Can Oxford Nanopore Continue to Grow Revenues?

Final 12 months, we requested an enormous query in one among our year-end articles: Is It Lastly Time To Dump Illumina Inventory? The query got here up following a sequence of administration missteps punctuated by the failed acquisition of GRAIL, a liquid biopsy firm, and an investor revolt led by Carl Icahn. The clincher for us as tech buyers is the extended drought in income development, as a result of we stay massive believers within the general genomics sequencing funding theme. The sphere underpins a lot of the innovation underway immediately in healthcare, from gene-editing to personalised drugs. 

Earlier this month, on the forty second Annual J.P. Morgan Healthcare Convention on Jan. 9, Illumina introduced preliminary 2023 outcomes. As anticipated, income was flat (technically down 2%) at $4.5 billion, marking the second 12 months in a row of stalled development. It’s additionally the second 12 months in a row that the corporate has posted a loss. Buyers greeted the information with little fanfare, most likely ready for juicier particulars to emerge when Illumina releases its full report subsequent month. 

Whereas Illumina (ILMN) stays the main option to play the gene sequencing theme, 4 different shares signify both genetic sequencing or genetic testing corporations. A type of corporations, Oxford Nanopore (ONT.L), a pioneer in long-read sequencing, supplied its personal sneak preview of 2023 outcomes on the identical day on the identical convention. There was sufficient meat within the presentation to present us one thing to chew on to start the 12 months whereas we await the Illumina report.

Income Development Stays Excessive

The final time we checked in with Oxford Nanopore the corporate posted 36% income development for 2022 in what it calls underlying Life Science Analysis Instruments (LSRT) income. This quantity strips out covid sequencing, which has practically dried up at this level, and a particular one-off contract for the United Arab Emirates Genome Program (EGP). Underlying LSRT income comes from the sale of long-read sequencing machines and consumables. The latter accounts for about 75% of revenues, proving that Nanopore’s razor-and-blade enterprise mannequin is strong.

On the floor, the story seems to be just about the identical in 2023. Oxford Nanopore expects a 39% enhance in underlying income development and the same 25%-75% break up in machines versus consumables gross sales. So, you may be a wee bit stunned to be taught that Oxford Nanopore inventory is down greater than 20% since CEO Gordon Sanghera launched preliminary numbers again on January 9 and geeked out about genomic sequencing science for 37 minutes. We all know as a result of we listened to the entire thing.

There are just a few the explanation why Oxford Nanopore inventory took successful – none of which we predict impacts the corporate’s long-term prospects. 

Underlying LSRT income development dropped from 53% within the first half of 2023 when in comparison with the corresponding six-month interval to “simply” 32% within the second half. The slowdown was blamed on a longer-than-expected ramp-up of its greatest prospects. These revenues will present up within the 2024 ledger.

New guidelines by the US and others about exporting AI semiconductor expertise to China, in addition to sure nations within the Center East, additionally chipped away at development. We didn’t get precise numbers right here however administration says product improvement this 12 months ought to present a piece round. China was a gradual supply of development in Asia for Oxford Nanopore at 20% in H1-2023. 

Gross margins are anticipated to fall between 53% and 55%, dragged down a bit by the EGP mission. In any other case, gross margin is nearer to 57% and the administration is sticking with a mid-term goal of 65% gross margin by 2026. The corporate claims enhancements in manufacturing, comparable to automation, and recycling {of electrical} parts will finally assist enhance profitability. Needless to say many of the margin comes from consumables versus {hardware}.

Administration additionally promised that underlying income development will proceed to trace at 30% or higher for the foreseeable future. That’s the form of sturdy year-after-year development we had come to anticipate from Illumina. 

Buyer Development Ranges Off

Up to now, we’ve been fairly bullish in our evaluation of Oxford Nanopore inventory. In spite of everything, we have been assured sufficient in our earlier analyses to open a place. However that doesn’t imply we don’t constantly problem the corporate celebration line and our personal assumptions. Within the the rest of this text, we wish to probe simply how practical is Oxford Nanopore’s capacity to keep up a minimum of 30% income development. That clearly hinges on the corporate’s capacity to develop its buyer base and for these prospects to spend more cash over time on the nanopore platform, which ranges from handheld and desktop sequencers to costly high-throughput machines. 

The technique continues to be principally about constructing model consciousness by getting its low-end units into the palms of small laboratories that usually wouldn’t have the experience or sources to do genomic sequencing. These are the principle prospects who’ve printed greater than 8,000 scientific papers praising and parsing the expertise. There are greater than 7,000 of them, spending upwards of $25,000 however averaging $6,000 – in what the corporate refers to as its S1 tier. The following tier of shoppers (S2) is those that spend between $25,000 and $250,000. There are about 1,100 of those mid-tier prospects who spend a mean of $60,000. Lastly, there are presently 90 prospects (S3) who common $600,000 every.

