Oxford Nanopore Technologies plc (ONT) Earnings Call Transcript & Summary

Good morning. I'm James Gordon, JPMorgan European Healthcare Analyst and today, I've got the pleasure of introducing the Oxford Nanopore presentation. So we're going to be joined by Oxford Nanopore, CEO, Gordon Sanghera. Thanks a lot for joining us today, Gordon. I look forward to the presentation. Having just said that, give me one second, I'll just track down our speaker. And after that dramatic wait, here is our speaker. Gordon Sanghera.

It's not my fault, the loos were completely busy. Good morning, everybody. I'd like to start thanking JPMorgan for allowing me to present. Been coming here for about 12 years. We floated in London in 2021 and in '22, I did a virtual Zoom from Oxford. So I've never actually presented. So I'm a little bit nervous, but I shouldn't be. It looks like an interesting and fun crowd out there. So for those of you who don't know, we were spun out of Oxford in 2005, to develop a new sensing platform that is electronic single molecule sensing. We are applying that initially to DNA RNA sequencing. And I will talk you through this highly differentiated sequencing platform. The company, I'm going to pass around a sequencer. I want it back, please. It's got a little tracker in it. This is a handheld DNA RNA sequencer. Have a play around with that. We launched the MinKNOW in 2015. Today, we are in 120 countries. We have over 7,300 active customers and over 8,800 publications. And you'll hear why that KPI is so important. We have developed this technology from the bottom up, including the consumables, which are the flow cells and the kits. They are manufactured in Oxfordshire in our bespoke factory which we opened in 2018. You all know the life science research tools market is $6.2 billion, but the opportunity to cross the chasm into applied clinical has not been met yet. And I'm going to tell you why we are going to make the same transformation as we saw from mainframe to desktop and handheld and the portfolio of products that Nanopore has will enable that. It still staggers me that we've got 1,200 people. I don't know everybody's name anymore. But we are in 120 countries that the exact team have been together for over 15 years. It's been a lifelong journey for us all. But in recent years, we have poached, attracted commercial leadership from LSRT competitors as we really start to expand commercially. So getting into the numbers straight away. Our preliminary revenues for full year 2023 are going to be around GBP 169 million. That's a 39% underlying growth. So removing the COVID, one-off COVID and our Emirati Genome Program revenues. And in the 5 years, last 5 years, our compound annual growth has been 39%. The biggest number on here is the fact that 75% of our revenue comes from consumables. People are sequencing. They are pushing the boundaries of biology with our highly differentiated platform. Medium term, at IPO, we said we would grow greater than 30% year-on-year. We have delivered on that, including '22 when our competitors saw 0% growth. We continue to push that greater than 30% underlying growth in revenue. We are targeting 65% margin in that medium term in 2026, greater than 65%. I say that with confidence because it's not just economies of scale, there is manufacturing innovation, and we will build on that innovation to hit our target on margin, and we expect to be adjusted EBITDA breakeven by the end of 2026. Okay. Now I could spend a whole of the presentation talking about DNA and RNA. So I'm going to be very disciplined in this presentation. We all know DNA is a source code of all living things. It doesn't come in one size. Virus is a 10,000 bases. Bacterial pathogens, several million. Humans, 3 billion, plants can be tens of billions. It has been over 20 years since the first draft genome was completed. The more we look at our DNA, the more complicated it is. And we now know that we have genomics, single-point mutations, but we have so much more. We have epigenetics. We have liquid biopsy, circular and tumor cell-free DNA fragmentomics. We have in RNA transcriptomics. And we are also developing a proteomic workflow. One, I promise I'd only do one Lord of The Rings, one ring to rule them all. One platform to enable and analyze all these multi-omic nuanced drivers of biology beyond single point mutations on DNA. It's been almost 20 years since I met Spike Willcocks, my cofounder and he showed me Nanopore sensing in academia, a single channel platform. We developed hundreds -- tens, hundreds and thousands of electronic application-specific integrated circuits that underpin the foundation of this platform. In addition, whilst we were spun out of Oxford, we immediately did partnerships with the godfathers of sequencing in 2005 to 2007. Harvard, Santa Cruz, California, UMass, Texas A&M and obviously, Professor Hagan Bayley at Oxford. Today, that is 32 academic nanopore groups we have exclusive partnerships with, providing us with an evergreen portfolio of nanopores that power our continuous improvements and also our new offerings, including proteomics. So we have an evergreen IP portfolio that underpins this. We are coming. We are a replacement technology, and we're going to be here for a very long time. So how does Nanopore work? As the name implies, a nanopore is a very small hole, nanoscale. And what this animated present slide shows is a cut through. The mushroom is actually a protein. And as you can see, the DNA singulates and translocates via the help of