Thursday, October 1, 2015

PacBio's gain would be Illumina's loss in a simple world...

...but the DNA sequencing market is anything but simple. The past several years have seen several generations of machines from the incumbent companies, principally Illumina and ThermoFisher, with PacBio a distant third.  Until yesterday's reveal of the Sequel System as a successor to the RS II.

Naturally, shares of PacBio stocks popped today, rising 58% by the late afternoon of the trading day, in stark contrast to the 10% drop in Illumina.  I'll get to why it's pretty clear that PacBio is in a very good position compared to Illumina, but these swings are even more impressive if you consider what happened with their respective market caps.  PacBio's value increased by about $121 million, while Illumina went down by about $2.7 billion.

Why the discrepancy?

Running through possible scenarios like overestimation of Illumina's future cash flows (likely) or other non-PacBio sequencing platforms being viewed as the main beneficiaries today (not so much) sheds some light on what's happening.  It's clear that PacBio insiders like Michael Hunkapiller had huge confidence in their long read technology for years now, and here's why, according to Fool contributor George Budwell:
The problem is that the PacBio RS II appears to be too costly to use on the huge scale required by Big Pharma to hopefully usher in the era of personalized medicine, mainly by improving in vitro diagnostics. The Sequel System, by contrast, was specifically designed to be used as part of Roche's efforts in the area of human in vitro diagnostics by reducing sequencing costs and the size of the sequencer, meaning that this machine could be a major breakthrough in terms of producing medicines that are tailor made for the individual.
Yes, cost was a big problem for adoption, but it's only part of the story.

Medical research centers, where personalized medicine is being developed today, largely rely on Illumina sequencers because the technology is entrenched.  It's understood by techs and genomics facilities.  It's (relatively) easy to analyze.  In contrast, PacBio machines were less pervasive and people didn't get a lot of experience with using them or the data coming off them, making them "too much of a research tool even for researchers".

However, the longer reads that come off the PacBio (5+ contiguous kilobases vs 100-300 unpaired bases off Illumina machines) are much more useful for a variety of research and medical applications, with two principal ones standing out:
  1. Long reads let you easily map out how cancer genomes have been messed up in the disease, which is a very important realization in the past year,
  2. PacBio technology lets you find cancer related transcripts (i.e. gene fusions, like BCR-ABL in leukemias)
Medical researchers know that these things are pretty hard to do, even with the ridiculous throughput of Illumina machines today (I'm sure someone, somewhere, once thought that '640,000 reads ought to be enough for anyone'), and in fact, Illumina has been trying to get long-read sequencing off the ground since at least 2013.

However, PacBio has the potential to produce data that's much, much better for these two purposes, which is a huge win for the clinical sequencing market.  Cost is definitely a factor; The reduced capital cost of the PacBio ($350k) makes it more likely that the adoption barrier I've just described can be overcome in the near future.  

Regular readers here know that I think Illumina is a great company and is here to stay, but the quality of long read data trumps the cost in many situations. PacBio has just validated that concept, which is why Illumina's absolute dominance suddenly doesn't feel that guaranteed anymore.