Oxford Nanopore Stock: The Internet of Living Things

If you took all the stocks in the world and put them in a single basket, about 58% of that combined market cap would be U.S. stocks. If you want to look that number up, just download a fact sheet for the MSCI ACWI IMI Index. All those cryptic acronyms mean that the index includes stocks of all sizes, for all countries that have stocks. In second place is Japan, with about 6.3% of the world’s stocks by market cap, followed by the U.K. at 3.9%.

For anyone with an Interactive Brokers account, the world is your oyster. Stocks that trade on any global exchange are accessible, and by holding them you’re diversifying your portfolio in numerous ways. It’s something we touched on in our recent piece on how to Protect Your Portfolio When the U.S. Dollar Collapses. Today, we’re going to talk about a popular life sciences company – Oxford Nanopore Technologies – that’s decided to have their initial public offering (IPO) on the London Stock Exchange (LSE).

(All below numbers are in USD unless otherwise stated.)

About Oxford Nanopore Stock

Click for company website

Founded in 2005, and unsurprisingly from a lovely part of the United Kingdom known as Oxfordshire, Oxford Nanopore Technologies has raised around $1.376 billion in funding from a plethora of investors including Invesco, IP Group, Amgen, Nikon, and Illumina. The last time we looked at the company was several years back in a piece titled Oxford Nanopore Sequencing vs. Illumina. At that time, analysts were claiming that Oxford Nanopore was overvalued at a valuation of $1.55 billion, and that an exit seemed unlikely at that valuation. Today, the company is valued at $3.47 billion and looking to do an IPO on the LSE which allows us to see the inner workings of a company that says their long-read genetic sequencing technology will lead us to a world where every living thing is quantified precisely and completely – the Internet of Living Things.

Our goal is to enable the analysis of anything, by anyoneanywhere.

Oxford Nanopore Technologies

Not All Revenues Are Created Equal

We’ve been carefully avoiding any investment thesis that relies on The Rona because it’s a space that’s just far too volatile. Today’s modern test could be tomorrow’s obsolete test, or today’s most effective vaccine might be tomorrow’s most flawed. There are far too many uncertainties, too much global regulatory complexity to consider. That’s why when a company does the pandemic pivot, we question if that detracts from focusing on their core product offering. Just look at how Oxford Nanopore has benefited from COVID testing.

Bar graph showing Oxford Nanopore's Revenues, how Oxford Nanopore has benefited from COVID testing. Credit: Nanalyze
Credit: Nanalyze

The IPO filing document talks about how in 2020, the UK Department of Health and Social Care (DHSC) engaged Oxford Nanopore for “the one-time purchase of certain SARS-CoV-2 COVID-19 test kits.” Said purchase accounted for 42% of 2020 revenues, or the entirety of all testing revenues Oxford Nanopore received. (During the same period, 92% of the Group’s life science research tools revenue was generated from sales to customers located outside the UK.) A closer look at the COVID testing revenues shows us they are largely just a distraction.

Oxford Nanopore’s COVID Tests

Oxford Nanopore’s COVID testing segment consists of two parts:

  • Sourcing PCR tests from third-party suppliers and reselling them to the UK government.
  • The LamPORE Assay – the company’s first Europe-approved test developed and commercialized in 2020 to detect COVID 19.

The first bullet point is rubbish. We want to invest in a company that’s developing leading-edge genetic sequencing equipment, not a PCR test reseller. The second bullet may seem promising, but the aforementioned customer concentration risk came around and bit them in the ass. The filing states:

In April 2021, the DHSC determined it no longer had a requirement for LamPORE and sent a notice purporting to terminate its contract with the Group early before taking the maximum quantity allowable under the contract.

As a result, Oxford Nanopore’s 2021 revenues are expected to be materially impacted. So, that whole COVID testing thing is a big nothing sandwich.

Life Science Research Tools

Now we can redo the revenue chart to show what matters – revenues from Life Science Research Tools (LSRT) – and we’ll also include the results for the first half of 2021 (LSRT revenues only, of which 66% came from consumables):

A redo of the revenue chart to show what matters - revenues from Life Science Research Tools (LSRT) - and also included the results for the first half of 2021 (LSRT revenues only, of which 66% came from consumables. Credit: Nanalyze
Credit: Nanalyze

This is looking a whole lot better, especially when you consider that during the second half of the year, Oxford Nanopore realizes more revenue than the first half. (Historically it’s about 40% first half, 60% second half.) That being said, we’re given guidance that says “The Group is targeting LSRT revenue growth of 30-40% in FY21” which would equate to about $117 million for 2021 on the lower end of that guidance range.

In their recent announcement to float, Oxford Nanopore also provided guidance looking forward to 2023. We extrapolated the below chart using the lower range of their cryptic guidance which skips 2022 for whatever reason.