a DNA motor called helicases. It translates at 450 bases per second. Each of those tens, hundreds and thousands of channels is an individual nanoscale sequencing play. So there are 500 on the MinION that's been passed around. Sequencing at 400 bases per second. The DNA is native. If you remember nothing else in my presentation today, the DNA is native. That means we see everything. We do not make a PC hard copy where we remove all the high definition and color and produce a black and white single-point mutational analysis tool. We take the signal which is current as a function of time. It's a simple electrophysiology reading platform. If you've had an ECG, that's what it is, but it's doing sequencing. That signal current as a function of time. We use machine learning, AI models. We have been for over a decade to deconvolute that raw signal into real-time DNA, streaming live real time. In order to do that, we need phenomenally powerful compute. We have been partnered with GP -- with NVIDIA for over a decade. And that allows us, particularly for our medium scale and high throughput sequences to stream in real time, DNA RNA information. We recently we've been collaborating in '23 with Apple silicon team. We have now, for our next-generation MinION integrated it into their next-generation iPad, so we can do real-time live base calling for decentralized point-of-care applications, which I will talk about. So let's talk about accuracy. We launched Nanopore sequencing in 2015, minimal viable product. Disruptive innovators are taught to do that. And today, and since March '22, our 10 Series chemistry, which came from an academic partnership in Belgium that was a nanopore that was discovered about a decade ago. It's got a long IP cycle on it. We can hit with our single strand simplex sequencing, all the single point mutations that you can get with sequencing by synthesis. We can also hit the variance that you can get with sequencing by synthesis. But we can also sequence the whole genome. What I mean by that is 8% of the genome is unmapped with sequencing by synthesis. Sequencing by synthesis is short read. Nanopore can do short, hundreds of bases, tens of hundreds of bases, long tens of thousands of bases ultra-long, hundreds of thousands of bases. When we pay that capability with Duplex, where the first and second strands go down together, we have single molecule accuracy of Q30, 99.9%. We have telomere-to-telomere, not draft complete genomes on nanopore only Q40 99.99%. We polish that to fix some homopolymer issues, and we're at Q50. It's been 20 years. I've been lying awake at 5:00 every morning to say this is the most comprehensive end-to-end human genome, 20 years after the draft genome was published and it's got everything in it. What that means as we move from the single point mutation biology in the last 20 years have shown us there are multiple drivers of biological function an application to disease understanding, starting with small variants were equivalent, sequencing biosynthesis. Yet, we can do large, more complex variance structural variation, copy number variation and repeat expansions. We get in the same sequencing run all of these epigenetics because we're looking at native DNA, we see all the modifications. It is not a derivatized by sulfide sequencing for Epigenetics, that's in your run comes out of the sequencer. And that means we can uncover the dark genome. When you couple regions of the genome that are mapped by short read with large complex variants, over 35% of known diseases are hidden inside that piece. And that is commercially low-hanging fruit for us at Nanopore. Now it's not just about the chemistry that allows us to do this biology in high color and high definition. It's also about the platforms. One size does not fit all. Sequencing today has been in the mainframe moment. You need multimillion dollars of CapEx. It's in large centralized facilities and transitioning into the clinic, into applied, into near patient, into point of origin is challenging for a small clinical laboratory to adopt a million dollar machine and all the expertise that goes with it. Our platforms, 2 things. First of all, we bundle the platforms in OpEx. So from thousands to tens of thousands up to $1 million, that's fixed-term contracts with consumables. There was minimal cost to acquire the sequencer, affordable, accessible, distributed sequencing. We think that's where the genomic revolution will really be capitalized, and we will transition from that mainframe moment into sequencing for everybody. Our commercial model is to use our low-end sequencers starting at $1,000 to really see the market. To really -- those 8,000 publications I talked about to really publish how native DNA, full def, high color is game-changing. So those publications are the lifeblood of what we do. For the higher throughput customers, medium use and high use customers, it's more of a business-to-business sequencing play. And just to give you a sense of what our customer base looks like. Our S1 -- is that -- how long have I done? 5 minutes -- so sorry, our S1 customers, we have over 7,000 of those. They spend up to $25,000, the mean spend is $6,000. Our medium customers, S2, we have around 1,100, they spend $25,000 to $250,000, a mean of $60,000 and then we have 90 large high-throughput customers, excluding our Emirati Genome Program, and their mean spend is $600,000. And just looking at the high throughput PromethION platform, today, we have enabled one genome per flow cell. We have a road