Author Topic: PACB - Pacific Biosciences of California  (Read 6505 times)

writser

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PACB - Pacific Biosciences of California
« on: January 02, 2019, 11:53:47 AM »
Pacific Biosciences is a smallish biotech company that manufactures systems for (real time) gene sequencing. Revenue the past five years was ~$90m usd. In November last year a competitor, Illumina, announced it would acquire PACB at $8 per share or a ~80% premium. The buyer is a much larger company and the deal is not subject to financing conditions. Total merger consideration is roughly $1.2b. PACB has to pay a $43m fee if the merger is terminated and ILMN has to pay $98m if they don't consummate the merger (though as far as I understand they don't have to pay up if the deal fails due to antitrust issues). The vote seems a formality given 13% insider ownership, lack of protests so far from large shareholders (owning ~32%) and the huge premium offered. The deal is expected to complete 'mid 2019'.

The way I see it basically the only risk (apart from some black swan events) is that regulators block the deal due to concerns about the competitiveness of the sequencing space. Both EU and US regulatory approval is required. Illumina is, as far as I can see, by far the largest player in the genome sequencing space. According to this article Illumina had 2017 revenue of $2.75b while the #2 only had ~$400m revenue in this space. So yeah, you should probably be concerned a bit. On the other hand, PACB is only a very small player - acquiring it shouldn't change the competitive landscape that much over the next few years. Also, both companies specialize in slightly different technologies: "short-read" v.s. "long-read" sequencing (interesting Forbes article). Not sure if that's very relevant for antitrust considerations: in the end they're both sequencing methods.

Anyway, yeah, there's a chance that regulators will block and/or delay this deal. But common sense tells me that a $44b US company buying a $500m US company (before the deal announcement) that is developing technologies that are currently a bit speculative isn't a super big problem. Several other big players are active in the sequencing market (Thermo Fisher Scientific, BGI genomics - a Chinese company, Agilent) so it's not like Illumina is crushing its small competitors. It seems unlikely the Trump administration would block such a deal.

Shares traded as high as $7.80 after the deal was announced but have since slided to ~$7.37 now. I've seen no relevant news regarding antitrust issues in the meantime so I'm not sure what the market is doing. Looks like shares have been sold down a bit in the December panic. At the current price upside is ~8.5% or ~18% annualized if the deal closes mid-year. Even if regulatory issues cause a delay of a few months the IRR should be satisfactory. I bought a few shares. Small position - just based upon a 'common sense' approach which could be completely wrong. I'm absolutely not an expert in this space nor in antitrust concerns.

As always, any thoughts would be appreciated.
« Last Edit: January 02, 2019, 11:57:24 AM by writser »
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Foreign Tuffett

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Re: PACB - Pacific Biosciences of California
« Reply #1 on: January 02, 2019, 01:42:50 PM »
This is a must-read:

https://seekingalpha.com/article/4226863-illumina-inc-ilmn-ceo-management-presents-citis-2018-global-healthcare-conference-transcript?part=single

- "it's complementary technology, its markets that we don't play in today."

- "at this point given the level of revenues that PacBio has in China, we don't believe it needs to go for regulatory approval. But I would never say never that that's never going to be the case where China decides to look at it, but at this point we don't believe it should go up for regulatory approval."

writser

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Re: PACB - Pacific Biosciences of California
« Reply #2 on: January 02, 2019, 02:07:55 PM »
Thanks for the link. They expect US regulatory approval to take 7-9 months so exactly mid-year seems a bit optimistic. Probably July / August is a more conservative estimate (and that's ignoring EU approval).
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Hielko

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Re: PACB - Pacific Biosciences of California
« Reply #3 on: January 02, 2019, 02:10:32 PM »
If they think that US approval takes 7-9 months it probably also means that they don't expect to get this transaction rubber stamped.

Gregmal

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Re: PACB - Pacific Biosciences of California
« Reply #4 on: January 02, 2019, 02:14:17 PM »
I'm familiar with this space and a lot of the companies in it, and all I'd say is that when it comes to regulatory stuff, you are in the Wild West. While I think this goes through, it would be a big mistake to assume no/little revenue= no regulatory hurdles.

writser

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Re: PACB - Pacific Biosciences of California
« Reply #5 on: January 03, 2019, 12:23:55 PM »
For sure it is risky and maybe I'm being too optimistic / naive. Hence the small position. On the flip side a 10% cash spread makes up for a lot of uncertainty and places you in the company of deals like Shire / Takeda, Sprint / T-Mobile or NxStage medical. Can't help but think I'd rather be long PACB.

On a related note, BMY today announced the acquisition of CELG. Another risky biotech deal. This one is much bigger ($50b), partially paid in stock with a possible CVR payout. Current spread: 16% - 27% depending on how you value the CVR. Might or might not be interesting - haven't looked at it in detail.
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Foreign Tuffett

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Re: PACB - Pacific Biosciences of California
« Reply #6 on: January 04, 2019, 06:45:48 AM »

Jurgis

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Re: PACB - Pacific Biosciences of California
« Reply #7 on: January 04, 2019, 07:22:45 AM »
My heavily discounted $.02 thoughts on this: on one hand, I'd think this should be approved; on another hand, I don't like that PACB is money losing IMO richly valued business.

Running Kelly on this assuming .08 increase on success and .4 drop (a bit generous?) on failure, Kelly swings to gains at ~85% chance of approval. This might be reasonable expectation of success.

Personally, I won't buy, but I'm probably not a good role model on this.  8)

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Hielko

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Re: PACB - Pacific Biosciences of California
« Reply #8 on: January 04, 2019, 08:07:58 AM »
FTC second request for info. Not a good sign.

https://www.sec.gov/Archives/edgar/data/1299130/000119312519001735/d677749d8k.htm
I think that was going to be expected. While I do think that this deal should be approved it's for sure one that will not get rubber stamped.

writser

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Re: PACB - Pacific Biosciences of California
« Reply #9 on: January 04, 2019, 11:21:53 AM »
Market seems to agree with that because shares hardly budge upon the news.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.