Illumina (ILMN 0.63%) and Bionano Genomics (BNGO -4.73%) might both make gene sequencing devices, but as investments the two couldn't be more different. Whereas Bionano is a new entrant to the market and still has a lot to prove to its investors as well as the scientific community, Illumina is the top dog that's fighting to maintain its position.
So which is the better choice for investors who want exposure to one of the biopharma sector's most important segments? Let's dive in and take a look at each business.
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The case for buying Illumina
Bulls argue that Illumina is the better gene sequencing stock because in some sequencing markets, it's basically the only option in town, particularly in the all-important market for next generation sequencers (NGS).
Putting aside the fact that NGS has been around for more than 10 years and is no longer "next generation" but current generation, the bulls largely have it right; Illumina effectively has a firm grip on the sequencing market segment that matters the most today. Per a report by Grandview Research, in 2022 the NGS market was worth $5.7 billion, and Illumina's revenue was $4.5 billion -- and it only sells NGS sequencers.
Likewise, Illumina dominates the NGS-enabled high-throughput sequencer market, which makes it the first stop for large healthcare systems and biopharma companies alike.
Once Illumina sets a customer up with one of its sequencers, it gets plenty of recurring revenue for years afterward. Sequencers require specialized chemical reagents, software, and maintenance to operate, and the more samples that customers want to run, the more they'll need to cough up additional cash to keep their device working.
In Q1 of 2023 alone, Illumina brought in $692 million in revenue from consumables out of just over $1 billion in total core sales, of which $154 million were from sales of instruments. But its core revenue shrunk by 12% year over year despite 3% more sequencing usage due to pricing pressures, and in recent years it has faced difficulty in staying profitable.
Illumina doesn't need to work very hard to keep getting paid quarter after quarter. It just needs to keep producing enough consumables to meet demand, and investing in research and development (R&D) of new sequencing technologies is the icing on the cake.
Illumina's reign as king in the gene sequencer market is quite likely to continue, regardless of recent blunders like its recent ill-fated attempt to acquire the genetic testing company Grail. And since being the king has been a profitable proposition for it over the last decade, investors who buy it are banking on its expected continued dominance.
Bionano is a niche challenger, but could be a better investment
Bionano is one of Illumina's indirect competitors, and it only competes in a very small and emerging niche: optical genome mapping devices.
Regardless of what that means in a technical sense, Illumina doesn't have any products that serve the niche, and while there isn't nearly as much demand for optical genome mapping capabilities as there might be in comparison to something like NGS, that doesn't much matter for the purpose of evaluating Bionano as an investment. After all, it could potentially expand much faster, and its total addressable market is $10 billion per management's estimates.
In terms of its business model, Bionano's is largely the same as Illumina's. It's using a razor-and-blade model in which customers buy its device called Saphyr and then pay regularly for additional consumables, software, and maintenance packages. It isn't profitable yet, but that could change in a few years' time.
Right now, when laboratories want to do optical genome mapping without Bionano's hardware, they need to use a hodgepodge of different techniques. That hodgepodge tends to be time and labor-intensive, not to mention being prone to errors, all of which are challenges that the Saphyr can solve. In other words, the Saphyr could be for the optical genome mapping market what the original NGS hardware by Illumina was for the sequencing market: a massive leap forward in multiple critical dimensions.
As of late 2022, Bionano reported that each of its Saphyr systems installed with biopharma customers generated approximately $73,000 in revenue annually from sales of consumables. For Q1 of this year, management expects sales to be around $7.4 million, up roughly 30% from a year prior. It doesn't need to steal any of Illumina's market share to continue to grow faster; it only needs to penetrate its target market -- and it doesn't have any competitors there.
And if the Saphyr can gain traction as effectively as Illumina did with NGS, it too will become a standard way of doing things within its market, such that the traditional methods are looked upon as tedious-to-use relics of yesteryear.
Betting on the underdog is a better proposition
Given all this, investors need to understand that Bionano is a much riskier investment than Illumina as it's seeking to pioneer a new device by targeting a relatively niche market, which might not ever grow by that much.
At the same time, Illumina is struggling to grow its revenue in its core segments, and rapid growth is a thing of the past. Major customers who want its gene sequencers already have several, and new customers aren't going to be as abundant today as they were five or 10 years ago.
Therefore, Bionano is the better gene sequencing stock to buy for growth in the short and medium term. In the long term, it could still be a better investment than Illumina, but competition between the pair could become more relevant on longer timescales.
