[Updated, 11/2/18, 11:09 a.m. ET. See below.] DNA sequencing giant Illumina is shoring up its position in genetic research through a cash deal to acquire Pacific Biosciences for approximately $1.2 billion.
Under the agreement, Illumina (NASDAQ: ILMN) will pay $8 per Pacific Biosciences (NASDAQ: PACB) share, a 79 percent premium to the Wednesday closing stock price of the Menlo Park, CA, company.The company’s shares haven’t traded above $8 since November 2016. PacBio went public eight years ago at $16 per share.
Though both Illumina and PacBio offer gene sequencing systems, the companies say the deal brings together complementary technologies. Illumina’s sequencing technologies analyze short stretches of DNA, or short reads. PacBio’s gene sequencing system, based on its Single Molecule, Real-Time (SMRT) technology, gives scientists the ability to analyze long stretches of DNA, or long reads. Illumina plans to offer both technologies to scientists and clinicians.
Francis deSouza, CEO of San Diego-based Illumina, said in a conference call following the announcement Thursday that he expects the acquisition to expand his company’s total addressable market. DeSouza said PacBio told him that the market for long-read sequencing—$600 million in 2017—is growing at 30 percent yearly, and will reach $2.5 billion in 2022.
He also noted that the acquisition is set to be the largest Illumina has made since it bought Hayward, CA-based Solexa, a maker of genome sequencing machines, for $600 million in 2007. That deal was done by then-CEO Jay Flatley, who led the company from 1999 to 2016. Illumina has swallowed up other companies under deSouza, albeit on a smaller scale: Earlier this year it splashed out $100 million on San Diego-based startup Edico Genome.
[The following two paragraphs added to include analyst comment.] In a research note sent Friday morning, Leerink Partners analyst Puneet Souda wrote that the PacBio acquisition plugs “a major gap that remained unfilled so far.” The genomic sequencing market is mostly the short-read analysis, such as what Illumina offers. While short-read technology is fast and economical, long-read technology provides more accuracy can analyze parts of the genome that short-reads can’t. But long reads are slower and more expensive. Adding PacBio increases the market opportunity for Illumina and improves the company’s standing against competitors, Souda wrote.
“With long-read technology, [Illumina] can address applications including structural variation, haplotypes and regions of genomes that are refractory (repeats of bases),” Souda said. “This we believe will become important as clinical genomes come to market longer term and as pharmacogenomics and other applications grow.”
PacBio, and its shareholders, have had an up-and-down journey. The company raised $200 million in its 2010 IPO and went on to bring its first product to the market the following year. But early on PacBio had a hard time selling its instruments, which were then priced at $700,000 a pop. The company’s flagging stock price reflected those struggles, dipping to a low of $1.20 per share in 2012.
Though business has picked up for PacBio in recent years, the company has struggled to grow and diversify its customer base. An agreement with Roche to develop diagnostic products based on the PacBio technology was terminated in late 2016. According PacBio’s latest annual report, aside from Roche, one customer accounted for 31 percent of its $93.5 million in 2017 revenue.
The boards of directors of both companies have signed off on the deal, which still needs approval from PacBio shareholders as well as regulators. Illumina expects to close the acquisition in mid-2019.
Xconomy editor Sarah de Crescenzo contributed to this report.
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