Oxford Nanopore Technologies plc ($ONT)

Good afternoon, everyone. My name is Jon Unwin. I'm one of the analysts on the European med tech and services team at Barclays. And I'm delighted to be joined by Nick Keher today, Chief Financial Officer of Oxford Nanopore Technologies. Welcome, Nick. Thank you for coming.

Thank you, Jonathan, for having me.

Lots of opportunities for Oxford Nanopore. We'll dive into lots of them as well. You split your revenues into sort of 4 end markets: research, clinical, biopharma and applied industrial. Today, research is the biggest portion of your revenues, but it's not the fastest growing. I wonder if you could talk a little bit about your journey into the clinical and biopharma space, perhaps setting out the -- the move from research to sort of LDTs to regulated tests, sort of where we are on that journey today. We've spoken about it a lot since Capital Markets Day back in -- when was it again?

'23.

2023. Just sort of like characterize where we are and what needs to be done in terms of products left to get you into that regulated environment and yes, just sort of set the scene for us.

Yes, absolutely. So yes, research is 67% of revenues in the year just gone. We grew just over 15% in the year, which is a good result given the turmoil that kind of everybody has seen, particularly in the Americas with the NIH funding situation, which is about 13% of our revenue overall. But thankfully, we're seeing fast, quick adoption into the applied markets. So applied industrial, which we kind of badge as anybody doing synthetic biology in the kind of core service providers, clinical market, which was -- sorry, applied industrial is about 12% of our revenues in the year just gone, grew 27%. And there's about $1 billion, $1.5 billion market here in synthetic biology where we think we've got a right to win, particularly because of the nature of our technology, the fact you get long read, richer information, quick turnaround time and price point and the ability to debatch as well, actually. All of those things mean we think we've got a right to win there, and we're kind of replacing things like Sanger sequencing. And we've had great success with companies like Plasmidsaurus who are doing very well. Then you go into the clinical space where 13% of our revenues in the year just gone. We grew 60%. And in the Americas, we actually grew around 85% overall. And we're growing there because the adoption of the technology now really of age within things like rare disease, within things like infectious disease and oncology, particularly rare blood tumors. So within rare disease, I think everybody will know, you need to have long-read information to get that structural variation. We have a higher diagnostic yield than the conventional legacy short-read technologies that are out there. And because of our turnaround time, we can do this in ultra-quick fashion. So there are LDTs out there available, reimbursement becoming available in the U.S., which is mean that we're seeing this adoption curve really start to increase as people are thinking less about us being a reflex test and actually start to be think of as frontline test for things like rare disease which is very good. Infectious disease because of the fact that we get rich metagenomic information because we've got that long-read capability, even methylation is important here as well. You combine that with our turnaround time and the fact that you can do it within 3 to 4 hours and the fact that you can miniaturize our technology. So we're going to do what Gordon always does and pull out one of the sequences right now. So the form factor is right as well. So for the infectious disease market, we think, again, this is a space that we can win at. And so we're pushing very hard on there. And again, it's the LDT market that's seeing the adoption today, but the forward-looking people as well, and we've signed deals with Danaher, so Cepheid and with bioMérieux, who are going to take this technology into the IVD space as well. So product with -- there's various ways in which they're thinking about the end market potential. But think about those high-value infectious disease segments where pricing is also very high today, but PCR tests don't quite do it and where you need that full metagenomic information because you don't know exactly what you're looking for. So just get the entire picture and you need it quickly to treat patients, this is the answer. And so those companies have formed partnerships with us because they can see that this should be the intel inside for that market. And so where we are on that journey, we've got AmPORE-TB, which we did in-house, and I think hindsight is always 2020, but maybe we might have thought about doing that in a different way, but we've got that product to market from the CE-IVD status. We've got that status now for our GridION Dx box as well. But interestingly, in most markets, you only really need to kind of get to a queue line status as we put it, so like a semi-regulated lockdown version is kind of what all the customers need from our perspective. And that will allow companies like Danaher, bioMérieux to develop these regulated tests on top. So the clinical market grew very strongly, even faster -- 60%, even faster in Americas because these things are being adopted now and going more mainstream. And we've got a very good partnership with St. Jude's as well. And we had them at one of our commercial kickoffs recently, and they talked about the fact that they can turn $1,000 worth of pathology tests for things like AML, and they can do adaptive sampling on our platform and it costs $150 and gives you the exact same answers that you need to diagnose the patient. So people will find -- like an adaptive sampling is going to be a big driver for this company in the oncology space in particular, because this is quite cool, but you can train the Nanopore to look for a gene of interest. And so we've got a hereditary cancer panel out there at the moment. You can ask it to look for 100 different genes of interest. It's like a software program. And then you throw on your DNA sample and Nanopore, if it's not the right gene, it will just split it out. And that will very quickly change the need to do a whole genome and actually just do that approach instead makes it much quicker, a hell of a lot cheaper because the prep time and cost of kits that you have to buy from third parties goes down. And it's -- yes, so it could revolutionize that space.

