Oxford Nanopore still working out path to profit

Interim losses have widened at genomic sequencing company Oxford Nanopore Technologies (ONT), despite profit growth in its Life Science Research Tools (LSRT) division. This outcome had mostly been flagged in advance by the company – which was the beneficiary of a government Covid testing contract that ended last year.

Like many of its peers in the life sciences sector, Oxford Nanopore is having to figure out how to fill gaps in its income statement in the post-pandemic period. It’s hoping customers will continue to realise that its sequencing solutions have numerous scientific applications. For instance, one product being developed by the company recently met World Health Organization criteria for detecting drug-resistant strains of tuberculosis.

The group says its nanopore-based sensing technology is currently being used in more than 120 countries to provide real-time analysis of DNA and RNA. Put simply, these tools can help researchers and clinicians better understand the biology of plants, animals, viruses and bacteria. 

In the six months to the end of June, LSRT revenue increased by 22 per cent to £86mn, primarily thanks to interest from new customers. The division’s gross margin also increased by 280 basis points to 57.6 per cent, though this was partially offset by one-off costs associated with Covid testing write-offs and investment in IT infrastructure.

Management has now narrowed its guidance for the full financial year, with LSRT revenue growth expected to be in the range of 18-25 per cent, versus 16-30 per cent previously. Underlying LSRT revenue – which excludes revenue from Covid testing and an ongoing genome sequencing project in the UAE – is expected to grow by 40 per cent.

However, some brokers have questioned whether this guidance is achievable. “We continue to be wary of this ambitious growth rate in the near to medium term given a potentially deteriorating outlook in the life sciences and the research tools space,” wrote Stifel analysts in a 6 September note. Macroeconomic uncertainty is partly to blame for the gloomy forecast, as is the dominance of California biotech Illumina (US:ILMN) in the genomic sequencing space.

While the broker acknowledged that Oxford Nanopore’s sequencing devices are “highly innovative” it also warned that the widespread adoption of them could take time. On the plus side, the company is debt-free and in a strong cash position – meaning it likely has the firepower required to reach profitability. 

We’d like to see some more upward momentum before committing. Hold.

Last IC view: Hold, 181p, 21 March 2023