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Still some New Frontiers In Biology
In previous articles, we discussed the rise of Next-Generation-Sequencing (NGS) and its potential to revolutionize medicine. Biotechnology and medicine are getting more precise by the day thanks to cheaper tools for sequencing DNA, utilizing RNA, and synthesizing proteins. The makers of these tools were discussed in “Illumina vs Pacific Bioscience: Choosing the Next Generation Genome Sequencing Company”
There is, nevertheless, some data still missing. Tools like NGS sequencers still agglomerate the data from thousands or even millions of cells simultaneously. But researchers often need to figure out what is happening in one single cell at a time, with a nanometer level of precision.
This is now becoming possible thanks to the emergence of a new field of science: spatial biology.
Instead of looking at the “mix” of molecules in a sample, spatial biology can determine where in a tissue or a single cell a molecule of interest, like a specific sequence of RNA, is located. And this is either in 2D or 3D.
This will tell researchers how cells interact with each other, how defense mechanisms activate, how a cell reacts to contact with a virus, and so much more.
This also has the advantage of providing much more sensitive data. While data of something happening in just a few cells could drown in a larger sample, the targeted approach of spatial biology can reveal the key roles of localized phenomena or rare cell types.
You can read in more detail the unique advantages of spatial biology in this FAQ by Nanostring.
The Investing Potential of Spatial Biology
In the 2000s, genome sequencing initiated a revolution that is now turning into gene therapies, gene editing, mRNA vaccines, etc… in the 2020s. This turned the $16/share of Illumina at its 2000s IPO into $495/share in 2021 at its peak (and still $190-$220 since)
It is possible that the first dedicated machines for spatial biology of our day will be seen as the early stage of another revolution that will fully take over by the late 2030s. It usually pays off to be early in new technology.
This is also a way for startups and innovators to outrun established competitors. It can be very hard to beat a $35B company like Illumina on its own turf like NGS. But the playing field is more equal for new techniques where the larger competitor holds no key patents, like spatial biology.
Some estimates put the Spatial biology total addressable market at $16B, as most of the genetic and molecular biology research is still done using older, less powerful technologies.
Currently, the 2 leading companies in the segment are 10x Genomics and Nanostring.
10x Genomics Technology
The company was founded in 2012, with among its founders Serge Saxonov, the director of R&D of the personalized genome testing company 23andMe. The company initially focused on single-cell gene expression before branching into spatial biology with Visium Spatial.
10x Genomic grew using a mix of R&D ($1B+ investing in R&D so far) and acquisitions. Notably, its Visium platform was obtained through the acquisition of Spatial Transcriptomics in 2018.
This is also how 10x Genomics would acquire its Xenium platform through the acquisition of Readcoor and Cartana in 2020.
In 2020, it would also launch the Chromium platform, updated the year after to Chromium X.
Through the acquisition of Tetramer Shop in 2021, 10x Genomics would also launch BEAM in 2022.
Visium is among the leading technologies for tissue spatial biology. It is currently used by thousands of customers and is referred to in 440 publications. In Q3 2022, 10x Genomics sold more than 100 Visium machines.
Chromium is focused on single-cell data, looking at the nanometer scale. 4,150 instruments have been sold and represent the bulk of 10x Genomics installed park of machines.
Xenium is a platform allowing for the simultaneous analysis of both RNA and proteins with complete and accurate spatial data. This is something really powerful for researchers, with thousands of different molecules looked at once. This is likely the direction 10x Genomics machines will take in the future for all analyses.
BEAM (Barcode Enabled Antigen Mapping) is a new technology that would allow researchers to identify immune system components in detail. This could be very impactful in research on immunity, pathogens, and new diseases like Covid-19.
10x Genomics offers a full set of software for analyzing the data produced by its equipment in 5 different categories and also offers cloud capability and custom designs.
Nanostring Technology & Products
Nanostring was launched in 2003 to leverage the digital molecular barcoding technology invented at the Seattle Institute for Systems Biology.
By 2008, it had launched its first product, nCounter.
This was great progress in transcriptomic (the study of mRNA). Previous and alternative methods were either slower or more complex. They also introduced a lot of errors and had lower-quality results. Nanostring summarized it simply: “Faster than NGS (Next Generation Sequencing), simpler than qPCR.
GeoMx & CosMX
GeoMx is designed to study RNA expression in whole tissues and is also able to analyze 150+ proteins, more targets than 10x's Xenium.