These numbers are from Sanghera’s presentation, so we don’t have the ultimate stats. Nevertheless, these numbers aren’t dramatically completely different to these launched final 12 months. For instance, Oxford Nanopore claimed 7,210 S1 prospects, practically 1,000 S2 prospects, and 73 S1 prospects in 2022. If that’s the case – that Oxford Nanopore added considerably fewer new prospects in 2023 than the earlier 12 months – then a lot of the underlying income development is from current prospects. That’s definitely a validation of the platform however what to make of the drop in new prospects, particularly within the S3 cohort (30% new prospects in 2022 all the way down to 23% in 2023)?

Chasing the $100 Genome

We’re notably within the greatest spenders as a result of high-throughput sequencing is almost certainly the place Oxford Nanopore immediately competes with Illumina. Whereas the corporate is pushing the idea of decentralized sequencing – within the subject or point-of-care utilizing handheld or desktop machines – the Holy Grail stays the $100 genome. Illumina’s new flagship sequencing machine, the NovaSeq X, is anticipated to deliver prices all the way down to $200 per human genome. Oxford Nanopore’s high machine in its PromethION line prices $345 per genome.

Final 12 months, a startup referred to as Ultima Genomics got here out of stealth in an enormous manner by saying it had damaged the $100 genome barrier with its UG 100 platform. Positioned within the larger San Francisco space, the corporate raised $600 million in a single 2022 enterprise spherical from the likes of Khosla Ventures and Andreessen Horowitz, amongst others. It reportedly made some tweaks to the traditional sequencing course of, comparable to changing the advanced and expensive move cell with a silicon wafer and leaning extra on machine studying to provide usable knowledge. Like Oxford Nanopore, Ultima Genomics makes use of Nvidia AI {hardware} to energy its machine. Additionally it is working with the opposite genetics sequencing firm in our portfolio, 10x Genomics (TXG), to include its cell-by-cell analytics functionality into the UG 100 platform. 

We haven’t even talked about China-based BGI Group, which stated again in 2020 it could provide supercharged sequencers for giant inhabitants genetics research that break the $100 per genome barrier. So far as we all know, not a lot has occurred because the announcement, but it surely’s solely a matter of time earlier than the value drops.

Income Development Depends on New Markets

As Oxford Nanopore buyers, we wish to maintain shut tabs on these types of developments by rivals whereas protecting in thoughts that these applied sciences aren’t apples to apples. Oxford Nanopore’s long-read sequencing platform presents completely different benefits over short-read machines like these developed by Illumina, BGI, and even Ultima Genomics. As an example, it could detect epigenetic modifications, that are modifications in gene expression that may be inherited. Additionally it is higher at sequencing the transcriptome, which incorporates the directions for making proteins and for regulating gene exercise. Sanghara claims that its platform will finally have purposes for proteomics, the research of the whole lot to do with proteins. He supplied the inevitable if much less poetic “Lord of the Rings” paraphrase: “One platform to allow and analyze all these multi-omics-nuanced drivers of biology.”

Lengthy-read sequencing is usually dearer, so the query stays whether or not Oxford Nanopore can proceed to develop a platform that’s each sturdy and price aggressive throughout these and different rising fields. In different phrases, whether or not the corporate can keep 30% income development for the lengthy haul will largely depend upon its capacity to develop its whole addressable market past analysis and restricted medical purposes into extra profitable ones comparable to oncology, infectious illness, and even agriculture. In that case, at a easy valuation ratio of about 7 (based mostly on a $1.6 billion market cap/$215 million annual income), we may be tempted so as to add shares, particularly if we determine to exit Illumina. As at all times, our cherished subscribers would be the first to know if we make any strikes.

Conclusion

Genetics expertise has come an extended, good distance because the human genome was first sequenced again in 2003. Actually, solely extra lately, with the arrival of long-read sequencing by Oxford Nanopore and rival Pacific Biosciences (PACB), did scientists lastly tease out a number of the closing particulars of the human genome. It is a fast-evolving trade that’s turning into extra accessible and enticing to rivals as obstacles to value drop whereas the potential market alternative goes up. As one of many few high quality, publicly traded gene-sequencing corporations available on the market immediately, Oxford Nanopore appears compelling if it could keep its income development trajectory by penetrating new markets as its platform ramps up.