10x Genomics Stock: The Illumina of Single-Cell Analysis?

The USA is famously essentially the most litigious society on this planet. One statistic we’ve come throughout is that the nation spends about $310 billion a yr on litigation. One significantly well-known American has been concerned in some 3,500 lawsuits, maybe skewing the statistics a bit. Nevertheless, our specific curiosity is in patent lawsuits, which is when firms scuffle over mental property. About 14% of all patent litigation instances in america contain the biotech and pharmaceutical business, and we’ve coated our share of them over time. These embody the large battle royale over gene-editing CRISPR know-how and lesser-known lawsuits over one thing like genetic-testing strategies utilizing fragments of DNA in blood.

A Litigious Starting for 10x Genomics

That brings us to the quickly rising area of single-cell genomics, which is strictly what it says on the tin: the examine of particular person cell genomes. The method can reveal mobile variations and capabilities in tissues and organs which might be in any other case undetectable utilizing conventional sequencing approaches by trying on the DNA or RNA of every cell. This can assist scientists higher perceive illnesses like most cancers. Identical to the gene-editing software CRISPR, a lot of the early analysis and growth of single-cell evaluation know-how got here out of academia. As an example, a life science firm known as Bio-Rad (BIO) licensed among the specialised strategies used to isolate cells for genetic evaluation from patents owned by the College of Chicago.

In 2012, three guys named Serge Saxonov, Ben Hindson, and Kevin Ness based 10X Genomics (TXG), primarily based in a San Francisco exurb, to develop comparable know-how. Particularly, the corporate began growing specialised devices and consumable merchandise used to organize and analyze single-cell samples for next-generation sequencing (NGS) on customary units offered by firms like Illumina (ILMN). Saxonov was worker numero uno at a bit of gene-testing firm known as 23andMe again within the day. Hindson and Ness had beforehand co-founded a biotech known as QuantaLife (the place Saxonov labored as a vice chairman after leaving 23andMe) earlier than they offered the startup to Bio-Rad in 2011. 

You may be capable of guess what occurred subsequent: Bio-Rad began submitting lawsuits towards 10x Genomics, alleging that the founders had breached confidentiality and non-compete clauses. This was again in 2014 and marked the start of a seven-year-long patent battle of lawsuits and countersuits. Bio-Rad arguably scored the largest win again in 2018 when a jury discovered that 10x had infringed upon a few of these College of Chicago patents licensed by Bio-Rad. Ultimately, 10x coughed up greater than $35 million to fulfill that judgment. It was solely in 2021 that the 2 sides lastly agreed to a full stop hearth, resolving excellent litigation worldwide and cross-licensing their single-cell patents. 10x additionally kicked in one other $29 million in royalties and curiosity associated to its flagship product on the coronary heart of the battle.

What’s Occurring with 10x Genomics Inventory?

None of that stopped 10x Genomics from rising revenues from lower than $4 million in 2015 to $490.5 million in 2021. That’s a compound annual development price of 128%. The lawsuits additionally didn’t cease the corporate from having a profitable IPO in 2019, elevating almost $400 million within the course of. By then, the corporate was thought-about the dominant participant within the single-cell sequencing panorama. We ultimately determined to go lengthy on 10x Genomics inventory and have stayed the course regardless of share volatility, assured within the firm’s sturdy gross margins, broad market penetration, and strong razor-and-blade enterprise mannequin.

Then there’s the outcomes from 2022. Income development has slowed dramatically (5% in 2022) and margins are shrinking (77% in 2022 from 85% in 2021). One huge drag on development was Asia, which accounted for about 30% of 2022 revenues at $105.6 million. That quantity represents a ten% decline over the prior yr. Particularly, the corporate pointed the finger at China, which was nonetheless in covid jail final yr. Not that development was gangbusters elsewhere: Income development within the Americas barely cracked double digits at 11%, ending the yr with almost $294 million in income. Income from European markets was about $117 million, a rise of 8%. One other potential drag on development: 10x Genomics as soon as once more discovered itself embroiled in a number of new lawsuits (extra on that later). The corporate presently has about $400 million to bankroll litigation and function a enterprise. 

