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10X Genomics Continues Expanding Platform Menu

When not busy trying to resurrect the wooly mammoth, geneticist George Church spends his time launching new biotech companies at a pace nearly on par with SpaceX sending rockets into space. At last count, he had co-founded or otherwise helped kickstart about 50 different companies – many of which have gained some amount of traction. For instance, Ginkgo Bioworks (DNA) acquired one of his very first ventures, a synthetic biology startup called Gen9 that we covered at the time. In fact, we’ve written about a number of the Harvard professor’s many businesses, and even held shares in another early venture, Editas Medicine (EDIT), before exiting our position in 2022. 

Highlights of 10X Genomics
Credit: 10X Genomics

Another one of Church’s earliest startups was a company called ReadCoor whose intellectual property (IP) would eventually become a key technology that is currently helping fuel growth for 10X Genomics (TXG). The biotech company recently released its 2023 year-end results. Revenue climbed 20% year-over-year to more than $618 million after growth hit a wall the prior year in 2022. New product platforms are helping revive growth, though the company’s flagship platform is still flagging and gross margins are still shrinking. Let’s take a closer look under the hood.

10X Genomics Rapidly Expanding Platforms

Click for 10x Genomics website

As we described in detail in our last article on 10X Genomics, the company’s founders originally started the company to develop technology around single-cell gene expression, which enables scientist-types to analyze the activity of genes in individual cells to better understand their function and dysfunction. It expanded the capabilities of the Chromium platform over time to help researchers understand things like how genes are regulated in cells and even how the immune system works at the cellular level. It is the company’s flagship platform over 5,180 instruments sold so far.

While Chromum accounted for 76% of 2023 revenues, the breakdown between machines and consumables is worth noting. The latter accounted for 70% of Chromium’s revenues and grew over the year while machine sales declined.

10X Genomics revenue
Credit: 10X Genomics

Last quarter we see that same trend, with another product line called “Spatial” showing growth across both consumables and instruments. That story began in 2018 with the acquisition of Stockholm-based Spatial Transcriptomics, and since then 10X Genomics has rapidly expanded into an adjacent field of high-resolution genomics called spatial sequencing. In 2019, 10X Genomics released Visium, its first spatial sequencing platform.

While single-cell sequencing can tell you what gene each cell is expressing, spatial sequencing describes the spatial relationships between cells in a tissue sample. Then, in 2020, 10X Genomics spent $350 million to buy Church’s company ReadCoor and $41 million to acquire another Stockholm-based biotech called Cortana. The IP from those two companies helped launch 10X Genomics’ newest spatial-sequencing platform, Xenium In Situ, which maps gene expression at the subcellular level, revealing the location of specific genes within cells.

10X Genomics platforms
The company’s three platforms. Credit: 10X Genomics

While each platform is a standalone product, 10X Genomics markets its product lines as complementary. For instance, company scientists recently published a study in Nature Communications that illustrated how these different platforms can build upon each other by analyzing a breast cancer tumor. First, they leveraged the Chromium platform to describe the cellular composition of the sample. They then employed the Visium spatial platform to provide a high-resolution spatial view of the sample, identifying three spatially distinct tumor regions. Finally, the team used the Xenium In Situ platform to more precisely map complex regions of the tumor where multiple cell types were present in very close proximity. The integrated approach enabled the scientists to understand the turmor’s biology more precisely than any one method alone.

Checking In on the Competition

While we’re MBAs trying to invest our money wisely and not geneticists trying to cure cancer or resurrect extinct circus animals, we want a rudimentary understanding of this complex technology in order to analyze the company’s long-term growth prospects. For instance, we’re attracted to the technological moat that 10X Genomics is digging around a rapidly emerging market that is still very much slanted toward academia and research. Just imagine the total addressable market (TAM) for 10X Genomics when its platforms help customers commercialize new therapies and other applications. 

Total addressable market for 10X Genomics
Near-term TAM for 10X Genomics. Credit: 10X Genomics

However, as we discussed in our recent article on ASML stock, there is often a fine line between a moat and a monopoly, which can earn the scrutiny of regulators. 10X Genomics claims to have spent more than $1.5 billion in R&D to date, though presumably some of that money paid for licensing IP from universities or acquiring companies like ReadCoor. Our last dive into 10X Genomics revealed a crossfire of litigation over patents and IP with a bevy of different competitors. A ceasefire with its biggest rival, Bio-Rad, gave us enough confidence to go long on TXG. One competitor, NanoString, recently filed for bankruptcy, citing the litigious assault by 10X Genomics for driving it to the brink of insolvency. 

