An Update on Long-Read Sequencing Stocks
Table of contents
Spending an afternoon on the Oxford campus is a special experience that opens your eyes to the possibilities of youth. As you sip your shandy and watch the students scurry by, you start to realize that while some academics dedicate their entire lives to benefiting humanity, others of us can barely manage to keep our substance abuse problems in check. We fall into the latter category, so we prefer to let other people do the heavy lifting and then leverage their hard work to save time. Fortunately, the bright folks at the University of Cambridge have put together a primer on long-read sequencing which we’ll distill down to get you up to speed quickly.
Short-Read vs. Long-Read Sequencing
All those machines sold by Illumina (ILMN), the dominant leader in next-generation sequencing (NGS), utilize short-read sequencing (SRS) which is what it says on the tin.
Illumina sequencing primarily sequences small fragments of DNA, producing read lengths of 50-300 base pairs (bp) which are then assembled into a whole genome sequence using bioinformatics pipelines and reference genomes.
University of Cambridge, PHG Foundation
The downside is that it’s time and labor-intensive to start piecing everything together with questionable accuracy in certain situations. Then, there’s long-read sequencing (LRS) which examines a single molecule of DNA to produce reads of 10,000-30,000 base pairs in length. LRS can sequence parts of the genome that cannot easily be sequenced by short-read sequencing. It also allows one to take all these strands and assemble an entire genome with less ambiguity. If you had to imagine the evolution of NGS technology in twenty years’ time, SRS would be Betamax and LRS would be VHS. As investors, we feel our NGS exposure, which comes from holding shares in Illumina, ought to be propped up by some LRS exposure. That’s because the last time we checked, Illumina wasn’t doing jack in LRS following their failed acquisition of Pacific Biosciences in January 2020. According to experts at the University of Cambridge, there are only two stocks we ought to be looking at for long-read sequencing exposure.
The two dominant producers of ‘true’ long-read sequencing technologies are Pacific Biosciences (PacBio) and Oxford Nanopore Technologies (Nanopore)
University of Cambridge, PHG Foundation
Regular readers already know this because we’ve covered both companies before. Let’s look at what each has been up to starting across the pond.
Oxford Nanopore (ONT.L)
Our last article on Oxford Nanopore (ONT.L) – Oxford Nanopore Stock: The Internet of Living Things – focused on separating their COVID revenues from Life Science Research Tools (LSRT) revenues which represent the long-read sequencing exposure we so desire. While revenues from their pandemic pivot have dropped dramatically, there’s another concern we see surrounding the work they’re doing with the United Arab Emirates Genome Program (EGP) which constituted 23% of 2021 revenues.
While COVID revenues are on the decline, the Emirates has now become the company’s largest customer as they generate loads of consumables revenues while trying to test one million people. The company breaks this out for us in their annual report which – while confusing the reader by mixing USD and GBP – does impart some insights:
- EGP revenues are becoming a substantial part of LSRT revenues
- The average customer spend for S2 customers is growing quite slowly – for S3 customers, it’s on the decline
One would expect Oxford Nanopore’s largest customers to be spending more over time, not less, so this is somewhat of a concern. We also see some customer concentration risk arising from what they’re doing in the Emirates.
Back in 2019, the United Arab Emirates began working with BGI and Oxford Nanopore Technologies on perhaps the largest scale personalized medicine project underway anywhere. The end goal is to collect samples from all of the Emirati population – about one million people – but as a voluntary program. A project of this scale raises some interesting ethical questions. For example, what might happen should some children not have DNA that matches their father? In a country where adultery is punishable by stoning, has anyone sat down and really thought this through?
Anyways, this heavy reliance on a single customer is a risk, even though revenue growth is expected to continue with Oxford Nanopore increasing guidance for LSRT revenues going into 2022/2023, but without providing color on how much can be attributed to the EGP program. Since this is a U.K. company, the next update will be in mid-2022.
Pacific Biosciences Stock (PACB)
The other life sciences company offering “true” long-read sequencing is Pacific Biosciences (PACB), a favorite of Ark Invest. Last February, we published a piece titled Why is Pacific Biosciences Stock Dropping? in which we expressed concerns with how much hype surrounded the stock. At the time, the stock wasn’t dropping, but we fully expected that it would.
