Last week Illumina’s management shared its estimate of total NGS instruments sold to date: 1,500. According to their accounting, this represents only 10% of the total number of first generation, capillary electrophoresis instruments sold. In their words, only the ”really high end of that marketplace” has been reached so far. And it is only recently, with the announcement of Ion Torrent’s sub-$50K entry, that a serious contender for the low-end of the market has appeared.
Since 2005, with the introduction of 454’s GS 20, essentially 100% of instruments sold have had price points above $400K – beyond reach of most small or medium laboratories. Based on data from the High-throughput “Next Generation” Sequencing Facilities Map, 50% of all NGS sales since 2005 have gone to just 16 sequencing centers, and 75% to 73 centers. Most U.S. universities that own one or more sequencers are in the top 20%, as ranked by life sciences R&D spending, which means they have annual life sciences R&D budgets of ~$100M or more.
The high-end research market was a logical target for the initial wave of NGS systems. It is a substantial market, highly concentrated (for example, according to data from the National Science Foundation, NSF, 10% of academic labs account for two thirds of life sciences R&D spending in the U.S.), and includes a large number of adventurous early adopters. In addition, the high throughput offered by NGS instruments has let manufacturers take advantage of pent-up demand for large sequencing studies at genome centers and research institutes around the world.
But the attractions of the high-end research market have their limits. For one, it relies heavily on the federal government: from 2001 to 2008, roughly 60% of academic life sciences R&D was financed by the taxpayer (based on data from NSF). This funding can be subject to political whims and can create demand distortions. During the early 2000s, the sequencing equipment purchasing boom associated with the Human Genome Project led to a bubble, with revenues peaking in 2002 and subsequently falling for several years (data from Kalorama). From 1999 through 2006, the market for sequencing instruments was essentially flat, growing at a CAGR of only 0.2%.
In addition, the high-end research market is only so big – and it keeps getting more crowded. Until Ion Torrent, every new NGS competitor that followed on the heels of 454 targeted this segment. Meanwhile, the low-end of the research market and the clinical market lie mostly fallow, and, particularly in the case of the former, ready for the taking.
The low-end research market does not seem, at first glance, very attractive: highly fragmented and consisting of small or medium laboratories with limited budgets. This is especially true on the academic side. On the commercial side, looking at biopharma, R&D has historically been heavily concentrated in the “big pharma” companies. Some interesting trends, however, may be leading to a more even distribution of spending. In the last year, most large firms have announced significant reductions in their in-house R&D operations. These moves intersect with a broader pattern of partnering with small, early-stage R&D companies. In essence, big pharma is outsourcing more and more of its R&D to the small companies that make up the low-end of the research market.
Two different approaches will be used to address this market. Low-end instruments like Ion Torrent’s are the first. The lower purchase price is a key factor, but other important selling points will be convenience and simplicity: the benchtop machine with a user’s manual and a PC, versus the 500 lb. cabinet with the highly-trained operator and the expensive IT infrastructure. The other approach is through low-cost sequencing services. Turnkey services provide the extreme level of simplicity, with the tradeoff being less convenience and control. The analogy of a Kinko’s versus a desktop printer is quite relevant. Customers who need high volume and low per-unit costs will find outsourcing more attractive, whereas benchtop instruments will be ideal for lower-volume, small-scale experiments that are currently not cost-effective or are conducted with alternate technologies.
The clinical market is made up of clinical diagnostic labs of which there are three main kinds: physician office-based, hospital-based, and independent. In general, this is another fragmented market, although among the latter two buckets, and especially independent labs, there is more concentration – for example, LabCorp and Quest account for more than 50% of independent clinical lab revenues (per Kalorama). The majority of diagnostic tests are “routine” tests that are essentially commoditized. “Specialty” tests, which include genetic tests, tend to be proprietary and conducted at centralized, specialized locations.
While there are numerous early applications of NGS in clinical diagnostics, this market is not as ready for NGS as the low-end research market. There are several factors that hinder adoption at this time:
- The limited number of clinically useful, NGS-enabled tests – much more research is needed to expand the potential applications for NGS in clinical settings.
- Insufficient accuracy of current NGS instruments; this includes both raw accuracy, which can be overcome by repeat sequencing –albeit at a cost–, and amplification bias, which can be avoided with single molecule technologies.
- Lack of specialized instruments that provide improved ease-of-use, versatility, standardization, and lower test costs.
- An immature, uncertain regulatory framework and an unfriendly reimbursement environment for both molecular diagnostic tests and NGS instruments.
- A shortage of trained practitioners who can understand and interpret the kinds of tests that NGS platforms will enable.
The clinical market presents a greater strategic challenge than the low-end research market, but together these are alluring alternatives to a hotly contested (and hard-to-enter) high-end research market. Helicos Biosciences belatedly recognized this and switched its focus to the clinical market (the low-end research market was not an option for the $1M HeliScope), though its efforts may yet prove premature. With the GS Junior, 454 has also shifted at least some of its efforts away from the high-end market. Illumina states that its yet-to-be-introduced Avantome technology will be targeted at the low-end market. It remains to be seen whether other new entrants choose to fight it out in the high-end research market, or go after the comparatively wide-open (for now) alternatives.