A comparison of spatial-imaging technologies.
Aside from beating its competitors in court, 10X Genomics also claims to beat them on instrumental functionality. MERSCOPE from Vizgen and CosMx from NanoString are the spatial-imaging technologies competing against Xenium from 10X. Credit: 10X Genomics

For every NanoString that goes bankrupt, two more startups take its place. For example, a UK startup called CS Genetics is working on an instrument-free, single-cell analysis technology, while a well-funded biotech out of China, Singleron Biotechnologies, has emerged with more than $144 million in funding over the last five years. 

Antitrust Allegations Against 10X

But NanoString and another 10X rival, Vizgen, are not going down without a fight. Last year, a judge ruled that both companies can continue to pursue antitrust claims against 10X Genomics and Harvard over the IP that came along with the ReadCoor acquisition. It’s a long and convoluted story, but basically, the two 10X Genomics competitors claim that the technology was originally developed with U.S. government funding and Church had committed to make the innovations broadly available. Instead, the technology was transferred to 10X Genomics, which has successfully defended its patents against both companies so far. 

Whether the accusations of predatory behavior on the part of 10X Genomics to maintain an alleged monopoly will go anywhere is anyone’s guess. Still, we’ve seen regulators acting more aggressively of late when it comes to competition in the biotech space (see Illumina and Grail). And while 10X Genomics has continued to come out on top against both Vizgen and NanoString, the legal costs battle is still far from over.

Spatial Sequencing Drives Growth

Despite forking over more money to attorneys, the company managed to achieve its first free cash flow positive quarter in Q4-2023 to the tune of $20 million. Management recently said it has likely reached peak spending on capital expenditures for its current growth stage. 

When looking out over the next 12 months, we are anticipating about $20 million to $25 million of total capital expenditures, down from almost $50 million in 2023 and $132 million in 2022.

Justin McAnear, Chief Financial Officer, 10X Genomics

No doubt that comment refers partly to the investments in spatial-sequencing technology through the Visium and Xenium product lines. The payoff is reflected in spatial instrument revenue of $75.6 million in 2023 compared to just $13.8 million in 2022, as well as spatial consumables revenue of nearly $60 million, which is up 69% year-over-year. Last year, the company sold 247 Xenium instruments giving the company a total instrument deployment of close to 6,000 instruments.

On the flip side, Xenium is also seriously dragging down gross margin, which clocked in at just 66% in 2023, compared to 77% in the prior year – and 85% back in 2021. One of the big selling points of 10X Genomics stock was the excellent gross margins the company posted thanks to its razor-and-blade consumables business model. That’s looking a little shaky right now and we’re not provided much reassurance when the company states, “the Xenium instrument currently carries a significantly lower margin than our other instruments.” In addition to Xenium, 10X Genomics recently launched the new Visium HD system, which increases the resolution of the platform by more than three orders of magnitude. The company also completed its first major overhaul of the Chromium platform in five years, as it looks to reinvigorate instrument sales, which were down 18% in 2023.

Growth and Valuation

All of that innovation requires customers to open their minds and their wallets. Management expects it will take time for its customers to transition to the new products and platforms. In other words, expect Q1-2024 to be soft, with full-year growth expected to be in the range of $670 million to $690 million, representing growth of 8% to 12% over 2023. Based on last quarter’s revenues, the company’s simple valuation ratio currently stands at about 7.6 ($5.6 billion market cap/$736 million in annualized revenues) so just above our catalog average of six.

However, we think SVR could go even lower in the first half of the year if investors experience a little freak out when Q1-2024 results come out. That’s because many of them suffer from short-term memory loss and will have forgotten what management said just three months earlier. In addition, there will be concerns around the sharp decline in gross margin for a product that has yet to see widespread adoption.

Conclusion

10X Genomics stock rode the pandemic tech bubble as one of the hottest biotech stocks after its 2019 IPO. While the bubble did finally burst, the company has been investing heavily in defending and expanding its market-leading position in one of the most complex corners of gene-sequencing technology today. The early results suggest that those investments are starting to pay off, even as they cause (hopefully) short-term pain with shrinking margins and slower growth.