So currently, in that clinical space, most of those -- or all of those revenues are coming from LDTs?

Almost, yes.

Okay. And some of those LDTs are second line, but actually you're seeing some adoption in the first-line sort of treatment test.

Yes.

And it's fair to say -- I just get your opinion that the applications which you have the biggest right to play in are rare disease, infectious disease, and generally things where you need a quick turnaround time for POC and there where we should be thinking your right to win is.

Yes, or where methylation is needed as well because we have the gold standard for methylation.

Maybe if you can just talk about the development of methylation as a biomarker, why it's important and what differentiates Oxford Nanopore's technology in that space.

Yes, absolutely. So if you think about how methylation is done today on conventional platforms, they have a very deep approach, but very narrow approach to looking at the entire methylome so they don't get full 100% of the data. We can get the 100%, and you can go as deep as you like depending on the coverage you want to go for. We were with a customer yesterday in New York, actually, who is showing us what they're doing in the transplantation space where they're using methylation as a predictive marker for knowing when an organ is going to fail. And that's just in transplantation, but it's also the same in oncology where methylation starts to increase as cancers become active. So this is a predictive marker for the need for patients to kind of go back into hospital for be it the transplant is going to fail, be it that cancer is coming back or it's becoming active. And the key thing here is we can look at all of the methylome on all of the sample types rather than just looking for things in the needle in the haystack that you know is there, we can just look at the entire haystack and just tell you everything that's there. So there is the "so what" of value of the technology in methylation, absolutely agree. We've got more to do here, but there is a 50,000 U.K. biobank study going on at the moment where we are untapping all of this biology, which we believe could actually drive a lot of interest because as we start to show these biomarkers, it's going to create a whole new wave of interest, particularly from pharma who are going to think about this from a drug discovery standpoint, but also in the diagnostics world as people start going, "actually, this is pretty important." So more to come.

Okay. I guess to help contextualize rare disease infectious disease methylation, they are the sort of key things to think about in clinical. Like how big are those markets today? And like can you -- is this a share gain opportunity? Or is it like expanding into white space where tests aren't currently being done? Like how should we think about the opportunity for Oxford Nanopore in those 2 sort of buckets?

Yes, good question. So in terms of like the total clinical market today, it's broadly speaking, 1/3 to 1/2 of the total $9 billion to $10 billion of NGS spend that's happening. We think the serviceable addressable market for our technology is more like $20 billion to $25 billion. And so the balance of that is conventional tests, be it PCR assays, other things that are being used today. In the clinical market, we think the total addressable market to us is around $10 billion. And of those high-priority segments, clinical is a big chunk. Another big chunk that we haven't quite got to is the biopharma piece. And so...

We'll get to it.

We're going to get -- and yes, that's maybe $3 billion to $4 billion and an area that we think is a high priority segment for us as well.

Okay. So there's some change from PCR to ONT, there's some change, there's some expansion. But would you expect to gain share from other sequencing platforms in this space as well?

Yes. So when I've been to see customers, I think legacy technologies where they've been adopted and they work very well, are going to be very hard to displace, and that's genuinely where we're trying to avoid going because actually, some of these technologies do the test very well. And in diagnostics, the test that works, the test that's used. And dislodging those tests is maybe a fool's errand. And actually, our focus is to provide value to the customer where they can't see it today. So -- and our belief is that -- and we can prove it out is that you can see more on a Nanopore. So that's what we want to show people. And then -- so what we've seen is these people have multiple of the devices in their clinical labs, and we're being used on top of because they have to batch with these conventional techniques because they need a quick turnaround time, because they want the methylation, because they want to infectious disease, quality, accuracy, all of those things that you can get on ours that you can't get on theirs. So we also, to be fair, don't actually have the ecosystem around the product the same way some of our competitors do today, but that is coming. So we've got to be realistic with we're going to land and we're going to expand. Absolutely, that's what you're seeing. And the technology is now at the time from the robustness, from an accuracy, from a cost perspective, where that's what we're seeing as well.

