Business analysis - Oxford Nanopore

Investor warning: The following post is for entertainment purpose only, and should not be considered as financial advice of any sort. Please consult your favorite government-certified investment adviser or central banker regarding decisions on investing your life savings.

In February of this year, we made a forecast that Oxford Nanopore would fire-sale or close by the end of 2017. It has been ten months since then, and we feel obliged to provide an update to our readers.

About Oxford Nanopore

Many of our readers are already familiar with the mentioned company, but for the benefit of general audience, Oxford Nanopore is a UK-based company developing technologies for nucleotide sequencing. The company is working on bringing revolutionary hand-held sequencing instruments to the market. Reads sequenced by those instruments are generally long, but often contain substantial errors. Therefore, the bioinformatics challenges are similar to those posed by the Pacbio technology. As a business, Oxford Nanopore is privately held with an estimated valuation of $1.57 billion.

For various reasons explained in our earlier blog posts, we have been negative on the company. In our opinion, the cost of bringing this promising technology to the market had been too high and may not be ultimately supported by the market. Our views contrast with the opinions of most others in the field, who had been very positive on the company. To help our readers to get a balanced perspective, we link at the bottom to a number of posts from a knowledgeable blogger (Keith Robison), who had been enthusiatic about the technology and the company. This post quotes extensively from his blog.

The company raises $126M in Dec 2016

It was reported this week that the company raised another $126M from the existing and new investors. This event is not in line with our expectations from February, when we argued that the company would not raise any more private money. High valuation, immature technology and the lack of penetration in a clearly saturating market were our primary reasons.

It is still unclear what the investors find attractive, but clearly this 10+ year old company keeps raising more and more money in every round. In August 2014, they got £35 million. In July 2015, they received £70 Million. This time, they raised £100M.

Above observation, coupled with the fact that the existing investors themselves had to pour money in the company again, does not bode well for its future.

Wisdom or Martingale?

Maybe the private investors are unusually smart or wise, and see something we do not see. To us, pouring increasing amount of money in an unprofitable venture looks like Martingale betting strategy.

A martingale is any of a class of betting strategies that originated from and were popular in 18th century France. The simplest of these strategies was designed for a game in which the gambler wins his stake if a coin comes up heads and loses it if the coin comes up tails. The strategy had the gambler double his bet after every loss, so that the first win would recover all previous losses plus win a profit equal to the original stake. The martingale strategy has been applied to roulette as well, as the probability of hitting either red or black is close to 50%.

Interestingly, when it comes to investing, the line between wisdom and Martingale is very fine.

Valuation and Brexit effect

In this round, the valuation of the company in British pound went up 35% from £930 million to ~£1250 billion. However, remember that British pound itself fell by over 20% during this period due to Brexit. Therefore, in dollar terms, the increase in valuation is more modest.

This issue is important, because the company got a new investor (GT Healthcare) with Asian presence. Non-British investors are likely to use the dollar valuation as an important metric. The key message here is that they were not eager to pay a huge premium over the 2015 dollar valuation to invest in the company. Why they paid any premium is a mystery, but the further involvement of the existing investors in this round suggests that the company was having difficulty to raise money from new outsiders.

Two major existing investors - IP group and Woodford fund - are themselves publicly traded. In the annual report of IP group, Oxford Nanopore investment carries a big part in unrealized gain. Neil Woodford, the manager of the other fund, had stellar reputation on managing money, but that is somewhat tarnished after a few bad biotech investments. His last year’s performance is in bottom 10 among 102 UK-based fund managers mentioned here.

Crashes at Circassia, Northwest Bio drive double-digit drop at Woodford’s fund

Investors reject Woodford’s call for more money

Maybe Oxford Nanopore will turn out to be one of his successful bets. Nonetheless, the fact remains that the current valuation is based on the opinions of only a small number of investors. That is scary, because the company continues to lose money hand over fist in an oversaturated market for sequencing.

The saturating market of sequencing instruments

Speaking of oversaturation, the Illumina stock peaked right around our June 2015 post - Peak Sequencing? BGI Unveils ‘Nation-scale’ Sequencer, and halved in 16 months. In China, sequencing ‘giant’ BGI is having trouble doing a mid-sized IPO ($260M).

Venture-Backed BGI Suffers IPO Blow As Regulators Terminate Review

Week In Review: Chi-Next Exchange Rejects BGI’s $260 Million IPO Application

Pacbio, another sequencing company with significant footprint, is not printing money either. Although their revenue increased substantially from the last year, the losses continue to show up in the quarterly statements.