map, and there is capacity in the system to go to 2, then 3, then 4 genomes, which gets us for that full comprehensive genome to $200, and that road map is coming, and we are very confident on that. So in summary, we have a platform that provides native DNA. No other sequencing platform provides that, which gives you unparalleled, rich insights into the drivers of functional genomics in disease. Real-time, and affordable, accessible platforms. I'm going to whiz through a couple of these slides because I want to get on to crossing the chasm. So it's really important that the discovery and translational piece continues to be innovated and publications come at breakneck speed because they fuel the translation to patients and into practice. Those publications are the lifeblood of proving out these proof points. This is going to be painful, but these are just some of the landmark publications that have happened, and I'm actually going to skip through this slide. When we zoom out from these publications and by the way, on the left. It's on the International Space Station. No other sequence can get anywhere near that. When we zoom out, what things can we commercially go after with this highly differentiated platform that the competition cannot? Human genetics, cancer and infection. Human genetics because we can sequence a whole genome. Cancer because we can look at 100% of the methylome as part of the sequencing and infection, rapid real-time point of care in critical care settings. These use cases in this presentation will be posted are available. You should look at these. There's amazing landmark studies speaking to those applications. How do we make these groundbreaking publications and turn into a hard commercial strategy? At IPO, with the view that we had our foundational Q20+ chemistry launching 6 months after IPO, March '22, we started to evolve our commercial team from selling directly in the S1 category to our high throughput, medium-sized and high-throughput customers. We've hired some really great talent from the competition to really drive the high-throughput customers in the medium term to hit our 2026 targets. We are really going to focus on those S2, S3 customer groupings with this highly differentiated platform in the targeted areas that we know we are strong and other competitors cannot get into that space. I've talked about this $3.1 billion. I think somebody deliberately did that to me because I knew I'd talk about the market too much. The opportunity for Applied Clinical is greater than $100 billion. In order to facilitate that, we are in the death throes of launching Q line, so regulated software and hardware on the platform so that customers are enabled to create content. I want to be very clear that we do not create assays and content. We create the platform and enabling technologies that will allow our customers to create that content through partnerships. We are listening to our customers, particularly medium to high throughput clinical customers. They want automated end-to-end workflows. I've already talked about our sequencing tertiary analysis partners, coupled with front-end automation will really allow customers to develop these automated assays for applied markets. And our platforms are suitable to do that because they're very low cost, they're affordable, they're accessible. If you've got a PCR lab, you can do sequencing. Think sequencing meets PCR. That's what we bring to the game. And we are in the foothills with partnerships. We have done a partnership with bioMérieux on infectious disease, and they are developing the content for certain assays, taking them to clinic. We are providing the supporting technology in that partnership. At the other end of the spectrum, we have a partnership with Mayo Clinic. They're looking at cancer applications that are very difficult to see with short read. So -- and that's just 2 extremes of the spectrum. There will be many, many more applications. We are developing our partnership schemes, the Q line, the automation, the tertiary analysis will drive that adoption from the already 8,800 publications where people can see what they can do when they look at native DNA with all the epigenome. If they're talking about liquid biopsy, there is modifications on there that are removed when you look at sequencing by synthesis. So you can see the methylation. Fragmentomics is becoming a thing. The size of yourself recirculating tumor DNA we can do that. One ring to rule them all. One platform to provide this multi-omic play, and you'll hear more about us and the use cases in the coming years. So in summary, almost 3 minutes over, so I'll push the limit. We will continue to grow and take market share from expanding the market with our S1 genomic explorers, they're new to sequencing. But because of the fact that we are reading native DNA with all the features it provides and the richest of content, we will continue to grow our life science research tools business. We have a commercial team and leadership in place now to focus on the medium and high throughput customers, and really pushing the value proposition. That's all underpinned by the foundation of our Q20 chemistry launched in March '22. We are very excited about clinical and applications in that space and our Q line, our automation, our tertiary analysis partners will really allow us to push on in that segment. And we expect to continue to deliver greater than 30% underlying growth year-on-year. And with that, thank you for your time, and we'll take questions.