Any time someone calls a stock “red-hot,” that’s cause for concern. In this case, that’s probably an understatement, because this red-hot stock looks like it just might burn some hands. Incredibly, Pacific Biosciences (PACB) stock is up +875% in just six months on what appears to be some favorable press releases and lots of speculation about future potential.
Credit: Nanalyze
And burn hands it did. Since we published that piece last February, the value of the company has plunged more than 80%. That’s after they managed to finish 2021 with a record $130.52 million in revenues. As seen in the below chart, quarterly revenues have broken out in 2021 and show consistent growth over the past four quarters (the red bars):
Bear in mind that this stock is suffering from the ARK effect, so there may be some value to be found now that valuations have settled back down to earth. We’ll come back around and take a closer look at the company Illumina failed to acquire in a follow-up article. Speaking of Illumina, perhaps the biggest news this year for long-read sequencing was the announcement that Illumina has thrown their hat into the ring with their own offering – Infinity.
Illumina (ILMN)
At this year’s JP Morgan Healthcare Conference, Illumina announced plans to debut their own long-read sequencing technology, Infinity, which will be made available for early access in Q2-2022. From the horse’s mouth:
Finally, deSouza announced new patented technologies for a highly accurate and cost-effective long read workflow, codenamed Infinity, that will deliver contiguous data up to 10Kb in length to address the final edge cases of the genome. Infinity enables 10x greater throughput with 90% less DNA input than legacy long reads, can be fully automated, and is seamlessly compatible with sequencing by synthesis (SBS) chemistry, enabling it to be rapidly applied across Illumina’s 20,000 instrument installed base.
Illumina press release Jan 10, 2022
A blog piece by computational biologist Keith Robison talks about the synthetic approach used by Illumina which may have come from an Australian firm called Longas that was developing long-read technology. The CSO of Longas at the time, Aaron Darling, gave a presentation in 2019 titled “Introducing Morphoseq: high accuracy long reads from short read platforms.” That was around the time his company emerged out of stealth mode, and now he’s a Director of Software development at Illumina. You can draw your own conclusions, but perhaps there was a quiet acquisition and Longas is now part of Illumina. Long story short, the experts just don’t know enough about Infinity yet to start drawing comparisons or speculating on what use cases could or couldn’t be addressed using Illumina’s synthetic approach.
We’re MBAs, not computational biologists, so our interest surrounds the business case. If Illumina can enable the 20,000 platforms they have deployed with long-read technology that works for a majority of use cases, then that is sufficient. We talked about a possible Plan B following their failed acquisition of Pacific Biosciences and this appears to be it. As one would expect, Pacific Biosciences doesn’t think the Illumina news will affect them one bit. That’s because Illumina is doing “synthetic” long reads which – Pacific Biosciences claims – aren’t capable because they still rely on short-read sequencing.
ILMN vs. PACB vs. ONT.L vs. BNGO
Given Illumina’s dominance in NGS tools and consumables, it’s a given that you’d want to hold that stock over all the others we’ve discussed today. With a market cap of $54.5 billion, Illumina is in our size sweet spot and seven times the size of the other three companies combined. They clearly have the resources, foresight, and install base in place to deploy long-read sequencing capabilities at their discretion – provided the synthetic stuff works. With 20,000 platforms deployed across 8,000 customers around the globe, Illumina has their hand in the pocketbook of any life sciences company that’s worth its salt. Assuming you own Illumina and want to hedge your holding with a long-read sequencing stock, you have several companies to choose from. Here’s how they compare using our simple valuation ratio:
| Company Name | Market Cap | Annualized Revenues | Ratio |
| Illumina | 54.500 | 4.8 | 11 |
| Pacific Biosciences | 2.110 | 0.144 | 15 |
| Oxford Nanopore | 4.390 | 0.166 (2021 LSRT) | 26 |
Based on valuation, Pacific Biosciences would be the best option, while the more richly priced Oxford Nanopore allows you some foreign currency exposure and diversification benefits given it’s traded on a foreign exchange. Looking at this from a technical perspective, a great article by Evaluate breaks down these offerings a bit in the below table.