Revenue for the third quarter of 2016 totaled $25.1 million, up 80% compared to $13.9 million for the third quarter of 2015. Product and service revenue for the third quarter of 2016 increased by 109% to $21.5 million, compared to $10.3 million for the third quarter of 2015. Revenue for the third quarter of each of 2016 and 2015 reflected $3.6 million of amortization of the upfront payment pursuant to the Company’s development, commercialization and license agreement with F. Hoffman-La Roche Ltd.

Net loss for the third quarter of 2016 was $17.5 million and net loss per share for the third quarter of 2016 was $0.19 per share. Net income for the third quarter of 2015 was $1.8 million and net income per share for the third quarter of 2015 was $0.02 per share, primarily driven by a one-time gain on lease amendments of $23.0 million.

Patent battles

Not only the market is saturated, the existing companies are spending a lot of efforts to raise patent barriers for the newcomers. Soon after our February post, Illumina sued Oxford Nanopore for patent infringement. That patent lawsuit has been settled since then, and “Oxford has agreed not to import or sell any product containing a pore with an amino acid sequence at least 68% similar to Mycobacterium smegmatis porin (Msp)…and to destroy any inventory of such products” according to Science Magazine. In the meanwhile, the company introduced CsgA pore (R9) that is not affected by the patent.

Right after the above patent battle was over, another patent lawsuit appeared on this horizon, this time from Pacbio. Pacbio argues that ONT’s use of double stranded data to clean sequencing error infringes on its patent. We are not sure where this patent will lead to, but at least it will remain as a major distraction for the company’s management.

Pacbio on the patent suit -

On November 2, 2016, we filed a complaint against Oxford Nanopore Technologies Ltd., Oxford Nanopore Technologies, Inc. and Metrichor, Ltd. (together, “ONT”) with the U.S. International Trade Commission for patent infringement. We are seeking injunctive relief with respect to several ONT products , including ONT’s MinION and PromethION devices. The complaint is based on our U.S. Patent No. 9,404,146, entitled “Compositions and methods for nucleic acid sequencing” which covers novel methods for sequencing single nucleic acid molecules using linked double-stranded nucleic acid templates, providing improved sequencing accuracy. We are seeking, among other things, an exclusion order permanently barring entry of infringing ONT products into the Unite d States, and a cease and desist order preventing ONT from advertising and selling infringing products in the United States. The estimated financial effect associated with this complaint cannot be made as of this 10-Q filing time.

ONT’s response on the patent suit -

Dr Gordon Sanghera, CEO of Oxford Nanopore said “This new out-of-the-blue ITC complaint shows some very one dimensional reasoning.”

We do not anticipate any disruption to our ongoing commercial progress as a result of this action, which we believe is without merit.

ONT’s technology

As the OmicsOmics blog pointed out, homopolymers remain a major problem for Oxford Nanopore’s sequences.

Homopolymers remain a problem - for now. With R7, the HMM-based basecaller was actually incapable of calling runs of longer than 6., and after polishing de novo assemblies it appears that such homopolymers dominated the errors. Brown spoke of a new “transducer-like” basecaller that should make inroads on the homopolymer problem, and also spoke of a “secret R9 chemistry” which has more predictable ratcheting during DNA translocatoin. Brown also mentioned that ONT continues to look for “less noisy” pores, including further mutants of the R9 pore. ONT’s goals for accuracy by end-of-year are 95% for 1D and 99% or better for 2D. Again, I urge that any such stats be generated using a wide range of G+C contents. Streptomyces rapamycinicus is a great high G+C organism, has an okay public reference genome and some truly evil repeats to test assembly algorithms. I wouldn’t want to grow Plasmodium, but that is one possibility for low G+C.

Those homopolymers can only be resolved by using another technology like Illumina. Doing so would take away much of the appeal for nanopore sequencing. An astute reader commented -

I think if ONT can make the molecules moving through the pores in constant speed, there is a possibility that homopolymer problems can be solved. However, I am seeing way more stalled moves (0 moves) in R9 data than R7 data. So it seems things are not moving in the right direction in the homopolymer space for now.

Market penetration

The user-base of Oxford Nanopore is not growing very fast, as observed by OmicsOmics blog -

Anyway, what is so striking is that the only mention of nanopore sequencing in the SFAF tweet stream were remarks on the absence of nanopore sequencing from SFAF. Which is particularly notable since so many of the talks were ploughing similar ground, particularly rapid diagnosis of infectious diseases and their drug resistances. A talk at SFAF using (I think) Illumina was excited to get the diagnosis time for tuberculosis drug resistance down to one week; at London Calling Zamin Iqbal talked about taking one day, two if the resistance signal was weak.

Now, the speakers at London Calling are generally demonstrably familiar with a wide range of sequencing platforms; many run core facilities or have published on multiple platforms. So at LC there aren’t blinders. But incidents such as the SFAF talks suggest that Oxford is still a niche platform, with a small (and perhaps slowly growing) band of devotees.

