Numis Reiterates $2 Billion Valuation for Oxford Nanopore

By Kevin Davies

November 29, 2012 | An analyst with Numis Securities in London has reiterated a $2-billion valuation for Oxford Nanopore, even before the sequencing company has commercially launched, based on its assessment of the medical market and an evaluation of one of the British sequencing company’s major investors, the publicly traded IP Group.

In a note to investors issued earlier this week, Charles Weston, director of equity research at Numis Securities, writes that “our $2-billion value for [Oxford] Nanopore is fair for the current risk. The technology is truly differentiated, and its products could lead the market within 3-4 years of launch.”

Numis estimates the current sequencing market at $1.5 billion and projects growth in the mid-to-high teens over the long-term, spurred by growth in clinical diagnostics. “Evidence suggests that a differentiated technology can take a market-leadership position within 3-4 years, and we estimate that Oxford Nanopore's revenue in the DNA sequencing market reach $1.7 billion by 2017, assuming revenue-generation begins in 2013. With consumer-electronics manufacturing and plug-and-play capability, we expect strong peak operating margins; potentially in excess of 30%.”

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If Oxford Nanopore can deliver this forecasted revenue, Numis argues that the market could pay over 25x forward earnings, placing a valuation on the company in four years of nearly $10 billion. “Discounting to today implies a $6-billion valuation, but we discount by 67% to account for the lack of data, or commercial launch, and the company's small size. We therefore calculate a $2-billion risk-adjusted fair value.”

And yet Weston notes that the Numis valuation focuses only on the DNA sequencing market. As Oxford Nanopore has suggested over the past year or two, its core technology is amenable to detection of a variety of moieties, from proteins to RNA to drugs. “Penetration into molecular diagnostics, which could be a $14-billion market by 2014, is upside to our base case,” says Weston.

Numis notes that IP Group holds slightly more than 21% of Oxford Nanopore. Based on a $2bn valuation, this represents a value 69p per IP Group share (54% total). The other main components of the firm’s 126p/share price target for IP Group include the listed portfolio (20p), other unlisted companies (8p), cash (14p), and an estimate of the value of IP Group’s exclusive relationships with UK universities (14p).

Numis reiterated a price target of 126p/share for IP Group, upgrading its recommendation from Hold to Add, with the caveat that “we have little visibility on timing of Nanopore news flow.” IP Group's shares have drifted down almost 30% from their peak earlier in 2012, following Oxford Nanopore’s first revelation of its strand-sequencing technology back in February.

Oxford Nanopore now employs some 130 people at two sites in the UK – Oxford and Cambridge – as well as smaller groups in New York and Cambridge, Mass. The company recently leased space in Kendall Square, Cambridge, in a building formerly occupied by another next-gen sequencing company, Helicos, which recently sought Chapter 11 bankruptcy protection.

At the recent American Society of Human Genetics conference, Oxford Nanopore CEO Gordon Sanghera was coy on the precise date for the early-access program or full commercial launch. However, the Numis report notes that Oxford Nanopore is currently recruiting for Field Application Scientists and is currently “prioritizing candidates to serve the East and West coasts of the US, and Western Europe.”

Numis also notes that the company has declared that it would not launch commercially until the sequencing error rate was below 1 percent. Chief Technology Officer Clive Brown presented preliminary data with an error rate of 4 percent last February.

On the manufacturing front, Numis believes Oxford Nanopore could generate “industry-leading gross margins once scale has been reached,” using a high-volume manufacturer and largely standard components. Illumina’s gross margin was reportedly 72% in 2011.

The Numis report also notes that the GridION and MinION devices are amenable to delivery via courier and designed to work straight out of the box. “We assume that Nanopore’s products will be reasonably robust in the field, but should a node fail, it should, in our view, be easy for Nanopore to ship a replacement to the customer and pick up the faulty item,” the report states.

“We therefore see little reason why Oxford Nanopore should employ many installation and service agents, which we believe is a significant cost to competitor companies such as Illumina, Life Technologies, and Roche. We believe that this is a key reason why management believes it can commercialize its products without partnering with a larger company.”