The same article has the Pacbio CEO talking about how he believes his firm isn’t competing with Oxford Nanopore for the same customers:
“We’re much more focused on the clinical side – large-scale plug and play sequencing – and they’re much more focused on what they call the explorer community.”
Pacific Biosciences CEO, interview with Evaluate
Investors holding shares in Illumina probably don’t have much to worry about as the market leader has the resources and wherewithal to make sure they don’t get left behind. The below chart puts the size of these companies in perspective.
We’ve also included Bionano Genomics (BNGO) in the above chart because that name came up when shares of the company soared +2,176% in less than 60 days because an ARK Invest analyst made a comment on Twitter.
Since then, the hype has subsided, and shares have dropped 77%. While BNGO is now starting to bring in some consistently growing revenue streams (along with consistently growing costs), the company doesn’t get any mention from the experts. There could be any number of reasons for that, but we’re all out of time now. Perhaps we’ll look at the company in a follow-up piece.
Conclusion
Long-read sequencing seems to be the next big step for the genomics community and there are two “true” long-read players – Oxford Nanopore and Pacific Biosciences. Then there’s Illumina with their newly debuted synthetic method. (We’ll set Bionano Genomics aside because they’re a smaller firm and don’t seem to be recognized by the experts for whatever reason.) Investors in Illumina should have some faith the firm has a master plan to compete with Pacific Biosciences on long-read sequencing, or at least capture a majority of the possible use cases using their synthetic approach. Next up, a closer look at how Pacific Biosciences managed to start achieving some consistent revenue growth in 2021.
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Is Illumina hedging in case it does not do well in the long read sequencing race ? It looks increasingly Illumina is becoming an investment company. See below:
“Illumina has invested in seven new startups advancing breakthrough therapeutics, diagnostics, DNA storage, mental wellness, and sustainable foods applications.
The companies will join the fourth global funding cycle of Illumina Accelerator San Francisco Bay Area and Cambridge, U.K.
The seven companies to join are: 4SR Biosciences; B4X; Cache DNA; CRISP-HR Therapeutics; NonExomics; Purpose Health; and Rethink Bio.
Illumina said the company creation engine is focused on partnering with entrepreneurs to build breakthrough genomics startups.
The Illumina Accelerator portfolio has grown to 68 startups.”
Thanks for the info Stan. That’s probably a good strategy for any larger high-tech company and it compliments what they do as opposed to pivoting into investing would say. As of Sept 2021 they had $560 million in capital under management. It’s a great way to see what sort of innovation is happening so you don’t start resting on your laurels.
SA article: “Infinity is not a new sequencing platform technology, but rather a new integrated workflow (SBS chemistry, data analytics, and a novel assay) that can run on existing systems and that Illumina believes will create accurate read-lengths of up to 10kb.”
So my take is: it will have limited impact ..
If that “new integrated workflow” can handle 75% of long-read sequencing use cases then it more than serves its purpose. We need more color from the community that uses this stuff before being able to assess the viability of what Illumina has developed.
I think Oxford Nanopore has the best long read sequencing tech, but one concern was always error rates. It is difficult to tell how big the problem is right now, because they are improving their tech quite fast.
Recent news from 30th March: “Latest chemistry enables 99.3% raw read accuracy at high data yields”. Raw read means a single read. That number looks very good.
The best accuracy of sequencing can be achieved by mixing different sequencing technologies: long read and short read.
Also: see article in medicalnewstoday published a few days ago: “Landmark achievement: Scientists fill in the gaps in the human genome”.
“Researchers belonging to the Telomere-to-Telomere (T2T) consortium have published the complete sequence of the human genome, filling in gaps present in previous versions.”
“Advances in technology have made it possible to sequence larger fragments of DNA. Current sequencing technologies are capable of sequencing DNA fragments ranging in length from a few kilobase pairs (1,000 bases) to over 100 kilobase pairs.
These technologies are useful for sequencing large DNA fragments with repetitive sequences but have a relatively high error rate. To ensure a high level of accuracy, the T2T consortium researchers combined these long-read sequencing technologies with a different sequencing technology possessing a read length of 20 kilobase pairs and low-error rates.”
We did note in our recent piece on PACB that both Oxford Nanopore and PACB technologies were used in that project.