CosMx Single Molecular Imager (SMI) instead can look at a single cell and what happens inside for RNA and up to 64 protein targets, and possibly up to 120 in 2024.
Both brought a powerful and automatized process to spatial biology. Before that, less sensitive, more costly and more labor-intensive methods would have had to be used. In this segment, GEoMX is the market-leading spatial profiler.
They are also able to use FFPE tissue samples, the most commonly made tissue sample in medical research. This means that millions of preexisting samples archived by researchers worldwide can be analyzed again for new insights. This expertise is directly derived from Nanostring's experience in that field through its nCounter legacy product.
So, Nanostring was instrumental to the explosion in scientific publications using spatial biology. No less than 7,117 publications mention Nanostring machines from various fields like research on cancer, Infectious disease (including Covid-19), immunology, agriculture, or neurology.
The company is also developing dedicated software to help researchers. It launched AtoMx, a SaaS solution (Software as a Service), in Q4 of 2022. This should help researchers analyze their data, share them with colleagues, and create large publicly or privately accessible databases of spatial biology research.
Financials and Valuations
10x Genomics is by far the largest company of the 2 discussed in this article. It has a total of 1,200 employees, and its market capitalization is standing at $5.7B.
Its revenues were $516M in the last quarter, up 9% year-to-year. 85% of its revenues are from consumables used by the previously sold machines. Net income was $6M in Q4 2022, the first time it reached a positive net income since the company was IPOed in 2019.
Due to very large investments in R&D and capex (-$131M), the company has a negative free cash flow of -$165M. It has a cash cushion of $429M. The company has a net debt of -$335M, better than the -$505M in 2021.
The company sales-to-price ratio is standing at 11, which is not cheap but expected for a company valued on its growth potential. Its valuation is even rather reasonable for a growth startup getting in the green for the first time. Some more dilution of existing shareholders is to be expected, as the company will need more cash in 1-2 years to accelerate growth and finance R&D + capex.
Overall, 10x Genomics is likely to become really profitable only once spatial genomics gets commonly used in most research labs instead of being the most advanced technology available, as it is today. Another step of growth can be expected in the future when spatial genomics starts to be used for medical diagnostics.
NanoString is smaller than 10x Genomics, with less than 800 employees. Its market cap is also 1/13th of 10x Genomics at $413M.
Its revenues were $34M in Q4 2022, for a net loss of $44M. In the last 4 quarters, revenues were $127Mm and net losses $115M. Revenues were roughly split 50/50 between nCounter and Spatial biology items. 80%-85% of revenues are from service and consumables for the previously sold equipment. Free cash flow was -$31M in Q4 2022 and was an accumulated -$239.9M in the last 2 years. It also has a net debt of $114M.
Available cash has declined from $410M in Q1 2021 to just $197M in Q4 2022. The company will need to raise more money at the current burn rate in 12-18 months.
Nanostring's price-to-sales ratio is relatively low at 3.1. It most likely reflects its recent losses, negative cash flow, and the impending need to raise more capital soon. The dramatic fall in stock price since 2021 might force a larger-than-planned dilution of existing shareholders.
Similarly to 10x Genomics, the path to profitability is through most research labs adopting spatial biology routinely in their workflow.
Nanostring or 10x Genomics?
Both companies have impressive technology, bringing revolutionary new understanding to RNA and proteomic analyses. There is little doubt spatial biology will soon become the favorite tool for researchers in oncology, neurology, and other fields where discrete and transient gene expression are the key to solving deadly diseases.
The two companies' competitive situation seems to be shaped similarly to the early Illumina vs PacBio rivalry. If that analogy holds true, the smaller competitor might struggle to keep up and turn profitable, as it will have to match the R&D budget despite lower total revenues. The higher income also allows the larger competitor to acquire promising startups and integrate their technologies into their own machines.
From an investment point of view, 10x Genomics seems safer. It is starting to be profitable and has more employees, cash on hand, cash flow, and an R&D budget to keep moving forward.
It is nevertheless priced much higher than Nanostring on a price-to-sales ratio basis. So, Nanostring is likely to outperform in terms of returns on invested capital IF it manages to close the gap in total sales with 10x Genomics. If this condition is fulfilled, Nanostring can outperform its larger rival and compensate for incoming shareholders' dilution.