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

Hello, everyone. Thank you very much for joining. It's my privilege to introduce Francis Van Parys, CEO of Oxford Nanopore; alongside Nick Keher, CFO. For those of you who don't know me, my name is Charles Weston, and I cover European Life Sciences at RBC. If you have any questions through this session, please use the button that should be on your screen. That will send me an e-mail. I will try to weave that into the discussion. And if I'm not able to, then I will come back to you directly on that.

I'm not going to use this opportunity to recap the investor presentation. Hopefully, you've all had a chance to look at that. Instead, I'm going to try and pick up some of the key individual drivers of the business in the near and medium term. And first, let's take a high-level step through. You described four aspects to the strategy, Francis. Customer-centric growth, which I paraphrase as a focus on key applications, focused innovation, which sounds like effectively using R&D to support those applications and keep some blue sky investments, disciplined execution, which sounds like simplify and standardize and high level or high-performance culture. So we'll come back to the applications in a moment. But on the H1 call, you described that high-performance culture and highlighted some key hires that you made. So first question, please, and pertinent perhaps given your announcement this morning, what are the personnel gaps at the top that remain? And I see you have quite a few senior hires on your website in business development and biopharma specifically. So is this an area where you're also looking to flesh out capabilities?

Well, thanks for the question. And first and foremost, the way you described those four pillars, indeed, what they sound like is indeed what we intend to communicate with those pillars. In terms of the leadership gaps, we have made an announcement earlier today with a Chief Marketing and Communications Officer joining us as well as a Chief Development and Product Officer, who's going to be responsible for our product development and product management capabilities. Those were two important positions to fill, given that as we went through the high-value applications that we want to pursue, we did a gap analysis of our current capabilities versus the customer needs in each of those applications. And we've identified a number of opportunities to close the gap in terms of reasserting our value proposition, our evidence generation, our product development capabilities as well as opportunity to simplify the portfolio. So those positions will really help us with that. BD and biopharma is an important area given that as part of our strategy update, we described also the various participation models that we are considering depending on market segment. And so in order to execute on that, that's perhaps one area we still want to strengthen a little bit more. But I do expect fingers crossed that in the Q4 time frame, we have a full management team that we will go into operationalizing the strategy with in 2027.

So are there any more announcements that we should expect about the top of the house senior hires over the next few weeks to get you into that shape for Q4?

There's a couple, that's not more than that.

Okay. So we went through the four different pillars just then, and you sort of teased us about the middle two, innovation and execution saying that you're going to come back to those and provide more detail before the 2026 full year results. So what can we expect and when?

It was really important for us to lay out where and how we will play because it determines everything else. And so by determining those markets we want to go after where we have a true belief we can win, we can differentiate, it informs the decisions we can make afterwards. And some of those decisions are actually underway, but some of those decisions are also not -- have not been finalized. And so what you can expect by full year results is that it is a true operational plan, which contains future product road map, go-to-market refinement, governance structure, organizational developments, if appropriate. And so a fully operationalized plan that follows on from the strategic choices that we have made. We expect to work on that in the next 2, 3 months and communicate about that by full year results time.

Okay. I guess that moves us on to some of those applications. And you presented a chart which I can bring up if it's helpful for you, of ease of realization versus effectively the differentiation for Nanopore, Oxford Nanopore technologies and also the GBP 14 billion to GBP 16 billion serviceable market opportunity. So how many individual target applications are within that GBP 14 billion to GBP 16 billion? And will we get to learn a little bit more about how you're splitting those out later in the year or the full year results?

We will go down more detailed view of what the schematic overview we presented represents. There is a much greater granularity that we have gone through, obviously, to select those high-value applications. We have come to anywhere between 15 and 20 that we want to focus on and maybe not all at the same time, but we have identified them as being significant contributors to our growth in the next 4 to 5 years. As we do deep dives in the coming year, you may well expect to see some of the good examples of those applications. So more to come on that front. There's obviously some commercial sensitivity associated with the greater amount of detail, which is why we haven't presented the full analysis here. But you can rest assured that we have gone through a significant -- that prioritization exercise and a series of characterizations of those segments that enable us to really nail down the entitlements we have in each of those applications, and that has then led to our guidance on the medium and longer term.