Okay. Maybe just thinking about competitors in this space. What differentiates you from PacBio, the other long-read player? And how would you characterize your technology versus the other Nanopore player that has been launched, which is Roche?

So on the PacBio front and the other -- the long-read technology that they have, good technology. And so nothing bad on that front. But I think with ours, we can see native DNA and RNA. That's really important. In our, we can do longer reads. We can do any read actually, length. And then you can also see -- you get the methylation from seeing direct data points. You can see modifications on RNA that you can't see on these other platforms, any other platform actually. And the ability to scale on Nanopore is clearly there. So form factor is also an important piece about the size of the technology. So I think we have -- we all have benefits over each other in certain instances, but we've been growing historically very quickly. We delivered 24% last year in a market which is definitely challenged, 23% the year before that. I think we're kind of proving that the Nanopore technology has a real place here. And actually, we've got a long way to go still. So -- and then against the other Nanopore player to launch, very different types of technology. And that's a key one, which is, again, we can see -- with our technology, you don't need to take a copy. We can see any read length. And that means that we get all of the methylation data, we get all of the direct information from looking at the DNA in its native form or the RNA and 1-day protein. The fact that you can kind of get that long read information, which we talked about from structural variation in things like rare disease, but over time, it will probably be proven out that it's important in everything. And the form factor and the ability to debatch, all of these things play into this as well. So yes, there's more competition in the market. I wish there was less. But where we are today, the reasons why we're growing, we don't see these things changing.

We hosted a panel yesterday with a genomics expert from the Broadlab, and she was talking about the Illumina TruPath pathway and she characterized it as a direct shot at PacBio and ONT. How are you thinking about it in the competitive dynamics?

Yes. So again, it's the Constellation renamed technology as well. We've seen it coming for quite a while. I think it's yet another attempt trying to do long read. But again, I would just kind of emphasize the same points that we kind of talked all the way through, which is this is essentially a technology that's stitching together. So it's imputed. It's not direct. So it's taking short reads and putting them back together. And how -- I think there's a lot to be proven out still. So how good is this going to be versus what we can do at looking at it directly, the entire read length or any read length you want to go for. So when you're looking at long variants in particular, we think we'll continue to have an edge. If you want to do long read and you want the methylation, we give you the methylation for free. You're not going to have to do a second test. I think there is also question -- I think we've got a lot more to understand about that product still from like price point ultimately, yes, they put one up there, but how much volume has to come with it, the device that you're going to have to do it on versus our own. There's a lot of considerations for the customer. And there's a time line when all these things come together for that product, whereas for our own, you can do it today. So I think it's also quite nice and ending that everybody is recognizing that long reads are important and multi-omic information is important. So it's great that all these things have come together. It'd be just great if you can do it all on one platform, that you can, Nanopore.

Yes. Okay. Maybe then taking a look at biopharma. So can you just high level run us through exactly what ONT is doing in the biopharma space and the quality control space and why they're uniquely positioned to save pharma companies money? Or what's the value proposition for Oxford Nanopore?

