from Illumina continue to gain traction, which is a headwind for the company. Moreover, Pacific Biosciences is a relatively small company compared with the second generation sequencing technology firms.

Moreover, product launches from the likes of 10X, Oxford Nanopore, Dovetail Genomics are expected to intensify competition in the genome assembly market, which will increase pricing pressure on Pacific Biosciences over the long term.

Among other major concerns, Pacific Biosciences’ sales in Europe have declined substantially on a year-over-year basis, lagging the company’s target. A number of customers in Europe have been slow in initiating the usage of Sequel systems. As a result, the company’s products witnessed poor adoption in European markets in the recent past.

Further, management forecasts 8-10% rise in operating expenses for full-year 2017 on a year-over-year basis. Operating expenses in the third quarter of 2017 totaled $29.8 million compared with $29.4 million in the year-ago quarter. Cash and investments at the end of the third quarter was $84 million compared with $102.6 million at the end of the second quarter.

On a positive note, Pacific Biosciences’ flagship platform — the Sequel system — has been fortifying the company’s footprint worldwide. Sequel system is a nucleic acid sequencing platform based on SMRT technology that was developed in partnership with Roche. However, Pacific Bioscience’s agreement with Roche terminated earlier in 2016. The Sequel System has been a persistent contributor to Pacific Bioscience’s top line.

Price Performance

The price movement of Pacific Biosciences has been unfavorable over the last six months. Notably, the stock has lost almost 21.1% comparing unfavorably with the industry’s rally of roughly 8.8%. Further, the current level compares unfavorably with the S&P 500 index’s return of 9.3%.

The ongoing sluggishness in the European markets is the principal cause for the dismal price performance. Further, the company terminated its three-year long agreement with Roche Diagnostics. The collaboration provided a way to generate millions of long, single-molecule barcoded DNA fragments, averaging 10-30 kilobases that originated from much longer fragments of around 100 kilobases.

Key Pick

A better-ranked stock in the broader medical sector is Bio-Rad Laboratories, Inc. BIO. Bio-Rad Laboratories flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.The company has a long-term expected earnings growth rate of 25%.

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