Okay. So let's start heading into those applications or those bigger markets, and we'll take them in order of growth contribution over the next few years. So firstly, biopharma. I think, Nick, you said that there were 20 or so pharma companies evaluating the technology in QC. Can you give us a sense of the range of companies in terms of their size or specialism or anything else that gives us a bit of color around those?

Of course, yes. So the Global biopharma essentially make up over half. So -- and other names that you are well known to maybe not in the top 20, but are well known to people around the world for their specialism in terms of like their focus areas, like those are the sorts of companies we're talking about.

And maybe we'll come back to what those specialisms might look like. But I think it might be fair to say that some of these evaluations have taken a little bit longer than hoped in the past, Nick, I think you've admitted that some of the delay was due to ONT execution issues. So what have been the holdups there? And how confident are you that those have been addressed?

So yes, good question and absolutely right. So this has been something that we've been -- as a company, we've seen these things happening in the background for a few couple of years now at least, and it's been going on a little bit longer than that in terms of the evaluation phases. So from a customer perspective, we can't control their time lines. And if you miss -- for the global companies, if you miss that yearly meeting, you genuinely miss that yearly assessment and it kind of comes around again. The other point is on for the companies that we've worked with, they've had delays on their own assets because for the majority of these instances, we're working on new assets, not established assets for the majority besides sterility, where that is across established assets. And then on our side, what has kind of not gone in a straight line, I think what we know for the GridION Q, so we released the GridION Q, which is now the version 1, and that was released nearly 2 years ago now. And the version 2 was released last week. So it's now on market and available if you want to buy one. And essentially with that, it has incremental features from an audit perspective, in particular, that the customer required for them to be able to -- this to be part of BLA filings and similar. So it has incremental features. Now on some of the product lines, so we've got 2 assays available that essentially are key ones in this space, which is the mRNA test pack and also the plasmid test pack. And on both of those, the clinical -- the critical attributes of the product have been improved along the way as well and now cover off the vast majority of what the customers want. There is actually some things we could do further on down the line, which actually means that particularly on the mRNA piece, we might be able to look at greater value capture over time as well. But for what's required today from customers, it's now method. So very confident on those things pushing forward from where we are. We've still got three more workflows are sterility testing and AAV and things like that, that we want to work through and release and that will be key to delivering and unlocking the value within the biopharma space as well. But we have worked through those kind of the headline issues that we've had on our side. We can't control the issues that may happen on the other side, clearly.

And does version 2 mean that they have to go through the testing to get that whole evaluation process again? Or does that tick some final boxes that allow people to then sort of make a final decision?

It's more the latter. So it's not a revalidation as such. So these are updates to the software that are features that they perhaps would have expected first time around.

You've called out mRNA and companies like Lonza and Moderna have talked about using sequencing as part of their processes. What about other modalities, cell and gene therapy, antibodies, anything else?

We focused on mRNA first because we are quite unique in how we sequence direct RNA. We have a number of others in the pipeline, AAV, [ AVA ] were already mentioned. And so we will continue to expand the applications to which sequencing is relevant. Those are part of the target markets for biopharma QC, but the immediate focus is on mRNA, AAV and [ ABA ] vectors. We have a number of applications also in cell therapy and could down the line also see where cell line characterization is relevant in the development process. But from a QC perspective, those are the target areas.

Can I just add as well? And absolutely right. I think it's important that we've always talked about QC because of our kind of capability that we're going in there. But in the R&D side of it, we shouldn't -- the target R&D side of what we do there, absolutely. But to your point there, Charles, so like antibody characterization and genomic characterization full stop for cell therapy is a big part of what we're doing as well. But those are more -- those aren't QC workflows. Those are in the R&D side. That's why biopharma has actually come up quite significant because we have this more research and development focused applications, but we've got these QC applications, which are a tech consolidation place ultimately to replace other modalities that are out there.