Credit: Nanalyze

That’s what revenue growth ought to look like. This isn’t some crummy SPAC pulling numbers out of their ass, this is a proper company where what management says reflects what they actually think they can do (otherwise the analysts will punish them for not meeting expectations). Speaking of which, here’s what valuation the analysts believe Oxford Nanopore will IPO at:

Analysts at Jefferies estimated a valuation of £4bn based on Oxford Nanopore’s 2023 revenue targets and in comparison to its closest publicly listed rival, the $6bn US company Pacific Biosciences.

Credit: The Financial Times

Now that we have some reference point for valuation, let’s see how these two genetic sequencing companies stack up using our simple valuation ratio (we’ve thrown in Illumina too for good measure).

Company NameMarket CapRevenue Data PointAnnualized RevenuesRatio
Illumina72.3Q3-20214.5216
Pacific Biosciences5,940Q2-2021122.4449
Oxford Nanopore5,5202021E117.5647

Any company with a ratio greater than 40 is too rich for our blood, no matter how great the story is. But if Oxford Nanopore shares end up being priced with a ratio under 40, should you buy the stock?

Should You Buy Oxford Nanopore?

We have no idea. We’re not your mum. But we can talk about whether or not we’d consider adding Oxford Nanopore to our portfolio of 33 disruptive tech stocks.

The bull thesis is that long-read sequencing is the way forward. While Oxford Nanopore’s machines are more expensive and less accurate than Illumina’s technology, (so sayeth the FT), analysts are predicting the price gap will close. Accuracy is already being improved significantly over time:

The Group has been able to improve Raw-Read Accuracy from around 80% in 2014, to 92% in 2019, and to 99.8% in May 2021 using the latest algorithms and chemistries.

Credit: Oxford Nanopore

Disruptive tech investment firm ARK Invest believes in the future of long-read sequencing, and they’ve made a play for Pacific Biosciences (PACB), a company that seems to be the only formidable competitor that Oxford Nanopore has at the moment. According to the filing document, PacBio “requires the complexity of synthesis as part of their sequencing process,” while Oxford Nanopore “sequences the native strand of DNA/RNA directly, enabling the delivery of rich biological data such as epigenetics.” We have no idea what that means either, but we’re certain that PacBio disagrees with that statement. It’s something we looked at in a piece titled Bionano Genomics Stock on Offer in IPO.

Pacific Biosciences vs. Oxford Nanopore

Let’s assume that playing the long-read sequencing thesis requires an investment in PacBio and/or Oxford Nanopore. (Bionano Genomics (BNGO) was suspiciously absent from Oxford Nanopore’s list of competitors which tells you something.) We always invest in market leaders if possible, so which company will come out ahead? There’s enough room for multiple providers of long-read sequencing technology, so there doesn’t have to be a single winner. Since we won’t have anything concrete on valuations until the IPO happens, we’ll leave you with this thought.

Earlier this year, we coined a piece titled Why is Pacific Biosciences Stock Dropping? At that time, shares of PacBio were trading at an all-time high and we correctly predicted they’d fall, -35% to be exact based on today’s prices. (A magic eight-ball, purchased from a Romanian fortune teller in the depths of the Hoia Baciu forest, helps put us in the 5% of active money managers that can beat the market over the long term.) Based on the first two quarters of 2021, it appears PacBio may be back on track with that revenue growth – $60 million for the first half of 2021. If they can keep that up, they’ll clear $120 million in revenues for the full year. That’s the growth we’re looking for, but there’s one other thing to consider here – the ARK Effect.

What caused PacBio to be so overpriced in the first place was arguably the ARK effect. Since ARK has historically preferred to stick with U.S. stocks, it seems unlikely they’d dabble in a stock that trades on the LSE. On top of that, companies that trade on the LSE usually enjoy a meaningful discount to those that trade in the States. (Just look at what’s happening right now with Blue Prism – activist investors saying a 100% premium on current share price would still undervalue the company, echoing what Blue Prism’s CEO already said.)

We’re keen to see what valuation Oxford Nanopore comes out of the gates at. One option could be to open a position funded with some trimmings from our large Illumina position. Whatever we decide to do, Nanalyze Premium annual subscribers will be the first to know.

Conclusion

What’s not to like about a company selling tomorrow’s life sciences research tools with a majority of revenues currently coming from consumables? Possibly the valuation, for one. Until Oxford Nanopore shares begin trading, we’ll have no idea if this is a company that can find a home in our portfolio. With just two companies vying for the lead in long-read sequencing – Pacific Biosciences and Oxford Nanopore – it’s a pretty straightforward decision to make once we have some clarity around comparative valuations.