Yes. So this has been going on for a few years where we're seeing a lot of pharma company interest, particularly around certain key features of the technology. First of all, like a door open, something as simple as plasmid sequencing used in all kind of cell biology experiments, but you want a quality -- you want to control step to make sure whatever you're putting into your cell line is the right thing. And the gold standard for a long time has been seen as Sanger. And I think we're changing that now that actually the gold standard will become ONT. And so we're seeing a lot of customers kind of evaluating our technology to move plasmid sequencing over to ourselves. And it's because you can get the full plasmid of information, we think you can see more and we can do it at a price point at a time, which is more competitive than what you can see from competitors. So that's the first thing. Then the other tests that go alongside it are things like mRNA vaccine production, where we've signed a contract with one of the leading players in the quality control environment. And this isn't against sequencing now. This is actually against 7 to 8 orthogonal types of tests where essentially people are doing HPLC, mass spec, gels essentially to try and approximate what the vaccine looks like. And whereas we can just look at it directly, and then we can tell you the weight of it. We can tell you the modifications that are on it. And that provides the customer with a more direct way of measuring what they've just made. And that's important from a quality control step from a safety perspective and an efficacy perspective. And so when we're thinking about personalized cancer vaccines and where they're all going, we think we could play a big part in this. And so that deal we struck being used in that mRNA vaccine production space, we're very excited about because we're not just being evaluated by one player. We're being evaluated by all of the players. And these things take time, but they're coming through. And then we have other workflows that are also getting a lot of interest like AVA, AAV and sterility testing more broadly where they have -- there's a reason -- infectious disease, we think we've got the leading platform. It's essentially infectious disease in certain instances in biopharma QC, where you're using the same workflow, give or take, same approach, but you get the same rich metagenomic information quickly. And for quality control, that's quite important. So what we're looking at here is an economic pull for the pharma company, which is a CFO, I guess. And then you're also getting this quality control step pull as well because you can see more with the information and it's quicker. So there are a lot of reasons why we're being evaluated by these pharmaceutical companies, and we think we can take sequencing into an area where you don't see sequencing today.

On that biopharma piece, when you do the quality control test, do you do it on the sort of big batch of API that they've produced or is that post fill/finish when it's in the vial and you're testing it there? So like is it one test or is it 5,000 tests?

It depends on what you're doing. So mRNA, it's because it's personalized cancer vaccines, this is literally per patient. And then for that European provider that we've also signed sterility pieces they're doing, they're having one facility that's monitoring several sites, and that is much more big batch biologic production.

Okay. Makes sense. Maybe we can talk a little bit about outlook in the last few minutes. So you did 24% constant currency growth in 2025. You're guiding to 21% to 25% this year and broadly similar next year. You had originally set a target of over 30% CAGR '24 to '27. So obviously, that's unlikely to happen at this stage. Can you just talk us through what has changed since setting that guidance in 2024 to essentially being 5% to 10% below it now?

Yes, absolutely. So when we set guidance in '24, at the beginning of '24, rolling back the clock now, when I joined, we had to push guidance back, first of all. So we actually -- we're aiming for breakeven in '26. Joining in '24 and evaluating everything we could see, it was kind of clear that, that wasn't going to be the case, otherwise that would be this year. And breakeven was going to be in '27. Cash flow breakeven in '28. And those were always the north stars of essentially what we were aiming for as a company, as a Board and as a management team, that's what we were kind of setting in stone, and we've reiterated that. Now we did say when we set guidance for over -- those guidance points, we said, to help you with your models and investors as well, we believe we would get there through growing over 30% a year. That's what the aim was on a CAGR, '24 to '27 underlying constant currency and then gross margins to be over 62% and cost growth of 3% to 8% a year. Now as we went through '23 and we delivered -- sorry, '24 and we delivered 23% growth, we were doing a big operational review internally. And then last year, we did a strategic review as well, looking about how we can grow this business quicker because what we were seeing is we weren't necessarily getting to that top line growth that we wanted to. Now we always said if we didn't achieve the top line, we would modulate the bottom line, and that's written down in the '24 release that we put the guidance out, anybody can check it. So we always said that that's what we would do. And last year, we took out a considerable amount of cost from the business twice. So we demonstrated that we do what we say. And as we went through that strategic review about why we weren't growing top line quickly enough, it led to a lot of changes internally as well because I think it's fair to say what's changed in our model. Part of it is the market has been tougher than we expected. And I think everybody may forgive us for that because actually the NIH has happened post the guide. China has been tougher from an export control restrictions point. I think it's just -- that is the reality. We didn't expect it to be this size of a headwind. But then on balance, we could have done better as well. And so there was an execution part here where we have a lot of soul searching, but we can be better as a company. So even though we're growing a lot faster than all of the competition, undoubted, we think we actually could be doing better again. And that's because we can see these end markets we're going for. We can see this $13 billion to $14 billion that actually we should win at. It's just how do we get there as quickly as possible. And now we -- I think we're aligning on that path to do it. But we've made very clear with everybody that '27 breakeven adjusted EBITDA was written in stone, and we've kept it in stone. We've not moved it out, even though we're not growing as fast as the top line because we're doing better on margin, we're doing better on cost control.

Okay. Great. We've got 5 seconds to spare, so I think I'll end it there. But thank you very much for your time this afternoon. Hope you all find it useful.

Thank you very much.