Sequencing can be split into two types: short-read and long-read. As one might guess, short-read sequencers read shorter DNA/RNA strands, or those 50-300 base pairs in length. Long-read sequencers read much longer strands of between 15,000-20,000 base pairs in length (or, in the case of Oxford Nanopore, 300,000 bp in length). Long-read and short-read have various advantages/disadvantages, but historically the trade-offs have centered around length of read, accuracy, and cost. Long-read sequencing was able to handle longer strands, but was both more expensive and less accurate. Consequently, short-read sequencing dominated for most use cases, and Illumina became synonymous with NGS.
But long-read sequencing has been, and is, the better option for certain types of genomic analysis:
Assembling entire genomes. Genomes are substantially longer than anything a sequencer can read in one run, and so need to be split into pieces, run through the sequencer, and then re-assembled. As one would guess, an 100 piece puzzle is easier to put together than a 10,000 piece puzzle. Assembling a genome (or transcriptome) with short-read sequencing means you have less overlap between individual strands, which makes it harder to put the pieces together accurately and causes gaps/errors in the final product.
Reading highly-repetitive sequences. This comes in especially handy for agricultural use cases (wheat has a genome with over 85% repeat content!), and rare diseases where the mutation causing the disease is present within an often repeated sequence.
Detecting structural variants, which are defined as genomic alterations larger than 50 base pairs. In the past this benefit was offset by long-read’s overall inaccuracy, which made it a very poor tool for detecting any non-structural variants (“Is this a single point mutation or did our machine just make a mistake?”)
Phasing – Humans have two copies of each chromosome, one from each parent; each copy is referred to as a haplotype. Phasing refers to the separation of these inherited copies into haplotypes. It’s especially useful for the diagnosis of rare diseases like Angelman’s, which is caused by a mutation in the chromosome inherited from the mother.
Methylation patterns. Long-read sequencing measures methylation patterns by default. Short-read sequencing requires additional library prep.
On top of this, there have been large strides made in both long-read cost and accuracy. The cost of sequencing a human genome using this method has come down from thousands of dollars to under a thousand, and accuracy has improved dramatically from an error rate of 10% to one of 0.1%.1
PacBio has long been the dominant player in long-read sequencing, a truth one wouldn’t recognize from looking at the company’s stock price, which is not only down ~76% over the past year but down 90% from when it went public in 2010. Its business model is essentially the same as its short-read sequencing peers: customers buy sequencers, which are infrequent/lower-margin purchases; these sequencers need consumables for each sequencing run, which PacBio sells at at a much higher margin. Said differently, the business is somewhat analogous to Apple, where infrequent hardware purchases enable the higher-margin, recurring revenue. Unlike Apple, however, sequencing companies are continually releasing machines that are not only better, but markedly cheaper. The bet here is that the more affordable sequencers become, the more demand for sequencing will increase. This increased demand has two components: the first is that institutions/companies that don’t currently have the balance sheet to buy a machine will do so once the cost comes down enough. The second is that existing customers have plenty of additional sequencing runs they’d currently like to do but can’t yet afford given each run’s cost. The way this bet plays out in sequencing companies’ financial statements is straightforward: margins are lower in years when a new sequencer is released, and consumables revenue for these new sequencers then takes a few years to fully ramp up.
Over the past few years, there’s been some uncertainty from investors that lower sequencer prices will continue to spur increased demand, as evidenced by analyst questions on both Illumina and PacBio earnings calls. This uncertainty illustrates the challenge of new product launches coinciding with a tougher macro environment: it’s easy for management to put extended sales cycles and lower than expected annual pull-through down to macro troubles, but it’s possible that there’s genuinely less of an appetite for sequencing than PacBio/Illumina anticipated.2 In PacBio’s case, it’s difficult to make a determination either way. On the long-read side, the company released two new machines over the past two-ish years: Revio, the latest version of its traditional sequencer, and Vega, a much more affordable, benchtop, option that’s lower throughput and has a higher-cost per sequencing run.3
The argument that PacBio overestimated long-term demand for long-read sequencing rests on comments from the company’s Q1 earnings call, when Revio utilization came in lower than expected:
“In Q1, more customers than we expected utilized their Revio systems at less than 20% capacity. Many of these are newer customers and the average age of the systems in this category was less than four months, which we believe indicates that these customers are still early in their ramp up. The pace of the ramp is dependent on a number of factors including, the timing of sample availability, lab readiness, and funding among other reasons. We are putting measures in place that we believe will help these customers ramp to their full utilization as timely as possible, and help drive consumable growth going forward.”4
It could be true that these customers are simply taking longer to ramp; it could also be true that these customers won’t actually ramp up to the expected levels. The recently announced Revio price cuts and the release of the much cheaper Vega option might be evidence of management realizing the latter is true. The worst case scenario (albeit an unlikely one) here would be something like what happened to Blackberry, where price cuts fail to stimulate further demand and instead result in less money to do R&D, which is a vital component for a sequencing company!5
I think the best counterargument to the above is what happened when PacBio initially released Revio in 2022. Revio actually cannibalized sales of its Sequel II sequencers faster than expected, to the point that management had to make excess inventory adjustments on the income statement. That indicates that at least some of PacBio’s customer base has a real appetite for higher throughput machines that can support increased research activity. Company management has emphasized the work that’s been done to lower the DNA input requirements for Revio and simplify the library preparation steps for sequencing runs; these are efforts that should both widen the addressable market and increase annual pull-through per sequencer. Lowered input requirements substantially expands Revio’s use cases (it’s now easier to sequence DNA from heel pricks and saliva samples), and easier library prep should result in decreased friction and thus increased customer activity.
