Oxford Nanopore Sequencing vs. Illumina
If you are lucky enough to have spent upwards of six figures on your MBA, you may be tempted to think that it was a waste of money now that the robots are in the process of devouring just about every job there is. That’s just not the case though. MBAs happen to be equipped with some very sophisticated tools that a robot would never be able to use – like Porter’s 5 Forces:
If you ever decide to whip out Porter’s Five Forces in a real-world situation, don’t. You’ll look like a complete tool. However, behind closed doors, it can be a useful framework for analyzing the competitive environment for any given company.
While reflecting on what geniuses we are for having backed the truck up on some shares of Illumina a few years back, we decided to analyze the company’s competitive position in order to help us sleep well at night. Illumina has a commanding market share, but ask any company in that position what makes them most nervous and they’ll tell you it’s being the market leader in a high-margin business. Such a situation is bound to attract competitors, and one such name that cropped up on our radar is a British startup called Oxford Nanopore Technologies.
Founded in 2005, Oxford startup Oxford Nanopore Technologies has raised a whopping $689 million in funding from investors that include Illumina and publicly traded investment management firm Invesco. The last funding round of $136 million closed just last month, giving Oxford Nanopore a valuation of $1.55 billion, and landing them on the highly coveted CB Insights Unicorn List. Oxford Nanopore has built a device for genetic sequencing that uses a technology they refer to as “nanopore sequencing” which is described below:
A nanopore is a nano-scale hole. In its devices, Oxford Nanopore passes an ionic current through nanopores and measures the changes in current as biological molecules pass through the nanopore or near it. The information about the change in current can be used to identify that molecule.
We’re less interested in the technical details here, and more interested to know about how Oxford Nanopore sequencing compares to Illumina sequencing. Both companies are involved in genetic sequencing, with Illumina building bigger machines that are more accurate and Oxford Nanopore building smaller devices that are “less accurate” like the one seen below:
The first thing to note here is that Illumina is actually an investor in Oxford Nanopore, but we don’t know the size of equity stake they hold. (Illumina was lead investor in an early venture round back in 2009.) This implies that they had a decent sized stake back when valuations were much lower. Any equity investment should come with some form of shareholder communication that isn’t available to the general public allowing Illumina to keep tabs on them. That didn’t keep the two companies from tangling in court however when a few years back Illumina claimed that Oxford Nanopore was guilty of patent infringement. The end result was in favor of Illumina.
Let’s get back to how the products from these two companies differ. A media outlet called EP Vantage published an article last week titled “Spotlight – Oxford Nanopore, the disruptive unicorn gunning for Illumina” which has a few really useful insights on this topic. The first is that even though Oxford Nanopore claims that their accuracy is on par with competitors like Illumina, not everyone agrees:
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.
In the beginning, even Oxford Nanopore agreed that their accuracy wasn’t on par with Illumina. That’s wasn’t exactly unexpected, considering their first low-cost device launched in 2015 was all about portability. Then, they moved on to other devices in a timeline that looks something like this:
- MinION, a handheld sequencing device that plugs into a laptop (2015)
- GridION, a system that can run up to five MinIONs, with an integrated computer (2017)
- PromethION, a much larger high-throughput system, 300X more powerful than MinION
Dubbed the “Illumina killer”, it’s the last product that has everyone excited. Well, not everyone. According to some analysts that know a whole lot more about this than we do, Oxford Nanopore is overvalued, and an exit seems unlikely at current valuations (an exit would mean an acquisition or IPO). Since a valuation is supposed to reflect the potential for future earnings, these analysts aren’t seeing the sorts of sales that would justify such a valuation. In other words, they’re not seeing sales that show Oxford Nanopore is posing a formidable threat to Illumina.
So, what does Oxford Nanopore not being able to exit mean for Illumina? At the very least, Illumina can continue to keep tabs on the company as a shareholder. If an acquisition took place, they may lose whatever little information advantage they might have. With over $2 billion in cash on hand, Illumina could be a potential suitor for an acquisition but that isn’t likely to happen if Illumina thinks that accuracy will be something that is always a key factor in the majority of sequencing use cases.
When looking at Illumina’s product offering, we see that their cheapest sequencer yet was released earlier this year, iSeq:
“For under $20,000, any researcher can have access to the accuracy of an Illumina sequencer in their lab,” said the CEO of Illumina about the new product. While this may sound like a jab at Oxford Nanopore’s historical subpar accuracy, it’s not a challenge. At least not according to Forbes writer Matthew Herper who thinks that the new device is “not an answer” to competitor Oxford Nanopore.
Seems like Illumina will not be likely to sacrifice accuracy for size anytime soon, and will instead increasingly shrink their offering until it overlaps with the Oxford Nanopore sequencing product profile. Or you could argue that they may just do a bolt-on acquisition of Oxford Nanopore and then increase the accuracy of the acquired device until it meets their high standard. Either way, it doesn’t seem likely Illumina will ever move away from “we’re the most accurate there is” product positioning. For now, that sort of dominance makes us sleep well at night knowing that our position in the market’s leading genetic sequencing firm is probably safe – for now.
Want to know what 30 tech stocks we own right now? Want to know which ones we think are too risky to hold? Become a Nanalyze Premium member and find out today!