Talking of which: 10x enormously expanded its portfolio of specialised devices and consumables final yr, together with for its flagship Chromium platform for single-cell evaluation. For instance, the Single Cell Gene Expression Flex array allows researchers to scale up experiments by an order of magnitude by processing as much as 10 million cells and a whole bunch of samples in a single run. Since 2018, when 10x Genomics acquired Spatial Transcriptomics, it has been pushing onerous right into a complementary space of single-cell sequencing known as spatial evaluation by means of its Visium platform. The place single-cell sequencing can let you know what gene every cell is expressing, spatial sequencing describes the spatial relationships between cells in a tissue pattern. For instance, spatial sequencing of cancerous tissue can reveal how cells are reacting to remedy. The corporate’s newest platform, Xenium In Situ, allows researchers to carry out focused spatial profiling at subcellular decision.

Some have in contrast 10x Genomics to the OG of NGS, Illumina (ILMN), in its early years of dominance earlier than going off the rails. So, why is development immediately stalling?

Why Has 10x Genomics Inventory Hit a Wall?

First, let’s acknowledge that what 10x Genomics does is fairly advanced. We’re MBAs, not no matter these guys are, so we’re going to depend on some greater brains than our personal to grasp the know-how and its disruptive potential. That features insights from DeciBio, a technique consulting and market intelligence agency that focuses on biotech and precision drugs. In a 2020 report, the agency defined why 10x Genomics was the dominant power in single-cell evaluation. However know-how on this area is transferring at warp velocity, and the identical analysts printed a follow-up report only a few months in the past after 10x launched its 2022 outcomes. The article questioned whether or not that dominance remains to be sustainable on two fronts.

• Price. Apparently, it may well value about $1,000 per pattern for single-cell evaluation, in line with DecBio. On the similar time, 10x is attempting to promote prospects on the concept that single-cell evaluation and spatial evaluation are complementary. That’s not how DecBio sees it: “Our major analysis … signifies that the excessive prices of those two approaches make them antagonistic – restricted budgets power customers to ‘select’ between the 2. In different phrases, single cell budgets are prone to shifting to spatial evaluation.” 10x Genomics is probably cannibalizing its personal enterprise. However, the price of NGS, which represents about half of the price of single-cell evaluation, is continually dropping. And merchandise like Chromium Flex are serving to drive down prices as properly. 
• Utility. This one is said to cost. Are the insights gleaned from the 10x platforms price the price when cheaper approaches, similar to bulk RNA-Seq evaluation, can analyze the expression of RNAs from massive populations of cells? It actually is determined by the scientific query at hand. 10x has offered greater than 4,600 devices to this point and is furiously cranking out new merchandise. The sensible wager is that the know-how will solely change into extra related as the information decision improves whereas prices drop, permitting scientists to drill ever deeper into human biology.

It’s additionally price noting that the first 10x buyer base immediately primarily contains primary analysis at educational and authorities establishments. Administration believes it nonetheless has loads of inroads to make in its 4 foremost markets:

It’s obvious this can be a very dynamic, fast-paced market. One huge query is how properly can 10x Genomics keep forward of the competitors?

Competitors and Lawsuits

As you may count on, legacy organic analysis and medical system firms (or no less than their subsidiaries) like Bio-Rad, BD Biosciences, and Takara Bio are among the many competitors. Up to now, in line with DeciBio, these firms “have tried to chip away at 10x’s market dominance previously [five] years however have been largely unsuccessful.” Surprisingly, Bio-Rad has but to launch its personal single-cell evaluation platform, although that’s purported to occur by the top of the yr.

As you additionally may count on, the larger disruption may come from a brand new wave of startups which might be “aiming to problem 10x’s dominance with instrument-free, modular, and scalable choices.” Slightly than costly devices, these new entrants to the single-cell scene maintain it easy. For instance, Seattle-based Parse Biosciences, which has raised about $50 million, sells kits with software program that may profile cell RNA utilizing customary lab gear. The completely different approaches between 10x Genomics and corporations like Parse Biosciences is considerably just like what’s taking place in long-read sequencing between Pacific Biosciences (PACB) and Oxford Nanopore (ONT.L). The previous’s new flagship long-read sequencer retails for $779,000 whereas the latter provides an instrument not a lot bigger than a thumb drive for about $1,000. Do prospects need huge and dangerous ass or fast and straightforward?

