Genomics: a source of future deal activity for the US
“Living in a world where a human genome can be sequenced for $100 is a future companies are increasingly preparing for by pursuing M&A and capital raising transactions.”
Predicting an individual’s health has become a key area of focus as healthcare companies attempt to determine and reduce total lifetime healthcare costs for patients.
The most accurate predictors that determine an individual’s health are medical care, genomics (the function and mapping of genomes), and social determinants of health. While only 11% of an individual’s health is driven by medical care, we currently spend 60% of our dollars in medical care, while very little is spent in genomics and social determinants of health. Increasing the focus and spend on genomics will have a significant impact on driving healthcare costs down as we will be able to try to predict what is going to happen to an individual’s health and consequently avoid expensive hospitalizations. We anticipate that these benefits will drive M&A and capital raising activity in coming years.
The impact of genomics on an individual’s health is 21%, however only 0.3% of total healthcare spending is currently related to genomics. This lack of spending is starting to change as companies that focus on genomics gain attention from investors and acquirers. A recent example of the increased attention genomics has received is 10x Genomics (NasdaqGS: TXG) and the $390 million it raised in its Nasdaq IPO this September. 10x Genomics, a lab equipment manufacturer that allows users to observe gene expression on an individual cell basis, has grown rapidly, more than doubling its 2017 revenue to reach $146 million in revenue in 2018. In its first day of trading, 10x Genomics’ stock price increased by 48% to $57.80, a sign that investors are starting to see the value of genomics based companies.
10x Genomics will create positive competitive tension for more established genomics companies like Illumina (NasdaqGS: ILMN). When Illumina introduced its first DNA sequencing machines in 2006, the cost to decode an entire human genome was $300,000. More recent Illumina sequencing machines can sequence a full human genome for $1,000, and Illumina hopes to be able to
bring the cost down to $100 in coming years. A $100 genome has the potential to create an overwhelming amount of data, so it will be important for there to be an entire ecosystem of genomics companies to process all of this information.
Living in a world where a human genome can be sequenced for $100 is a future companies are increasingly preparing for by pursuing M&A and capital raising transactions. On the M&A side, between 2013 and 2018, M&A transactions focused on genetic testing totalled $40 billion. We anticipate that this trend will continue in coming years, with a specific focus on direct-to-consumer genetic testing, cancer diagnostics, and gene editing. On the capital raising side, genomics has seen growing activity from a varied group of investors, including Y Combinator, Illumina, Polaris, and GV, the venture capital arm of Alphabet. These investors have been primarily focused on genetic testing, sequencing hardware and personalised medicine.
While the future of genomics is promising, there are still hurdles that must be overcome for the genomics space to reach its full potential. Firstly, new technologies will need to be developed to facilitate large scale analysis of genes and efficient storing of genomic data. Secondly, insurance plans will need to change the reimbursement landscape and establish a better framework for determining when genetic testing is appropriate. Lastly, the FDA and other regulatory entities will need to draft new guidance on how they plan to regulate genetic testing in an era of increased activity. If these potential hurdles are addressed, we foresee a significant increase in M&A and capital raising activity in the genomic space in coming years.