Monday, February 20, 2012

Great leap for DNA sequencing. Small step for early stage financing?

Wow. Just wow.

Oxford Nanopore went public last week with details of their DNA sequencing platform. It is a stunning advancement for sequencing in terms of access, cost, and performance, and represents some pretty amazing chemistry and engineering advancements.

(Great coverage of the science involved here and here and general coverage here.)

A decade ago, sequencing a single human genome cost a billion dollars and required a warehouse full of expensive machinery. Oxford Nanopore's new platform uses a handheld unit and about 5 machine-hours, at a total cost of ~$1,000 to generate a genome. Other technologies are may be capable of reaching the performance levels of Oxford Nanopore in one dimension (cost, read length, turnaround time, etc.), but no technology is as complete as what Oxford announced.

We will be sorting through the impact of the technology for a long time, but one business implication needs to be promoted in light of Oxford Nanopore's success: how a tiny financial brokerage company with a tiny amount of scientific expertise launched Oxford Nanopore.

University tech transfer offices have a thankless job - maximizing the return on young, immature IP, with little capital available for research to de-risk emerging technologies. This is especially true in the UK, where good science is abundant, but early capital is not.

In the early part of the last decade, Oxford University's tech transfer group struck an interesting deal: it sold a half-interest in all spin-outs from the chemistry department for a decade or so for £20M cash up front (~$37M).

The investor in this deal was a new entity (IP2IPO) founded by a small financial brokerage in London. IP2IPO (since renamed IP Group, and listed here) was a new fund dedicated to investing in university IP, and went public on the AIM on the basis of the Oxford agreement, and not much else. (Though after the Oxford deal, IP2IPO struck roughly similar deals with other UK universities.) IP Group is effectively a publicly traded VC firm.

In 2005, IP2IPO seeded what became Oxford Nanopore. (It is interesting to read the press release - there's zero mention of DNA sequencing, which means that either they were being coy, or weren't aware of the potential application for the chemistry technology.)

At the founding of Oxford Nanopore,  IP2IPO received a ~5% chunk of equity per their agreement with Oxford. They also injected start-up capital boosting their ownership interest. Seven years and a few more financing rounds, including a strategic investment by Illumina IP's share of Oxford Nanopore is still 21.5%.

Today IP Group's market cap is £413M or $654M (US), having jumped 12% (+$70M market cap) following the Oxford Nanopore (ONP) news. (IP Group has ~$30M in cash on hand, so EV= $624M).

Unpacking this for a second: Ion Torrent - a DNA sequencing firm with a very cool platform - was sold last year to Life Technologies for $725M. Given this comparable, plus inflation and ONP's advantages, ONP is probably worth $1B today, making IP Group's interest worth $215M, and suggesting that the OTHER 59 companies in IP Group's portfolio are worth $409M in aggregate.)

I am happy to see that such long-term investing has paid off for IP Group, but I would be curious to know today if IP2IPO, its' investors, or the universities would redo the arrangements if given the opportunity. I think if you could reliably find investors with 10+ year time horizons that the IP2IPO model would work on a greater scale, but a look at IP Group's stock chart (with a stock price about even since its' 2003 debut) suggests that the market is not a fan of the IP Group model, even with the Oxford Nanopore development.

(You also need access to stellar tech centers. It is a low risk bet that Oxford's chemistry department will invent something world-changing over the 10-12 years covered by the IP & Oxford agreement. But how many schools and departments can you say that about?)

For the IP2IPO model to work, the investors' value of the university technology should roughly match the university's determination of the value of cash in the present. But there is an inherent disconnect between the high-beta present value of a long term technology and the certain value of short term cash. Blanket agreements like IP2IPO's reduces risk slightly by spreading the risk across multiple spin-outs across multiple sectors.

Still, there seems to be an oversupply of high-risk capital, at least in the US, when including IT/internet investments. Perhaps the IP Group "product" will take off now that there is an obvious big win in ONP to sell to investors.

One other thought on Oxford Nanopore's news: if the disposable USB MinIon unit really does sell for $900, I can see myself buying one this year just to try it out AT HOME. I can't say that about a MiSeq.

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