Oxford Nanopore, the disruptive unicorn gunning for Illumina

Can the company's $1.5bn valuation be justified when last year it took just $23.5m in orders?

With the latest round of financing cementing its unicorn status and a new benchtop sequencing system having hit the market at the end of last year, Oxford Nanopore Technologies is sitting pretty. There are concerns, though, that its $1.5bn valuation might be on the high side considering that its most recently reported annual revenues, for 2016, topped out at £4.5m ($6.4m) and its net loss at £59m.

And the launch of its new PromethION machine means that it is now competing more directly with the likes of Illumina. Oxford Nanopore’s technology is highly innovative, but it is not clear that its accuracy can match Illumina’s, and the difficulties of carving market share away from the sequencing market leader should not be underestimated.

Oxford Nanopore made its name with the MinION, a handheld sequencing device that plugs into a laptop, which became available in 2015. MinION’s selling point was that researchers could take it anywhere, with its applications in healthcare including use at the bedside to identify infectious agents, perhaps in remote areas without much health infrastructure.

This was followed in 2017 by the GridION, a system that can run up to five MinIONs, with an integrated computer. And just before Christmas the group released PromethION, a much larger high-throughput system.

Oxford Nanopore's products
Product Description Status Cost
MinION Pocket-sized portable sequencer Started shipping mid-2015 Starter packs $1,000-14,999
Bundles $5,289-36,156
GridION Multiple sequencing devices with inbuilt computing module Started shipping mid-2017 Starter pack $49,955
System only $126,000
Or system free but customer must commit to buying 300 flow cells at $495 each; total of $158,500 including service and delivery
Ongoing service charge $10,000 pa
PromethION High-throughput, high-sample number benchtop system Started shipping late 2017 System free but flow cell and kit bundle costs $135,000
Ongoing service charge $15,000 pa
Flongle Adapter for MinION for smaller tests - single-use, on-demand sequencing Expected mid-2018 -
SmidgION Tiny sequencing device, designed to clip to a smartphone R&D stage; no launch date yet -

Oxford Nanopore says it received orders worth $23.5m for its various platforms in 2017. Orders, however, are not the same as sales.

Unusually for the DNA sequencing sector, Oxford Nanopore does not necessarily charge for the sequencing machine, instead offering an option whereby the sequencing device is given away for free, and the customer undertakes to purchase a certain quantity of consumables.

“Quite often people place year-long contracts, and that is the value of the orders received,” says a spokesperson for the company. So Oxford Nanopore booked $23.5m of orders in 2017, but the full $23.5m might not be realised until towards the end of this year.

“If you look at our accounts for 2016 our sales were $6m and our order book was $8m, so there’s not a huge difference,” the spokesperson says.

Long read

Oxford Nanopore expects to take orders worth $75m this year, helped by the launch of its new PromethION instrument, which is nearly 300 times as powerful as MinION.

“We’ll start to see revenue this year for PromethION,” says the spokesperson. “If someone wants to get one now they can buy a bundle, which is $135,000. But the box isn’t a capital item, they’re paying for consumables.”

The availability of PromethION means that Oxford Nanopore is combining a new kind of next-generation sequencing technology with an equally innovative pricing model. PromethION can sequence an entire human genome more cheaply than rival systems, the company says, with a cost of between $625 and $2,000 depending on the pricing plan the customer chooses.

But it also means Oxford Nanopore is up against other companies, some of which are much larger: PacBio (market cap $300m), Illumina (market cap $34bn), and Thermo Fisher (market cap $84bn).

“We’re trying to disrupt a market, not just compete against the big boys,” says the spokesperson. “We have got a few thousand people using the MinION, so if you look at the installed base we nearly have the same number of MinIONs out there as there are [Illumina flagship device] MiSeqs.” She says Oxford Nanopore’s technology will eventually take over in much the same way as digital photography has replaced film cameras.

Oxford Nanopore is indeed offering something new: long-read technology. Traditional next-gen sequencers produce short reads – small pieces of data, each around 300 DNA bases long; these then have to be assembled by computer. Oxford Nanopore’s devices can produce long reads, which can go as far as a million bases in one go, though in practice most of its customers choose to go for 5,000-20,000 bases.