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14 thoughts on “Oxford Nanopore Stock: The Internet of Living Things
  1. Oxford Nanopore raised money in May at £2.4B valuation. So that represents MC/revenue ratio = 20.4.
    According to Jefferies its fair valuation is £3.9B. So that would mean ratio = 33.
    But in your article you come with ratio=47, based on MC=£5.5B – not sure how you came with that number ..
    Obviously it is hard to tell what the real MC will be post IPO, a lot will depend on if ARK will invest or not in Oxford Nanopore. My guess is they are smart enough to invest in Oxford Nanopore.

  2. Oxford Nanopore scores £150M investment, genomic sequencing cloud support from Oracle.
    As part of a new partnership with the genomic sequencing tech developer, tech giant Oracle has pledged to contribute £150 million, or about $207 million, to Oxford Nanopore’s proposed IPO, which aims to raise a total of about £300 million, or about $413.8 million, according to founding shareholder IP Group.

  3. In a filing with Companies House, a UK government agency, Oxford Nanopore reported 2020 revenues of £113.9 million ($157.6 million), up from £52.1 million in 2019
    The firm did not provide specific 2021 guidance but said that the “general level of activity in 2021 is expected to increase, compared to 2020.” Revenue growth in its core business “has been strong and accelerating in the first six months of 2021, compared to the same period in 2020, with indicative growth of greater than 80 percent,” the firm said.

  4. Reuters: Oxford Nanopore valued at $6.7 bln as shares soar in London debut.
    Shares of Oxford Nanopore Technologies (ONT.L) soared more than 45% in their market debut on Thursday, giving the biotech group a market value of $6.7 billion and showing increased investor appetite in life sciences companies listing in London.

    1. That really sucks. Now that it’s been sufficiently hyped and overpriced, we won’t be buying it. It’s hardly a success story when an IPO soars on market debut – well, at least for retail investors.

    1. Market cap Yahoo Finance on Sunday 10/10/21: 4.62 billion GBP
      1H-2021 revenues from Oxford Nanopore prospectus: 58.95 million GBP (117.9 annualized)

      4.62 / .1179 = 39.19

      Now, let’s remove the COVID testing revenues which – as the article states – are simply a distraction.
      1H-2021 revenues from Oxford Nanopore prospectus minus COVID testing revenues: 52.59 million GBP (105.18 annualized)

      4.62 / .10518 = 44

      When we back out the temporary revenues, it’s over our ratio limit. If we go with total revenues, it’s within range. We’ll need to mull this over a bit. Nanalyze Premium annual subscribers like yourself will get an email if we pull the trigger and go long ONT.L

  5. See FT article: Pandemic puts Oxford Nanopore ‘on the map’

    In Guinea, the Birmingham team discovered that the MinION took less than an hour to sequence a sample of the Ebola virus, meaning they could analyse specimens and produce usable information within 24 hours.
    Months later, the team travelled to Brazil to study the spread of the Zika virus using the same sequencers, helping in the public health management of the outbreak. Nanopore sequencing had turned genomic sequencing into a real-time, decentralised community effort that could save lives. So, when the Covid-19 outbreak was declared a pandemic last year, the Oxford-based company’s patented technology proved indispensable. The devices were essential in identifying and tracking the spread of Covid variants in 85 countries, and have sequenced about 18 per cent of all coronavirus genomes globally.

    “Oxford Nanopore is a frontrunner in the next generation of sequencing technologies,” says Julian Roberts, an equities analyst at Jefferies. “The last year changed Nanopore’s revenues completely. One contract alone from the UK government was £115m, which was more than the company’s entire revenue for the previous year. The pandemic really put it on the map.”

    1. Those UK revenues came and went. If they managed to provide the company with greater publicity, and therefore a greater number of clients, then that’s great. But getting some temporary work during the pandemic from one large customer – the ‘ol pandemic pivot” could also serve to distract the company from their core focus.

  6. Four banks initiated coverage of DNA sequencing company Oxford Nanopore on Wednesday with positive ratings.
    JPMorgan, which started the stock at ‘overweight’ with a 725p price target, said Oxford Nanopore is a differentiated player, operating in an attractive segment, with a very strong long-term topline growth outlook.
    RBC Capital Markets, which initiated coverage at ‘outperform’ with an 800p price target, said the company’s’ technology has unique attributes which have the potential to enable it to disrupt the sequencing market, which itself is growing at double-digit rates.
    Barclays started coverage at ‘overweight’ with a 700p price target, saying Oxford has a “highly differentiated” technology with significant upside potential to estimates mid-term.
    Finally, Berenberg initiated coverage at ‘buy’ with a 662p price target.

    1. Thanks for the comment Stan. That might explain the bit of a pop shares have been seeing.

      After spending time working in the finance ecosystem, we’re sure of only one thing. These analysts are largely just talking out of their asses with these arbitrary price target that mean very little and constantly change based on the whims of each analyst. We believe this is a company that has long-term potential, and these short-term price targets are simply added noise. That said, it’s great to see institutions taking a closer look at a company we believe has great potential ahead of it.

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