So that, to some extent, brings me on to the next point, which is around this GBP 4.1 billion to GBP 5.5 billion addressable market that you've highlighted in biopharma. Is that calculated on a kind of a bottom-up basis, number of instruments and usage? Or is it more of a kind of top down? This is what's already going in as a spend on some of that QC that can be consolidated into Nanopore. How should we think about how you've come up with those numbers?

Both. So both bottom up and top down. So the QC aspect we've got the companies. And so what we've done is this -- the bottom-up perspective essentially on we know what the contract values are and we know what the assets are and we can -- and we risk-adjusted the numbers because we don't know what the probability of success would be for these drugs in reality. So we've just used industry averages and things like that. So the QC side, absolutely. And then we've used external advisers to help do the top-down perspective as well. In the R&D side, that's where it's been more of the top-down perspective because it's harder for us to get more reliable information for the bottom-up. But for QC, given the insight we've got, we could do the bottom-up part there. Yes. Okay. So let's stick on mRNA because we saw the big.

Move in Moderna last week on the melanoma vaccine. All the sequencing companies moved a lot on that since you have to sequence an individual patient's tumor. Can Nanopore participate in that side of the equation for a vaccine like this? Or are you more focused on that QC product release side?

Our immediate opportunity, given the resolution of our technology is on the QC side of mRNA. We use that to replace a number of existing tests in the quality control process of an mRNA molecule. And so the characterization of the tumor, while that's an opportunity is perhaps not very as differentiated.

Okay. And just thinking about Moderna then on that QC side or mRNA in general, perhaps. We know that they've attended some of your conferences, Moderna specifically, I'm assuming that they specifically have been looking at Nanopore sequencing as part of the QC. Is there a way we can think about value per patient in terms of the current spend on the existing QC pipeline?

Yes. So to help here, the test pack itself is about $2,000 and it's a test per patient. But you can clearly imagine that for high-volume commitments, we will discount commercially against that as well. So please don't work on $2,000 per patient or anything like that for any of those situations. But for multiyear high-volume commitments, clearly, we'll look at discounting to that. It's also worth noting that we're getting a lot of interest for the test pack to be utilized in the R&D setting now as well. So by companies that aren't necessarily far along in their journey just yet, but I want to make sure this is part of their analytical capability and we're discounting more meaningfully there again to ensure that they kind of for a better word, get hooked on it and essentially using it as part of the process early on. So yes, hopefully that answers your question.

It does. That's helpful. So [ $2,000 ] is what you are ostensibly listing that pack for. Is that right?

Yes.

How do you -- taking a step back away from mRNA specifically, how do you envisage the mix of direct to pharma sales versus sales through partners evolving? You've announced partner companies like Lonza in direct mRNA, ViruSure pathogen testing, PathoQuest, which obviously recently been acquired. How should we be thinking about what the plan is in terms of direct versus partnered?

Yes. There's a mix of partnership models here. But in order to simplify -- when it comes to adoption of the technology in a quality control setting, the customer need is to have a start-to-finish workflow, one that works every time and that reliably drives a result at the end and a report that's consistent every time. And so there, it is important that we deliver the full solution from the sample that goes in to the test report that comes out through the bioinformatics and then all the steps in between. For biopharma R&D, there's different partnership models depending on what the research is that the company is performing. And sometimes they do need test kits from some of our partners that we are that are complementary to our workflow. There's a bit more variation in what people are doing with the technology. So we would naturally focus on perhaps more of the kits to base calling capability, which is the essential part of our technology and then what the platform does really well and what we fully own. And so where we have partnerships, it's primarily to help with things like automation, sample preparation or customized reporting and bioinformatics. But for a specific workflow, once again, typically, we want to own the full solution.

Okay. And just one last question on biopharma then. People on this call will want to model biopharma on a more bottom-up basis. Obviously, you've given us some potential shape of where biopharma or applied markets that may contribute to a 2030 sales. But from a bottom-up perspective, can we be thinking about number of mRNA patients multiplied by 2,000 or, let's say, 1,000 post discounting? Or is it just so much more complicated in terms of all the various different other applications and the partners? Is there a way that we can think about modeling this?

