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Morningstar | Illumina Adds Long-Read Capability With $1.2 Billion Pacific Biosciences Acquisition

We’re somewhat surprised by Illumina’s announcement it intends to acquire Pacific Biosciences for $1.2 billion in cash. While Pacific does give Illumina access to the smaller and more niche long-read genome sequencing market, it comes as at an odd time, especially when newer nanopore technologies pose a larger threat to Pacific’s business. At this time, we don’t expect a change to Illumina’s fair value estimate or narrow moat rating. Illumina seems confident regulators will sign off on the deal given the different intended uses of the instruments despite Illumina’s very high share in the overall genome sequencing instrument market.

Pacific has also recently posted slower growth than Illumina and has yet to turn profitable, but we imagine expected new product launches combined with Illumina’s impressive innovation record and with its large manufacturing and marketing infrastructure can improve Pacific’s performance. Unlike Illumina’s larger growth opportunity in the clinical market, we anticipate most of Pacific’s market potential will remain in the research market where accurate long-read data has more applications. Although the deal looks expensive at nearly 13 times trailing sales, management expects the long-read market to grow at a nearly 30% annualized growth rate, which looks roughly in line with current forward revenue consensus for Pacific. With nearly $3.4 billion in cash and tracking over $1 billion in operating cash flow annually, Illumina faces no roadblocks to fund the takeover.