Understanding the State of the Genomics Market
In the wake of the Covid-19 pandemic, there is renewed interest and focus in revamping the global healthcare system. The pandemic painfully exposed many of the system’s weaknesses, from overburdened hospitals and staff and unavailable medicines, to patients who could not get diagnosed or treated for their conditions as a result of this crisis.
For many patients, technology could play a vital role in the near future. In particular, the recent focus on genomics, or the study of a person’s genome, could prove pivotal. Genomics opens up healthcare to a whole new paradigm of personalization by allowing doctors to more objectively diagnose individual patients and proactively keep large populations healthy. Technological advancements in this space cover everything from liquid biopsies (sampling and analysis of non solid tissue, primarily blood) to genetic testing platforms and gene editing (DNA insertion, deletion, or modification).
As an investor, I think there are three unique opportunities worth paying attention to in order to capitalize on these accelerating trends.
Illumina Inc. (ILMN, Financial) is an industry leader in the next-generation sequencing (NGS) category. What is NGS? This term refers to the processes and technologies that are used today to read DNA and RNA sequences. It can include sequencing the whole genome or analyzing only a targeted portion of the DNA sequence. Sequencing the whole genome requires full fledged NGS platforms, while sequencing only a portion commonly uses microarrays, which are cheaper.
As of today, NGS Is primarily used for research, but is also starting to become the norm in clinical diagnostics, which is becoming the bigger market as more discoveries are turned into medical treatments. While most clinicians today are still largely trained on traditional diagnostic methods, the ability to make a more educated patient diagnosis with novel sequencing technologies is rapidly accelerating the adoption of NGS technologies.
Genetic sequencing then is at the heart of the wide array of commercial and academic applications being explored in genomics, and Illumina is the company at the cutting edge of this space with a whopping 80% market share in the DNA sequencing market globally. NGS platforms represent more than 90% of Illumina’s business, while microarrays represent the remaining portion of the revenue.
The company’s platform is the primary NGS platform used by research institutions, contract research organizations, core labs (collect and analyze data from clinical studies) and pharma companies around the world. Illumina’s decentralized ecosystem model simultaneously allows the company to expand its technology, hold on to its existing customer base and expand across international markets. The model works; revenue is up 33% in the Americas, 47% in EMEA, 45% in APAC and 47% in Greater China year-over-year as of Q3 2021. Achieving this level of global dominance is not straightforward – regulations need to be complied with, sales teams need to be built and operational infrastructure needs to be scaled. Illumina’s track record of doing this gives it a veritable moat of sorts.
Although the company got its start in the academic research setting, it now has the potential, as well as ample opportunity, to expand into other applications. This is evident from Illumina’s customer mix, which is 80% academic institutions and governments, with the remainder being biotech and pharmaceutical companies, a segment which is rapidly growing. These high volume “applied” or commercial new customers could help the company move beyond research into the rapidly growing space of clinical diagnostics, drug development, personalized medicine (custom therapy/medication), agriculture (designing better seeds to improve yield), pharmacogenomics (personalized drug dosing) and many other use-cases. Novel applications being explored include population genomics initiatives with governments to improve the efficiency of healthcare systems, and direct to consumer genomics where end users can directly use the knowledge of their genome to take control of their nutrition and wellness.
In a view towards owning the rapidly growing clinical diagnostics space, Illumina recently acquired GRAIL, accelerating its access to multi-cancer early detection tests. Grail recently announced that its Galleri test was approved for prescription by the New York State Department of Health, and a trial was launched with the U.K.'s National Health Service, marking major regulatory milestones. Multi-cancer screening is estimated to be a $150 billion market in the U.S. with over 24 million cases per year expected by 2030, and sequencing is expected to become the industry standard. Illumina has made other strides in this space too – 70% of the insured population in the U.S. is now covered for these genetic cancer tests.
Bolstered by record shipments for both clinical and research applications, Illumina recorded revenue of $1.108 billion for Q3 2021, a 40% increase compared to last year. CEO Francis deSouza says clinical market expansion is the key driver of momentum, with significant demand for oncology testing leading this demand. Sequencing consumables revenue was up 45% year-over-year, while sequencing instruments was up 65%. Covid-19 has become a sales tailwind, driving over $55 million in sales as labs around the world buy sequencing equipment to track new variants as quickly as possible.
In the first three quarters of 2021, Illumina added more customers than in all of 2020 or 2019, helping raise its full year revenue growth outlook to 36%, well above the market growth rate of 19%.
According to Allied Market Research, the global DNA sequencing market is growing 20% annually and is expected to reach $25 billion by 2025. If Illumina were to hold its market share, which I believe is a reasonable assumption since the company has been growing at or above market’s growth rate, it could get to $100 billion in market capitalization at six times sales. The stock is currently trading with a $59 billion market capitalization and has a net cash position of $1.3 billion.
All in all, I think Illumina is a great opportunity for long-term patient investors to get exposure to gene sequencing in their portfolio.Gurus invested in the company include Polen Capital, Viking Global, Lee Ainslie (Trades, Portfolio) from Maverick Capital and Thomas Gayner from Markel Asset Management. With its global market dominance, and management’s moves into clinical diagnostics, Illumina’s future looks very bright.
