Gareth Blades on the differing attractions of the pioneers, enablers and adopters of genetic sequencing
In one of my favourite childhood films, Jurassic Park, Dr Ian Malcolm – perfectly played by Jeff Goldblum – cautions that “genetic power’s the most awesome force the planet’s ever seen”. That was 30 years ago – and it is safe to say that genetic power, and the ability to wield it, has moved on some since.
This is not about scare stories of genetic tinkering gone wrong, however – genetic sequencing has been widely adopted and has resulted in many investors making a lot of money. I hear people saying we are variously entering, or already in, a golden age of healthcare, on a regular basis – so one would be right to imagine there are even greater investment returns to be made.
What used to take days, months or years can now be completed in hours. A very small number of companies have pioneered sequencing technology, and a smaller number still enable the means to interrogate the genetic data and link it to disease – but a vast array adopts these technologies and create the product to provide genetic testing services. There are investment ideas in each category.
Illumina is the market leader, with a staggering number of installed sequencers – around 23,000. Its closest competitor, PacBio, has 1,000 machines installed. Sequencer manufacturers make most of their sales through consumables for these machines, rather than the machines themselves. The model is simple: as the machines become more automated and enjoy higher through-put, the more consumables are purchased.
What we are seeing in the industry now is a greater push into automation, as well as clinical applications for the diagnosis of disease, and for selecting the right therapy for the right patient – these are higher-margin and higher-volume applications.
It might be obvious that the company with the greatest number of sequencers installed will be the winner but this is not a foregone conclusion. There is increased competition in the space from new companies as well as the old guard. PacBio has recently launched two in-demand machines and their development roadmap specifically calls out clinical applications.
The collection, storage and analysis of genetic data is becoming more prominent as clinical applications develop. The key here is the ability to link the genetic information from sequenced genomes to disease – and from this to develop clinical insights, such as new diagnostics, disease prognostics or drug development targets. This is not trivial and there is a clear leader – Qiagen.
The company has twice the sales of the number two ranking firm and four times the sales of the number-three provider. It is an area of innovation and growth that is, I believe, under-appreciated – a view supported by the recent news Qiagen is looking at options to increase investment in this business through the sale of a minority stake.
Value is being ascribed to the pioneers of sequencing due to the foundational tools they supply. If we fail to understand how genomic data fits within a complex biological hypothesis of disease, however, there is little hope in leveraging genetic information for the benefit of the patient.
Genetic testing service providers
The discoveries enabled by sequencing genomes, and linking them to disease, are productised into scalable commercial patient-facing solutions. This part of the value chain is all about patient access, building patient trust and having the infrastructure to capture more patients.
This industry has changed significantly with Covid-19. Now patients expect ease of access via consumer-facing apps and web-portals, as well as convenient places for sample collection. A growing segment is wellness-testing and disease susceptibility. Companies with the greatest patient access and trust win market share.
LabCorp tops the list in terms of scale and patient access but there is a long list of others to mention, including Quest Diagnostics, which bears similarities to LabCorp; Hologic, which specialises in women’s health, but lacks direct patient access; and Myriad Genetics, which – while currently loss-making – is laser-focused on patient capture.
These three buckets of companies – as we would refer to them in the Amati Strategic Innovation Fund – are pioneers (sequencing tech), enablers (data analysis) and adopters (genetic testing). Each one forms an essential link between genetic discovery, analysis and finally patient-facing product. As these terms imply, there are different relative risks, depending which area takes your fancy.
Sequencing tech has the highest product risk and attracts the highest valuation multiples for profitable companies – for example, Illumina trades on 68x next year’s earnings, according to Bloomberg data as 23 March 2023. This sector also has a surfeit of loss-makers – however, the future value of clinical applications could be significant. As the clear leader, Qiagen is the high-quality way to secure exposure to data analysis. It is not pure-play – it offers lab machines and reagents, which give it direct access to clinical applications of genetic discoveries, such as diagnostic tests – but you get all this for 20x next year’s earnings, according to Bloomberg.
There are multiple options in the genetic-testing providers category. Key features here are clearly patient access, but also scale. This is an important feature and refers to both the breadth of tests that can be run, and also volume of patient use – both of which lead to superior profitability versus peers. Companies here tend to trade on the lowest multiples – LabCorp for example trading on 12x next year’s earnings, according to Bloomberg.
Dr Gareth Blades is an analyst with Amati Global Investors