Historically, PacBio’s struggled to branch out beyond academic and research applications, which is a real limitation for the business. A big part of the reason Illumina could enjoy success going forward is that the company is partially indexed to the growth of liquid biopsy/MRD market. If you think we’re in the early innings of these tests, then Illumina is a good way to bet on the picks/shovels in the gold rush.6 You can’t analyze a liquid biopsy sample if you don’t have a high-throughput, short-read sequencer! Moreover, diagnostics companies are very unlikely to change sequencing providers once test development is under way, and even more so once a test receives FDA approval. Unfortunately for PacBio, long-read sequencers are not used in the liquid biopsy/MRD workflow. Management is aware of this, and so developed its own short-read capabilities by acquiring Omniome in 2021 and Apton Biosystems in 2023. Its short-read sequencing system, Onso, was launched in August of ’23 with a sales pitch focused on the system’s accuracy. Illumina’s NovaSeq X systems advertise an error rate of Q30 (1 error per 1000 bases); PacBio’s Onso advertises one of Q40 (1 error per 10,000 bases). Accuracy of course matters, and Natera expressing interest in Onso is a positive signal, even if such interest wouldn’t result in real revenue for several years.7 That said, Illumina brings more to the table than just accuracy (as this reddit post goes into). Furthermore, now is a particularly inopportune time to get into the short-read sequencing market. Everyone, including the VC world, has woken up to the success of Illumina. Element, Ultima and BGI Genomics are all going after the short-read space, something that wasn’t happening to any notable degree pre-Covid. I think the best reason to believe PacBio has an advantage over venture-backed players is that its historic work in long-read puts it in a better position to understand what customers are looking for other than throughput, accuracy, and cost (eg. sequencers break often. If you don’t have a great customer service team you’re going to struggle long-term in this business). The fact that the company’s been around for a while also helps: it’s challenging to buy more consumables if your early-stage sequencing provider goes out of business!
It's not necessarily easy to figure out a valuation that makes sense for PacBio. On an EV/’25 Revenue multiple it’s valued remarkably like Illumina, at 5.7x as compared to Illumina’s 5.61x. This doesn’t make a lot of sense (although the organizations are similar in that executive turnover has been a cause for concern at both!). PacBio has negative EBITDA (Illumina’s is positive), its full-year revenue was down 23% YoY (Illumina’s was down ~2%), its short-read platform is far from proven out, and in Q1 of ‘24 management abandoned its 2026 target of at least 500mm in revenue. It’s true that Illumina fumbled the bag with its GRAIL acquisition and is facing increasing competition, but it’s still the king of short-read and powers liquid biopsy/MRD tests for the likes of GRAIL and Natera. PacBio sits in a fundamentally different position: it primarily serves the much smaller long-read market and is years out from its short-read sequencing efforts bearing real fruit. I think the stock would likely pop if management announced plans to abandon its short-read efforts and use that money for debt paydown, but that’s a strategy that could easily be taken too far. The sequencing industry is a prime example of a space where if you cut R&D too much you’ll quickly approach obsolescence.
Correction: In the first version of this research note I wrote “I think the stock would likely pop if mgmt announced plans to abandon its short-read efforts and use some of that money for buybacks.” As two people were quick to point out on Twitter that’s far from the smartest move in the world given the company’s debt levels! The general point is that it’s difficult to pull money away from R&D for buybacks or debt given how critical innovation is in this space.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence
It’s worth noting that short-read costs have of course also come down during this period, so it’s still a cheaper method than long-read. Long-read proponents argue that the costs have still decreased enough for the method to serve as a serious alternative to short-read for the right use cases. Long-read proponents will also argue that it can be a much more cost effective way to test for certain diseases. Eg. It can take up to 5 diagnostic tests to confirm Angelman Syndrome. Long-read sequencing can cut that down to one-test.
Annual pull-through refers to the amount spent on consumables per sequencing machine. Eg. Annual pull-through of 255k for PacBio’s Revio system means customers spent 255k per year on consumables when using that machine.
Vega was only released in November of 2024.
Taken from the company’s Q1 2024 prepared remarks.
Management’s response to this concern would be that the Revio’s price was getting cut during sales negotiations anyway, and so these machines weren’t selling at the previous sticker price of 779k. Dropping the price to 599k only serves to more accurately present what these machines were really going for, and presumably widens the funnel of potential customers.
Twist could also be a good bet here with the company’s NGS Prep kits, which are used by both liquid biopsy and MRD companies. Like sequencers, these NGS Prep kits are very hard to switch out once a test is FDA approved.
This interest was mentioned in Morgan Stanley’s note after the Q1 earnings call.