So you can ask the questions through the interface, which you're probably all familiar with and there's a lady with a microphone here if anyone has any questions. If not, you will have to pardon me to start them off. Maybe I'll start one off then, which would be you had an analyst meeting towards the end of last year where you actually talked for the first time about setting a target for clinical and applied use of the product. So where are we with that clinical and applied use? So what's the road map to that becoming a much bigger use?

So I think there are 3 parts to that. Number one is our genomic explorers publishing and showing use cases. So that publication and we have to then think about what is a commercial partnership look like. And with bioMérieux and with Mayo, there's a statement of work and a work plan, which is a year or so. And then you've got to think about, is this going directly into RUO, LDT, ClearWave or we're going to go straight for full diagnostic. So that's sort of a year. So it's a kind of 18- to 36-month cycle to go from a really interesting publication and use case to early revenues. But we've signaled that we have started that process now because we believe we have so many interesting, potential things that our customers want to do in the clinical space. We are going to really drive that and we believe that -- it will be little snowball, but it will be a couple of years. When we talk about medium-term revenues, we're very focused on the cash cow, which is Life Science research tools.

And what is it that means the product is now ready for more clinical and applied use that you couldn't do a few years ago?

I think partly accuracy, I didn't really fully appreciate in order to win confidence of the existing hardcore alumina customers, you have to give them what they already have. And in achieving that, that really is changing people's perception of what they can now do with Nanopore. So that -- I have said many times today, that Q20 chemistry in March was critical in laying the foundations to transition to be able to give them what they want, what they can do today, but with added benefits and value, whether that's decentralized real-time point of care or it's long reads or it's comprehensive methylation, all these different things. And there's lots of exciting translational and discovery research we're doing, for example, there is a 4,000 sample trial looking at long reads for neurodegeneration in Alzheimer's patients. It's well known the structural variation is important in neurodegeneration. NIH are now doing that study, and that's going to produce some insights. That's then going to produce potentially biomarkers for diagnostics. So there's all these markers been laid down, and we don't want to wait until something -- we want to be ready to catch those and catch those opportunities and really slingshot them into revenue generating in that sort of '26 and beyond time frame.

To the gentleman over there please.

Can you speak more on potential protein applications? Are you planning on sequencing proteins?

Yes. So we with the platform we have, we can change the Nanopore. So there's a bunch of academic partnerships and internal programs so that we can actually do protein sequencing. The principal we use at the moment is an enzyme called unfoldase which as it implies it takes a protein and it pulls it apart. We attach a piece of DNA, so we can pull it into the hole and we can now see it going through translocating. We cannot read all the immuno acids yet. So we have proof of concept that we can get the protein to unfold and pass through the nanopore. So that is still in development, so it's a little bit further out. But we ultimately believe we will be successful in providing a fully sequenced single molecule protein platform. And the exciting thing about that is we'll be able to look at post translational effects at the single molecule level as well as the fact that, that continuum goes DNA, RNA. So genomics, transcriptomics, proteomics and actually, we can do metabolites as well, but we're not working on that right now because there's so many things we can do. But that is the ultimate vision is to do that across the spectrum.

Just to put it in context, why would someone want to sequence of protein? What would that be useful for?

Right. I'm a chemist, not a biologist. So if anybody wants to correct me, please do, but source code tells your RNA messengers what to do. That then tells -- encodes proteins. So sometimes, we look at output, which is proteins to say these diseases are underpinned or they're great markets for disease. But when we can start to build that continuum back to the transcriptome, and back to the source code and link it all up, your understanding of biology just changes dramatically. You now have 3 orthogonal measurements on the drivers of that biology and that everybody says will be game changing, and it will be. And when you couple that with the machine learning AI revolution that's happening, it's great and machine learning is fantastic. But if you have really phenomenally high def data, that's what is also important. The quality of the data, not just machine learning, AI. And when you couple those 3 drivers of disease together, it will be game changing and the rate at which we will understand the underpinning biology and genomics of disease will change dramatically. And most importantly, early diagnosis. That's what that will bring.