Accuracy

But it is not clear how much of a draw this is, particularly when rival systems are generally believed to lead on accuracy. Oxford Nanopore concedes that with its sequencers “accuracy at the beginning wasn’t very good,” but says it is now comparable to competing systems.

Nick McCooke disagrees. He was previously chief executive of Solexa, the company bought by Illumina in 2007 and whose next-generation sequencing platform became the basis of Illumina’s current products, and is now chief business officer at DNAe, which offers a new kind of DNA sequencing based on semiconductor technology.

“Certainly Oxford Nanopore is improving accuracy,” he says. But he states that Illumina is the frontrunner on this measure, boasting “a level of accuracy no one else can match”.

This is a major motivating factor when customers choose which technology to opt for, Mr McCooke says. “At the moment the sales of both platforms would suggest – unless it’s historical inertia of people buying Illumina systems – that people are buying for higher accuracy rather than for long read length.”

The emphasis on accuracy could intensify with Oxford Nanopore’s move into benchtop systems, particularly as these are more likely to be used for the diagnosis of disease rather than, for example, by a botanist seeking to identify a plant species.

“They are taking Illumina much more head-on with those high-throughput devices. It’s Illumina territory,” Mr McCooke says.

And the move to diagnostics might shift the metrics by which sequencing platforms are judged. “It may be inappropriate in future to think about sequencing cost per base, accuracy per base, cost per human genome, how long it takes to deliver a human genome,” he adds. “There’ll be new measures: cost per test, turnaround time from sample to answer.” Oxford Nanopore’s claim to a sub-$1,000 genome might no longer be so important a boast.

Exit

But there is another, bigger, question for the future: where Oxford Nanopore can go as a company. Its investors have been incredibly patient, but even now an exit seems as far away as ever.

Anne Stevenson-Yang, co-founder of J Capital Research, says Oxford Nanopore has got too big too fast. As an analyst, she covers IP Group, Oxford Nanopore’s biggest investor.

“If they’d stopped financing five years ago or more, if they had just focused on becoming a niche technology to supplement the short reads that were already getting traction in the market, then they might have gotten taken out by someone like PacBio, and that would have been that,” she says.

Instead, Oxford Nanopore sought more and more cash, and its investors were happy to oblige. “The world is full of people who can’t bear to give up on sunk costs,” Ms Stevenson-Yang says, calling the company’s valuation  “unrealistically high”.

She believes that at the current valuation an acquisition is all but out of the question, and an IPO is also doubtful, though “certainly sillier things have been done”. Asked outright whether she thinks Oxford Nanopore’s investors will get their exit, she answers, “I don’t see how.”

Oxford Nanopore's funding
Date Round Investment ($m) Investors
Mar 20, 2018 Series J 140.0 GIC, CCB International, Hostplus, existing investors
Dec 11, 2016 Series I 126.0 GT Healthcare, Woodford Investment Management
Jul 21, 2015 Series H 109.0 Undisclosed
Aug 12, 2014 Series G 59.0 Woodford Investment Management
Oct 9, 2013 Series F 64.0 Odey Asset Management
May 3, 2012 Series E 50.8 Undisclosed 
Apr 26, 2011 Series D 41.0 Illumina, Invesco Perpetual, IP Group, Lansdowne Partners, Redmile Group
Feb 1, 2010 Series C 28.0 Invesco Perpetual, IP Group, Lansdowne Partners
Jan 11, 2009 Series B 18.0 Illumina
Mar 28, 2008 Series A 20.1 Undisclosed
Total 515.9
Source: EvaluateMedTech.

Ken Rumph, an analyst at Jefferies who also covers IP Group, is more positive. He believes that Oxford Nanopore’s investors will get their exit eventually, though he concurs with Ms Stevenson-Yang that an IPO is more feasible than an M&A deal.

“Oxford Nanopore ought to be a very listable business,” he says. “The money they’ve raised probably means they’re in no hurry to do that – it could be next year or the year after – and by that point they might well have rapidly growing sales, and the evidence across a number of product lines that they’ve got the potential to be a great deal larger.”

Still, “you have to sell a huge number of devices to justify a couple of billion dollars valuation,” he says. Oxford Nanopore seems unlikely to reach this point for a good few years yet.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizVantage on Twitter

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