An announcement which could shift the entire competitive landscape for ONT is that a new basecaller, using “transducer” technology, is imminent. What makes this update potentially game-changing is that this new tool, Scrappie, apparently resolves homopolymers. It apparently will call DNA modifications as well. Clearly this needs to be validated externally on a wide variety of samples, but if true it could remove the major barrier to high-quality nanopore-only de novo genome assemblies.

Changes in mood among the previously “gaga” fans

It is interesting to note that some of the previously gaga fans are turning negative on the company. For example, check - “Is PromethION a Strategic Error?” by Omics!Omics! blog. The comment “Should Oxford succeed, I’ll look like one more naysayer they’ve proved wrong” is quite a change in sentiment from “When it comes to Nanopore, am I too GAGA?” from the same author in January. We need to remind our readers that naysayers of the company were in fact rarely seen in the past, irrespective of what Omics!Omics! blog wrote. That number has grown substantially, if the comments in his blog are any indicator.

His larger point about PromethION is valid, and it aligns well with what we wrote in February. He wrote -

The question though is whether PromethION is a bridge too far. PromethION requires several technologies to be successfully developed and launched, and these technologies may not port easily to MinION. This is my first concern: PromethION represents a very large developmental fork away from MinION, which means improvements in one may not copy to the other. It also means further proliferation of components and sub-components.

We suspect big machines like PromethION are needed for the company to support its valuation. It is cute to ‘sequence sitting inside an Indian taxi’, but the big money still lies with the giant factories sequencing human genomes. Based on other announcements made by Oxford Nanopore (e.g. highlighting human genome sequencing by a Dutch group), we suspect they are recognizing the same. On the other hand, many researchers are excited about ONT because of their expectation about doing portable sequencing for the cost of USB stick. How the company keeps these two audiences happy remains to be seen.

Margin on individual nanopores

The company faces technological hurdles with homopolymers, but assuming that it solves that (not guaranteed), will they be able to bring down the cost of nanopore to that of USB sticks? That depends on the margin they have on each device. One reader of the Omics!Omics! blogwrote -

The minion is not a commercial product, clearly. Actually, go look at ONTs latest accounts (available to end the of 2015 on companies house). They recognized 750KGBP in revenue for sales, against a cost of goods of 500KGBP. That’s a horribly low markup (Illumina markup is something like x10 cost of goods). But even so, it probably doesn’t reflect the true cost. There a whole bunch of places they good be hiding costs just to make it look like the minion is sold at a profit in the accounts (e.g. is the cloud compute included, or is that a “research expense”?).

Is margin problem on handheld devices another reason for trying go for big machines like PromethION?

Employee sentiment

In addition to comments made by fans and foes, we look at the employee sentiment at Glassdoor.

Our February post highlighted a number of negative posts from the ONT workers, and two others appeared since then. In contrast, only one person wrote positively about the company (if calling it ‘shark tank’ sounds positive to you :)). We post parts of the negative comments below, as they appear relevant to our post.

A. Posted on Nov 2016 -

“Don’t be fooled by PR, avoid at all cost!” I worked at Oxford Nanopore Technologies full-time (More than 3 years)

Cons - toxic work atmosphere fostered from management all the way down - infighting & bullying between teams is accepted as normal - deadlines and objectives change all the time, leading to substandard engineering choices - noisy office in the middle of nowhere, terrible lunch options

B. Posted on April 2016 -

“Subpar product, highly political atmosphere, uncertainty” Current Employee - Anonymous Employee I have been working at Oxford Nanopore Technologies full-time

Cons Intensely political atmosphere, no sign of an IPO after 11 years in existence, some critical aspects of the product are still behaving deeply sub-par rendering it only somewhat useful for some niche applications, uncertainty about the future survivability of the company given its history and IP issues.

Summary

In summary, we do not consider being able to raise increasing amount of money from the existing investors a sign of strength. Our opinion about the future of the company remains the same as before.

References:

If our views are too negative, please try the following antidotes -

  1. May 25 - London Calling Preview

  2. May 29 - London Calling: Notes on Brownian Commotion

  3. June - London Calling 2016: Further Thoughts

  4. August - Where the bleep did my pores go??

  5. October - ONT’s Wafer Thin Update

  6. October - Tidying Loose Nanopore Patent Threads

  7. November - PacBio’s Quixotic Patent Litigation

  8. November - Is PromethION a Strategic Error?

  9. December - Oxford Nanopore New York City Meeting, Day 1

  10. December - Oxford Nanopore New York City Meeting, Day 2


If you are stuck with a lot of Nanopore or Pacbio data, the tutorials in our new membership site may help you.

Written by M. //