I think the mRNA piece is how I would think about it. So patient volumes times by price per test. And I think that's not a bad place to start that $1,000 mark that you've got. And then the difficulty here is when we go into things like sterility testing, that's going to be different again because that's per batch. And actually saying this, the mRNA piece is per batch ultimately because every patient is a batch. But you get my point here. We're talking like a batch when you talk about sterility testing. And so you'd have to think about the number of batches a biologics manufacturer may make. So that could be very difficult, I think, for somebody without real intimate knowledge of the other company to kind of like model that through in reality. But it's the same for other companies. We all have similar issues. And then per plasmid, we've been surprised about how much companies actually spend on plasmid internally on Sanger. And these are -- every company could be quite a few million dollars actually of just plasmid sequencing in-house that they do besides the stuff they send externally to people like plasmid source. So with -- but again, we get paid per plasmid and plasmid kit, et cetera, but you're not going to get that sort of visibility for you guys, I'm afraid, and we shouldn't really be giving that to you either. I think what we will look at is potentially a deeper level of KPIs that we can kind of report externally on this. And coming to that when we come to the operationalization of strategy and talk through that, have more things we can talk to there.

Okay. That's really interesting. I was on visible alpha earlier today, and I saw that unrisk adjusted, the Moderna vaccine is expected to be in 100,000 patients per year by 2034. So we multiply that by 1,000. We'll probably go into a bit more detail on this in our Virtual Life Sciences conference on the 21st and 22nd of September with you guys. Thank you for attending that, too. I hope some of the participants on this call will be able to make that. In the meantime, let's move on to Diagnostics. Clinical grew 35% in the first half, making it the fastest-growing division. Can you disaggregate the growth driver here between infectious disease testing and surveillance versus oncology and rare disease applications?

Yes. So we can, but it's a bit more subjective than I'd like it to be. And the reason for that is, as we've gone through this exercise actually as well, as you know, we've got like end market and organization. There's about five different tagging layers we've got with the data below it. We've gone ostensively to the lowest level and repadged all of the data for the last 3 years or tagged it. So to the extent where we've done about 70% revenue visibility for all of these applications, essentially, what is the customer doing with the product because there's not really much point of trying to figure out what every [ MII ] customer is doing because there's just too many of them and all spending like in reality, too little. And that meant that we can see where that growth essentially is coming from. Rare disease on a relative basis, on an absolute basis, infectious disease has been a big growth driver for us. And we are seeing oncology, particularly in Europe and parts in the U.S. But -- so in order, relative growth, rare disease, infectious disease, oncology is what I'd say. And I think it goes down to the -- we're talking before within certain oncology indications, we're getting used now. But if you take like ALL and things like that, but these are rare tumors, the small volume numbers, but they need an instant quick results where the technology they'll lean into. But where for infectious disease, we're the first technology they reach to because of the speed and the accuracy we've got. And in rare disease, as you know, there's more of a competitive situation, but we have got data to show that it's like a 30% uplift in diagnostic yield versus short-read technologies. People are beginning to see that as a switch. That's why the -- MyOme contract. And that's also a positive thing we put to the update that Natera company is obviously quite large and big in the space. But for their rare disease are looking -- utilizing Nanopore because they think that's the best technology.

Yes. Natera is also attending our Life Sciences conference at the end of this month. So I'm sure we'll be asking them about that directly. It's actually getting quite tough to figure out what's happening across your various different partnerships for me anyway. You've got Danaher, Cepheid, you've got bioMérieux, Bio-Techne, Natera now with MyOme, and then you've got a number of smaller partners. So before we even get on to the new licensing agreements, can you help us understand how all these fit together and perhaps which has the greatest commercial potential in the long term and perhaps the near term?