Natera Inc. (NTRA, Financial) is a diagnostic leader in the non-invasive prenatal test (NIPT) category. Reproductive health tests span every phase of life, starting from family planning to assessing a baby's health to evaluating hereditary risks. Non-invasive prenatal testing (NIPT) examines fetal DNA by taking a sample from a pregnant woman. With 140 million babies born globally each year, the market opportunity for NIPT is large and growing. In the U.S., over 80% of pregnancies are now covered for non-invasive prenatal testing
Natera’s flagship NIPT test, Panorama, detects common chromosomal abnormalities of a fetus with a blood draw from the mother. The company also offers prenatal single-gene screening tests for identifying single-gene disorders and screening to help couples determine the risk of passing serious genetic conditions to their child.
The company has grown and built scale in testing volumes by strengthening its market share in reproductive health testing and expanding into the transplant and oncology liquid biopsy fields. Within transplant, tests are used to evaluate transplant patients' health. Within oncology, tests are used to guide treatment decisions, including the ability to test and track mutations to a tumor.
Natera’s key to gaining rapid adoption in its markets is its cutting-edge technology, proprietary bioinformatics algorithms and proprietary data pools that detect genetic conditions far more accurately and far less invasively than over traditional means. However, Natera’s proprietary platform could also be a hindrance. It could slow down their international expansion capabilities, as they’ll need to validate testing, educate customers and build trust outside the U.S. A strategy to decentralize in order to offer testing outside of the U.S. is in the works.
Natera's management has shown strong commercial execution in convincing health insurance plans to cover testing costs. This competitive advantage can be realized through physicians, who will advise the patient to engage in Natera’s tests over others.
With that said, patient reviews about their experience using/working with Natera are mixed. Most have reported being overcharged and miscommunicated with, and Natera’s customer service is reportedly difficult to deal with. Despite these mixed reviews, the company has maintained its position as category leader. Fortunately, all of the issues described are operational and solvable.
According to Fortune Business Insights, the NIPT market is growing at 18% annually and will be a $10 billion market within the next five years. Natera has been growing faster than the market and could grow its sales to $1 billion or even $1.5 billion in five years. In the past quarter, Natera grew revenues more than 60% year-over-year to $158 million, and has increased its revenue guidance for the year by more than $100 million as it continues to exceed forecasts.
The company’s current market capitalization stands at $8.4 billion. This market cap indicates that the NIPT market potential and future sales are already priced in. Natera estimates transplant to be a $2 billion market opportunity that is currently less than 10% penetrated, and oncology liquid biopsy to be a $15 billion greenfield opportunity where the company has a lot of room to grow as the space is very young. With oncology, the company is in the early innings of commercializing a product for tumor monitoring, where positive early results have been reported.
The technology platform for transplant and oncology is an extension of NIPT and offers far more precision over existing market alternatives. If Natera were to capture even a small portion of these new greenfield opportunities in transplant and oncology, it would double its current market capitalization. The company would be a great fit for patient investors who want to get exposure to trends in personalized medicine with a proven technology platform and management team.
10x Genomics Inc.
10x Genomics Inc. (TXG, Financial) is a leader in the single cell sequencing category. Single-cell analysis provides information on individual cells within a sample and spatial analysis of biological systems. This technology allows researchers to tease out previously undiscovered cellular communication pathways for a particular disease and identify targets for novel drug candidates. The technique has become invaluable for immuno-oncology, cellular medicine and moving beyond the genome (DNA) to understand the transcriptome (mRNA) and proteome (proteins).
10x Genomics is the current leader in the space with its flagship technology platform, Chromium. 10x Genomics’ technology is primarily meant for research discoveries and not mass market applications, and has been optimized for research use cases.
The company requires the use of their own platform for analyses, requiring researchers to set up, manage and maintain the technology. While some research labs do purchase the technology, most institutions consider placing the instrument in core labs for institutional use. This restricted use of technology puts the company in competition with Illumina for lab space, where Illumina holds market share and is considered the gold standard. Management has shown great understanding and awareness of this issue and has been able to navigate these operational barriers. Other competitors include TakaraBio, Fluidigm Corp. (FLDM, Financial), Adaptive Biotechnologies Corp. (ADPT, Financial) and iRepertoire, all of which allow customers flexible alternatives.
According to the company, the market opportunity for 10x Genomics’ technology is $15 billion conservatively and $60 billion opportunistically. 10x Genomics dominates the single cell space and has been growing at a rate faster than the market. If it were to hold 25% to 35% of the market, which is a very conservative estimate given its leadership position, it could grow its sales in the range of $4 billion to $5 billion. At six times sales, the business could reach $25 billion to $30 billion in market capitalization. The stock is currently trading at a market cap of $16 billion.
The core business remains a valuable asset for long-term investors who want exposure to single-cell analysis secular trends in their portfolios.
Given the run up on the stocks in this article, long-term investors may want to gradually build positions or wait for a better entry point. In the fast-growing genomics industry, Illumina, Natera and 10x Genomics are market leaders, so investors with a long-term mindset could find them to be an attractive investment opportunity.