Oxford Nanopore (LSE:ONT) represents one of the most exciting London IPOs this year. Genomics is undeniably one of the paradigm-shifting developments of the 21st century, and in a market currently dominated by Illumina.
Oxford Nanopore appears to represent a formidable competitor that is looking to democratise and decentralise the sequencing market with differentiated and accessible technologies.
This has been a very closely watched IPO by investors and there is obviously still a lot of investor enthusiasm for the share price. The technology it works on helps drugs manufacturers as well as the identification of viruses and development of vaccines.
The company sells its customers sequencing machines of varying levels of sophistication, backed up with sequencing kits and flow cells which are required depending on what the base machine is being used for. Some commentators compare this with the highly profitable razor and blade model (or indeed printers, and printer cartridges to name another).
What makes Oxford Nanopore different?
Oxford Nanopore’s underlying nanopore technology works differently to current next-generation sequencing technology; in essence passing the DNA or RNA through electrically charged ‘pores’ with each combination of bases causing a characteristic electric signal that can be decoded, a process that leads to cheaper and faster sequencing. This allows for both short-read and long-read sequencing, adaptive sampling and real-time analysis to name but a few.
The company sits on the cutting edge of what is still very much a new and fast development industry. As such it should be capable of commanding valuations which would look expensive in other sectors. The sequencing market has been estimated to be around $10bn in size (Grand View Research).
In recent years the company has been launching new products and improving accuracy almost on a quarterly basis.
“The accuracy of Oxford Nanopore’s long-read technology is fast approaching that of Illumina’s,” said Sebastian Skeet, a senior healthcare sector analyst with Third Bridge research. “There are some nuances, especially when considering specific types of variation, but from what we hear from our experts, should their long-read technology become as accurate as Illumina’s short-read, this would be a ‘game-changer’.”
Company revenues are moving in the right direction, up from £32.5m in 2018 to £113.9m in 2020. It is an expensive company to run and requires a hefty re-investment of revenues into its R&D processes, so investors may not see much in the way of hefty profits from the firm over the short term in the wake of its IPO.
Illumina themselves obviously recognise the value of companies like Oxford Nanopore, as they historically tried, and failed, to acquire Oxford Nanopore’s long-read competitor Pacific Biosciences.
Illumina is often compared with Oxford Nanopore. Illumina was established in 1998 in the US and notably has helped to radically reduce the cost of sequencing DNA. It currently has a market cap of over $57 billion and and PE ratio north of 75. But just the sheer size and scope of the company and the important role it plays in the development of next generation medicines and vaccines cannot be underestimated.
We think this area of the biotech sector is just going to get more interesting in the next five years. The pandemic itself has illustrated this. Valuations will continue to look expensive however, as investor appetite for successful biotech ventures remains huge.
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