Yes, absolutely. There's a different -- there's a few different categories of partnerships, if I can help breaking it down. One is around infectious disease. with Cepheid and bioMérieux, where the need in that market segment is likely to be IVD certified. And so that is a capability that we chose and choose not to develop entirely by ourselves and where we feel we have an approach where either OEM type or co-development type of activities will need to happen to bring a solution to market. For that reason, because IVD certification takes a significant amount of time, including clinical trials, et cetera, we expect that return not to be significant before 3 to 5 years from now. So that's the first set of category. Ramping up in the meantime with a number of manual workflows that will precede some of those developments of those activities. Then there is primarily on oncology, rare disease and enablement strategy that we have of LDTs. And that's where partnerships like Natera come in, who are service providers and specialized in the development of laboratory developed tests and where we are the component and technology provider, but the assay is developed by those service providers. And so they are helpful access to markets, particularly in the U.S., but not exclusively in the U.S. also in Europe. And then there's a third category, which is more around our compatibility program, people who develop assays on our platform, who develop certain kits that help develop a certain sample type for a particular test and have validated that on our platform, which we then enable as a member or a partner in our compatibility program. And so they are typically more of an add-on capability and are smaller in nature, but could be quite significant over time as they enable new LDTs to be developed, right? So that's how I would characterize. Anything you want to add, Nick, on that?

No, perfect. I mean there is a slide actually as well that we have in the deck, which on the presentation today that I think is quite -- we get that question a lot, Charles. I think like the whole partnership piece, and that's exactly why we put this in here as well just to kind of -- this is -- we've mapped every single partnership to this and then also to the end market analysis that we've done for the target applications, et cetera. So yes, and that's how we're going to do all of these going forward. And then if you think about, say, technology fit to automation. So instead of developing our own automated platform on the [ Adesian ], we're now going to partner with all of the automation providers so that we kind of it's easier for the customer. So it's just thinking about -- so you're going to see more, not less. And yes, it could be difficult, but it's because we're following this framework and actually, it's a good thing to sign more, the right type that is.

And Francis, you talked about quite long time frames for clinical. What do you think is a nearer-term lever, the biggest kind of nearer-term lever out of all those partnerships you signed on the diagnostics side?

The longer-term time frame I referred to relates to an IVD solution for infectious disease in particular. I think in clinical, there are actually some nearer-term opportunities as well and through the enablement of service providers and the LDTs that they specify. So similarly to biopharma, there's a number of those companies who are currently validating our technology in particular tests, typically for oncology and rare disease applications. As those come online and get rolled out as a part of their service offering to hospitals, we expect actually near-term take-up of those tests and actually drive a nearer-term opportunity. But because it's not IVD, it can be adopted more quickly, and we need just to effectively enable those LDTs by offering the right solution and the workflow that's associated with it.

And is there a way we can think about the value here? You've helped us with the mRNA side on the $2,000 sort of pre-discounting. Is there a way that we can think about per patient, per test value in, let's say, rare disease or oncology?

Yes. So not -- the pricing is quite varied actually. So not today, but let us come back to you to see if we can be more helpful in the future because clearly, we have a price per sample that's kind of negotiated with the LDT provider. So I don't think it would be commercially not very good of us to kind of detail that much more. On the IVD setting, what I would think about here is kind of you can go find list prices for price for reimbursement for these tests themselves. And you can maybe think about what's a realistic value share that Oxford Nanopore should generate from that end market and then like multiply that by the number of patients per market, et cetera, et cetera.

Yes. Okay. Okay. A bit of excelling to do there. Let's move on to your new cross-licensing agreement. Well, I say you described this as new, and you've not mentioned anything about partnerships. So can we infer that this is not with an existing partner like Danaher or bioMérieux?

So it's not a partnership. It is a cross-licensing agreement. So yes, it does not concern Danaher or bioMérieux.

Okay. And you said that it involves certain patents. And we think about Oxford Nanopore being a Nanopore sequencing company and having all of Nanopore-related patents and base calling and the associated technologies. So given that's your focus and where all your IP presumably lies, what can we infer from that from somebody who would want to, therefore, license that Nanopore IP?