The 10X Genomics IPO and Single-Cell Sequencing
Over the last few weeks, pundits have been tearing apart the WeWork Initial Public Offering (IPO), and uncovering all kinds of things to write about. It’s a company that’s raised some eyebrows because of their burn rate (between $150 – 200 million a month) and the company’s vague business model which some have described as a “masterpiece of obfuscation.” An article by Fortune talks about how the word “energy” is used 13 times in their S-1 filing and that the CEO of WeWork apparently once told a reporter that their 11-figure valuation “had less to do with its revenue than its energy and spirituality.” Perhaps the most entertaining analysis came from Elizabeth Pitt over at The Verge who thinks WeWork Isn’t a Tech Company; It’s a Soap Opera. For example, here’s a look at WeWork’s corporate org chart that leaves her at a loss for words.
WeWork looks like the sort of company that might corner you in the office break-room and keep asking if you’ve ever wondered what it’s like to be financially independent.
All of the information that fueled these articles on WeWork can be found in a mandatory document that gets filed with the Securities Exchange Commission (SEC) every time there’s an IPO. In the SEC filing database, it’s referred to as an S-1 (domestic companies) or an F-1 (foreign companies). For investors, it’s more commonly called an “IPO Prospectus” which dummies.com succinctly describes as a list of “all the opportunities, risks, and financial details about the company that’s selling stock to the public.” One day, artificial intelligence algorithms will be able to instantaneously scan an IPO prospectus and turn it into an insightful one-pager, but until that happens we need to rely on the second-best technology available – MBAs. Whenever an IPO takes place that involves some sort of disruptive technology, we’ll cruise through the S-1 or F-1 to look for interesting stories – like 10X Genomics.
The 10X Genomics IPO
Founded in 2012, San Francisco startup 10X Genomics had raised just over $242 million from a slew of investors that included Wells Fargo, Fidelity, and Softbank before filing for an IPO to raise an additional $100 million. What 10X Genomics has developed can best be described as a high-resolution sequencing platform that allows large populations of cells to be segregated into partitions – a million or more – and then analyzed on a cell by cell basis. It’s a technology that can be used to understand the building blocks of life – cells.
The human body starts from a single cell until it eventually consists of over 40 trillion cells, each with a genome of 3 billion DNA base pairs. Recently, scientists launched the ambitious Human Cell Atlas Project, an international collaborative effort to map all cell types in the human body by using single-cell sequencing. The end result would be “a unique ID card for each cell type, a three-dimensional map of how cell types work together.” An academic paper on the topic of single-cell sequencing goes on to say:
Single-cell RNA sequencing (scRNA-seq), for example, can reveal complex and rare cell populations, uncover regulatory relationships between genes, and track the trajectories of distinct cell lineages in development.
Sounds kind of like 23-and-Me, except at a cellular level.
10X Genomics is also developing technology that shows how cells are positioned in a 3-dimensional environment which could be useful in seeing how cancer tumors grow and expand. While the technology may be in the infant stages of development, the potential hasn’t gone unnoticed by any number of other companies that want to play in this space. This has led to some fierce battles over intellectual property that have significantly impacted 10X Genomics.
An Intellectual Property Battle
Early on, 10X Genomics demonstrated the usefulness of their single-cell sequencing platform as researchers quickly climbed on board and started using it to publish over 500 research papers so far (70% of their clients are academic researchers):
Since launching our first product in mid-2015 through June 30, 2019, we have sold 1,284 instruments to researchers around the world, including 93 of the top 100 global research institutions by publications, and 13 of the top 15 global pharmaceutical companies by 2018 revenue.
That led to revenue growth that looks like this:
Consumables make up over 70% of those revenues which points to a very profitable razor-razorblade business model. That’s the good news. The bad news is, they can’t sell their original product anymore because of a company called Bio-Rad Laboratories (BIO).
In November 2018, a jury concluded that 10X Genomics’ GEM microfluidic chips – which have historically constituted substantially all of their product sales – infringed certain of Bio-Rad’s patents and that the infringement was willful. The courts also granted Bio-Rad a permanent injunction which means that 10X Genomics can only continue selling their current product and consumables to their “historical installed client base” with all past and future sales subject to a 15% royalty. In other words, 10X Genomics is no longer able to seek out new clients for a product that has historically constituted substantially all of their product sales. So, they decided to build another one – the “Next GEM microfluidic chip,” which is expected to be available in Q3-2019.
The next time around, 10X Genomics is going to try their damnedest to not violate anyone else’s intellectual property but there’s no guarantee that happens. Even if they manage to create some defensible intellectual property (10X Genomics has over 175 issued or allowed patents and 470 pending patent applications), there’s no guarantee that their competitors won’t drag them back into the legal system just because the ambulance chasers smell blood in the water after the first go around. If the new product from 10X Genomics is comparable to their old product, or better yet superior, then they can replace all the units that they’re having to pay a royalty on with ones they don’t. Then, there’s also other competition to consider.
In addition to Bio-Rad’s “ddSEQ Single-Cell Isolator” which is being offered in partnership with Illumina (ILMN), the S-1 filing also mentions a few other firms – Becton, Dickinson and Company (BDX) and Nanostring Technologies (NSTG) – the former being a $67 billion medical device manufacturer with over $1 billion in cash on their books. The same month that the courts ruled against 10X Genomics, Becton Dickinson also filed suit against 10X Genomics claiming that they infringed on 11 patents. According to the S-1, discovery is still underway.
When it comes to who the major players are, a paper on the “comparative analysis of commercially available single-cell RNA sequencing platforms” lists “three major commercial platforms” for single-cell sequencing:
- Takara Bio (4974:JP) – ICELL8 cx Single-Cell System
- Fluidigm (FLDM) – C1 System
- 10X Genomics – Chromium
Maybe when all the litigation dust settles, Illumina will step in to acquire the dominant platform and crowd out all the other competitors. At the moment, it seems like there’s a lot of uncertainty – in other words, risk – around single-cell sequencing as an investment theme.
In a recent article, we talked about some very smart Hungarians that are simulating cancer cells using artificial intelligence, and then manipulating them with such accuracy that they’re actually able to mimic wet lab tests. The ability to have a high-resolution device that lets us see what’s happening at a cellular level really provides the most basic of building blocks needed to understand how things work. It also generates an incredible amount of big data. The aforementioned paper on the topic of single-cell sequencing states “Some commercial companies provide software tools, such as 10× Genomics and Fluidigm, but this area remains in its infancy, and gold-standard tools have yet to be developed.” In a future article, we’ll take a closer look at the other companies out there that are offering the tools and software that will power what Science magazine has hailed as the 2018 ‘Breakthrough of the Year’ – the single-cell revolution.
If the IPO goes through as planned, 10X Genomics will trade under the ticker TXG.