When biotech investors talk about the future of DNA sequencing, they inevitably focus on industry leader Illumina (NASDAQ:ILMN). But when biotech researchers talk about the future of DNA sequencing, the conversation almost always centers on privately held Oxford Nanopore Technologies, which is developing a new approach to reading genetic code called nanopore sequencing. The excitement isn't entirely misplaced, despite a $40 billion gap in market valuation between the two companies.
Illumina has been publicly dismissive of Oxford Nanopore and of nanopore sequencing due to the technique's lower accuracy, but accuracy is not the only metric that matters. And the tiny competitor recently announced a realistic path toward making nanopore sequencing the fastest and cheapest, as well as the most accurate, approach in the industry. That would have major implications for Illumina shareholders.
A word on accuracy
Speaking at the Bank of America Merrill Lynch Health Care Conference on May 18, Illumina CFO Sam Samad noted that his company has a "healthy amount of paranoia about the competition," but "isn't necessarily worried about any single competitor." On the rise of Oxford Nanopore, he said:
You know, the nanopore technology is an interesting one ... But it's still challenged by accuracy. They can't establish Illumina-level single-base detection accuracy. They'd have to improve their accuracy by two- to threefold to get to the accuracy levels that we need to see when looking at the complex human genome.
Needing to improve accuracy "two- to threefold" is a relatively low hurdle, especially in the fast-moving world of biotech. In fact, it's only the difference between 99.9% accuracy (what Illumina machines routinely achieve after one pass over a sample) and 99.8% accuracy.
Although small, the difference is still enough to make Illumina the current gold standard for reading the letters of the human genome. But shareholders shouldn't get comfortable. All DNA sequencing methods must deliver on metrics including cost, time to results, and the accuracy of those results. Nanopore sequencing is already cheaper to access; it's competitive on a "cost per base" metric using the latest machine. It can deliver results in real time. And it's making headway on accuracy. That's why investors might want to start paying closer attention to the finer details that separate the two sequencing methods.
Accuracy matters today, but size matters tomorrow
Illumina's approach takes tiny fragments of genetic sequences and reads the alphabet approximately letter by letter using a light-based method (the "single-base accuracy" Samad refers to). The ability to achieve industry-leading accuracy and pricing (sub-$1,000 for human genomes, with a path to $100 for human genomes) has come from making larger and larger machines. The latest instrument Wall Street is clamoring over, the NovaSeq, is over five feet tall and weighs over 1,000 pounds. That could be a huge problem down the road -- one exposed courtesy of nanopore sequencing.
Oxford Nanopore's approach takes long genetic sequences, passes them through a single protein channel (a "nanopore"), and reads the alphabet in large chunks by measuring voltage changes across the channel. The current struggle with accuracy comes from the difficulty of inferring long DNA sequences from electrical signals produced by a single pore. But CTO Clive Brown recently announced exciting advances.
By passing genetic sequences through multiple different types of nanopores, then averaging the signals with machine learning, Oxford Nanopore has demonstrated improved accuracy -- and it's only been in development since early 2018. Brown asked rhetorically: "The question is: 'Why not five pores, different pores? Why not 500?' ... But we've got about four of them right now. We've got about four pores in development."
That's exactly the development the industry has been waiting for, and it puts Oxford Nanopore on a realistic path to matching -- and potentially besting -- Illumina in accuracy. Shareholders might grow increasingly uneasy with that prospect. Why? The silicon-based nanopore approach has other advantages over Illumina's current approach, including one notable consideration for the future of DNA sequencing: size.
Oxford Nanopore's MinION (pronounced "min-eye-on") is a handheld device, while the SmidgION in development plugs into a smartphone.
The PromethION, dubbed the "Illumina killer" by industry analysts, delivered sub-$800 human genomes in company testing (and that's the cost per run without amortization of the machine cost, unlike Illumina's stated genome costs). It processes several times more data than a NovaSeq, faster. It's roughly the size of a desktop computer -- and is about to hit the market.
That explains why nanopore technology has been to Antarctica and the International Space Station, and is in talks to be on board the next trip to Mars. A refrigerator-sized NovaSeq can't make those treks. More importantly, Illumina can't scale down its approach without sacrificing on cost, time to results, and the accuracy of those results.
Nanopore threatens the consumables business, too
The size of the instrument hasn't been an issue in DNA sequencing to date because most customers are hospitals or genetic testing companies with dedicated lab space. But Wall Street is overlooking the fact that biopharma is only one piece of the overall biotech sector. According to Bioeconomy Capital, biopharma comprised only 32% of all revenues in the American bioeconomy in 2016. Put another way: If a low-cost, fast, and accurate DNA sequencer could hook up to a smartphone, what other applications would become accessible?
Therein lies another sizable risk for Illumina's business: consumables. That is, all the chemical reagents and kits needed to conduct DNA sequencing, comprise 64% of the company's total revenue. Today, the most important reagents used in DNA sequencing must be shipped on ice and stored in freezers to maintain their activity. That's not a problem for instruments with access to utilities and freezers (such as in a hospital), but it's a deal-breaker for sequencing instruments used in the field (say, a jungle). The "cold chain" also comprises a great majority of the overall cost of sequencing: Illumina's $1,000 human genome price tag includes $797 in reagent expenses.
But because Oxford Nanopore's devices are intended for use both inside and outside the lab, it has been developing novel reagents that don't require cold storage. In fact, the first such products can withstand temperatures of over 100 degrees Fahrenheit for over one month. Removing the cold chain would make reading the genetic alphabet vastly more accessible, while greatly reducing the cost of sequencing -- without the need to build instruments the size of, ironically enough, a refrigerator.
Investors can't dismiss nanopore sequencing
Illumina is the ruler of DNA sequencing today because it went all in on a very specific technical path (one that requires larger machines to wring out improved performance -- and freezers) and user base (medical customers). However, investors who dare to peek over the horizon might notice that the industry appears to be headed in a different direction.
The rise of nanopore sequencing and the removal of the cold chain for consumables don't mean Illumina will be reduced to a heap of rubble, but they do mean, at the very least, that the company will be forced to share the sequencing market. Considering Wall Street's anxiety over its premium valuation -- shares trade at 75 times earnings, mostly due to a lack of competition -- that could sting shareholders who overlook the latest advances.