During our second quarter portfolio update, we profiled portfolio holding Illumina (ILMN). Below is a replay of our live commentary on the company from our quarterly portfolio update webinar and an excerpt from our QUARTERLY LETTER.

Illumina

We all know that DNA is the code of life, found within the nucleus of every cell of our bodies and all life forms on Earth. Complementing DNA is a sister molecule called RNA, which is used by cells to transmit the instructions of the DNA from the security of the nucleus outside to the rest of the cell, where ribosomes read the triplets of base pairs called condons to assemble the appropriate amino acids into proteins. Proteins are the building blocks of cells and the action and signaling mechanisms of life, from components of individual cells all the way up to coordinating the functioning of entire complex organisms such as animals and plants comprised of billions or trillions of cooperating cells. In addition, as we’ve become all too familiar over the past year, DNA and RNA are also key encoding mechanisms for pathogens such as bacteria and viruses.

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The key to understanding life is to understand the entire chain of mechanisms that comprise it, from the basic code in its DNA and RNA through the proteins they lead to building, to the coordinating systemic actions that they enable to create actions in the organisms they govern (commonly referred to as “omics”, i.e., genomics, transcriptomics, proteomics, etc.). This understanding also helps us to understand diseases that occur when those essential mechanisms fail or change and eventually how they might be fixed.

Furthermore, by understanding biological methods of action, we can do what humans always do with increasing scientific knowledge — use it to engineer new solutions to improve our personal and societal lives, a form of engineering commonly referred to as synthetic biology, in which we co-opt biological mechanisms at the cellular level to create these solutions.

Underpinning the majority of this crucial science and medicine is one company – Illumina.

Illumina’s gene sequencing instruments and associated consumable reagents and specialized flow cells are used in 80-90% of all sequencing applications (according to a study by the UK’s competition regulator, the Competition and Markets Authority). Its platform is at the heart of the trillions in value that companies across research, diagnostics, DNA/RNA based treatments, and the revolution across multiple industries that synthetic biology will be shaping over the next few decades.

The combination of Illumina’s “Next Generation Sequencing” or NGS platform, big data analytics/machine learning in computing, and crucial advancements in biology are driving a revolution in both the understanding of the code of life and in the creation of new techniques to manipulate that code in the diagnosis and treatment of disease. Just as important, is the creation of new manufacturing techniques leveraging Nature’s billion-years of design refinements embodied in the innumerable biological factories that exist everywhere on earth – the plethora of living cells.

What this will enable over the next few decades will look like science fiction and it will be widespread in its impact. The most familiar example of this innovation, unfortunately, are the RNA vaccines manufactured by Moderna and the BioNTech-Pfizer, but even more spectacular bioengineering to come will border on the miraculous – like cures for inherited diseases such as sickle cell anemia, hemophilia, and thalassemia, muscular dystrophy, certain forms of progressive blindness, screening for and curing many forms of cancer, saving babies from developmental issues, replacing old organs with new ones grown in a lab from your own cells, and maybe even slowing or reversing aging. All of these are mechanisms whose root causes lie in our DNA. Being able to read (sequence) DNA accurately, quickly, and cheaply, understand what it means (what proteins they encode), and how expression of the DNA is regulated will meaningfully impact all our lives over the next few decades.

Take for example the RNA vaccines developed by the NIH in conjunction with Moderna and BioNTech/Pfizer: the original SARS2 Coronavirus at the start of the pandemic in Wuhan had its RNA (some viruses use RNA as their (in)secure code, not DNA) sequenced using by Illumina instruments. That RNA sequence was then shared electronically with scientists around the world including the National Institutes of Health (NIH) in the US, where scientists deciphered the viral RNA sequence to identify the pieces that coded for the spike protein used by coronaviruses to enter their victim’s cells. Then Moderna and BioNTech went to work on manufacturing a stabilized mRNA vaccine at scale and getting it into the clinical trial process.

Though this is the most relatable example of a gene therapy application and an important life changing one for most people, it is only the beginning. And it is a crucial demonstration of the power that genomic sequencing has unlocked in the quest to improve our health and lifespans as well as its similarity to the computing world where code run on hardware drives so much of our daily lives. In this case, the code is the DNA/RNA sequence while the hardware is living cells executing that code, just as all of our cells do every second of our lives.

Illumina’s role in innovating, putting the pieces together across biology, chemistry, physics, and computation, and successfully commercializing sequencing instruments has been crucial in bringing down cost of DNA sequencing in the context of “Next Generation Sequencing” (NGS), which have reduced the price of sequencing a whole human genome by 99.99% from $10MM in 2005 to less than $1000 today and time to less than a day. For an even more dramatic perspective of just how far and how fast we’ve come, the first human genome was completed in 2003 at a cost of $3B and over a decade of work.

The rate of decline in pricing and time to sequence has been orders of magnitude faster than Moore’s Law, and just as semiconductor chips’ deflationary pricing has led to an abundance of applications that have proliferated over the past few decades, so it will be with DNA sequencing. In fact, its much faster rate of decline over the past decade has led to a Cambrian explosion of innovation that has driven volumes up faster than prices have declined, which is fueling the Synthetic Bioengineering explosion in innovation and attracting necessary funding to finance it. The results of this include innovations in medicine, pet health, food manufacturing, energy/chemical/environmental manufacturing and management, computing, and many others. Nature’s little factories are among the most efficient and diverse producers and consumers of organic compounds and so getting them to do our bidding is a driving force in revolutionizing these different industries.

Furthermore, as Illumina continues to drive down the cost of sequencing, it enables new applications that grow sequencing volumes and genomic data exponentially. As an example, less than 1% of the human population has been sequenced because costs had been high and uses of sequencing data outside of research labs was limited. However, as sequence prices have fallen below a couple thousand dollars, clinical applications have taken off including Non-Invasive Prenatal Testing or NIPT (via simple blood draw from mom not a needle into her womb), targeted cancer therapies and screening, and rare disease diagnosing. The greater access to sequencing has enabled new learnings in biology at an accelerating rate around the whole “omics” categories that is complemented by advances in bioengineering/automation techniques. As a result, scaled solutions have emerged that are driving down the cost curves of creating synthetic biological artifacts like large volumes of custom DNA, RNA, and specified organisms that can produce things of value to society. Gene therapy and personalized medicine based on reading, understanding, identifying, and editing an individual’s genes are being enabled by the democratization of sequencing.

Importantly, all of these growing sequencing applications create lots of opportunity for Illumina to grow volumes even faster as it drives sequencing pricing towards an asymptotic de minimis level of a couple of hundred dollars. And the exponential volumes of sequencing from applications like multicancer screening and remission monitoring being developed and commercialized by companies like GRAIL, a 2016 spin off founded by Illumina now being reacquired subject to an FTC and European Commission review process, will produce vast repositories of genomic data that when combined with electronic medical records and analyzed by machine learning techniques is bound to discover new insights into the causation of thousands of diseases whose root cause/mechanism remain a mystery. Moreover, discovering those genomic foundations will lead to the development of treatments either at their root via gene therapy techniques or more traditional but effective ones like adding/removing certain nutrients or drugs for those affected, greatly enhancing the quality and length of their lives.

To sum up, all of these DNA/RNA based innovations have at their foundation Illumina’s sequencing platform driven by its innovation engine, which means tremendous opportunity ahead for the company to continue creating value as the Synthetic Biology revolution just gets going.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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