And as you additionally may count on, these two firms have had their very own authorized wranglings over time, regardless of the obvious disparity between their approaches. So, it’s no shock, regardless of the completely different enterprise fashions, that Parse Biosciences is considered one of three firms that 10x Genomics is presently suing in courts world wide:

• Parse Biosciences: In August 2022, 10x sued Parse claiming that the startup “intends nothing lower than to repeat 10x’s full lineup of single-cell merchandise wholesale” associated to its Chromium platform.
• Vizgen, a biotech based in 2019, with greater than $136 million in funding: This lawsuit is concentrated on 10x Bioscience’s latest platform, Xenium, and an analogous product from Vizgen. Each firms have licensed patents for the know-how from Harvard, which additionally finds itself in the midst of the countersuit by Vizgen. 
• NanoString Applied sciences (NSTG), a microcap life sciences firm: 10x Genomics has been on the offensive towards NanoString over Xenium-related patents since 2021. 10x seems to have the higher hand after a courtroom in Germany issued an injunction for NanoString to stop promoting its spatial evaluation instrument and consumables. Lawsuits are nonetheless underway in america.

Retail buyers don’t have to have a level in jurisprudence, however litigation generally is a pink flag towards an organization or a whole business, if rivals are spending all their cash in courtroom slightly than on product growth. 10x actually has a proper to defend itself, however we additionally marvel if there are some bigger points at play with these university-licensed patents.

What’s Subsequent for 10x Genomics Inventory?

Definitely, 10x Genomics has loads of different issues, similar to returning to a high-growth tempo. Within the brief time period, buyers can count on regular however not spectacular development from the corporate. As of Q1-2023, administration mentioned it expects full-year income to be within the vary of $590 million to $610 million, representing development of 14% to 18%. That’s a bit of higher than the corporate beforehand predicted and is mirrored in Q1-2023 outcomes of $134.3 million, a 17% improve from the corresponding prior yr interval. China is constant to be a drag on revenues, which had been down about 36% in Q1-2023, after administration anticipated a drop of solely 20%. Hopefully, that improves as China emerges from lockdown.

The corporate just lately determined to drop considered one of its key efficiency indicators – what it calls “consumable pull-through.” Mainly, the quantity represents consumables income per machine. That metric is changing into increasingly meaningless as 10x introduces new devices and merchandise, significantly within the spatial evaluation market. Luckily, the 10x is now offering insights into its two foremost know-how markets (Chromium and Visium/Xenium):

We actually respect the brand new granularity into revenues. A few issues instantly soar out at us right here: Income from the newly launched spatial evaluation devices is off to an amazing begin, with spatial consumables income up 69% for the comparable three-month interval. Nevertheless, gross sales of Chromium devices dropped, maybe suggesting a point of saturation, cannibalization from spatial gross sales, or inroads by rivals. That’s one thing we’ll wish to revisit in subsequent yr’s check-in.

We’ll additionally wish to regulate gross margin; it fell to 73% within the first quarter of this yr. Administration conceded that it’ll proceed to pattern decrease as extra Xenium devices head out from the showroom ground, as a result of that machine presently carries a “considerably decrease margin than our different devices.” The corporate wished to construct a Mercedes not a Mitsubishi, with “high-end parts, prioritizing efficiency and time to market over value.” 10x says it should ultimately cut back prices on some parts, particularly because it scales manufacturing. Hopefully, deep-pocketed prospects are satisfied that the scientific outcomes justify the worth tag.

Conclusion

10x Genomics presently operates in one of the advanced and aggressive markets inside the broader genetics business. The large query is whether or not the corporate can keep its market-leading place in a sector that’s so comparatively new that it’s onerous to foretell which know-how will ultimately dominate. That’s particularly related with 10x at a transition level, because it builds out the brand new spatial evaluation platforms and deploys new merchandise for its flagship Chromium platform. Transitions are when firms are weak to disruption each externally and internally. If 10x Genomics can efficiently defend its technological moat towards a rising sea of startups and execute to plan, it might be the Illumina of single-cell (and spatial) evaluation.

Tech investing is extraordinarily dangerous. Reduce your danger with our inventory analysis, funding instruments, and portfolios, and discover out which tech shares it’s best to keep away from. Turn out to be a Nanalyze Premium member and discover out immediately!