Major advances have been made in human genome sequencing. And my two favorite sequencing stocks are 10x Genomics and NeoGenomics. Which is the better buy?
It took 13 years and $2.7 billion to complete the Human Genome Project. In the decade plus since that accomplishment the cost of sequencing a human genome and the time required to do so have been coming down dramatically.
This efficiency has been greatly aided by next-generation sequencing platforms, which have spurred wider adoption in academic, biopharma research and clinical environments. Concurrently, reimbursement in the U.S. has improved, as has the underlying technology, which now allows for less invasive sampling techniques, such as liquid biopsies.
All this is driving tremendous growth in genomic-driven precision medicine across a wide variety of fields.
There are many players in the sequencing market, each of which offers a different twist and exposure for investors.
Among the most intriguing are Illumina (ILMN), 10x Genomics (TXG), NanoString (NSTG), NeoGenomics (NEO), Guardant Health (GH), Adaptive Biotechnologies (ADPT) and Pacific Biosciences (PACB).
Today, we’re taking a closer look at two of these players: 10X Genomics (TXG) and NeoGenomics (NEO).
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10x Genomics (TXG)
10x Genomics is a life sciences company developing solutions to advance human health by analyzing biological systems at incredibly high resolution and massive scale. Its products are used by 97 of the top 100 global research institutions and 19 of the top 20 global pharma companies, all of which use 10x Genomics’ solutions to make major discoveries in oncology, immunology and neuroscience.
10x Genomics has a market cap of $12.3 billion, was founded in 2012, and went public in September 2019.
The company’s product portfolio is built around Chromium and Visium instruments, consumables, and software. These genetic testing solutions give researchers the power to measure biology at the highest level of resolution, such as at the single cell level, or at high spatial resolution of tissues and organs.
The bulk of revenue comes from academic markets, but the company also has exposure to government, biopharma and biotech customers. As with many companies in the sequencing market, consumables play a huge role (roughly 83% of revenue) and help smooth out fluctuations in instrument sales.
Analysts are generally positive on 10X Genomics stock and refer to the long runway of growth afforded by the company’s dual focus on affordable single cell (Chromium) and spatial (Visium) biology platforms. Visium is a newer platform that’s enjoyed a strong launch (over 600 labs since November 2019). The significant consumables offerings also drive high profit margins (78% gross margin) relative to competitors.
Growth is at the top of a competitive group of high-growth diagnostic and genetic analysis peers. Revenue soared 106% in 2018 and by 68%, to $246 million, in 2019.
This year is going to be an anomaly due to COVID-19, with just 6% revenue growth expected. But things should bounce back in 2021 when analysts see revenue up 85% to $480 million and a 73% improvement in EPS losses, which are seen at around -$0.28.
This is what the chart looks like.
TXG went public at 30 on September 12, 2019 and enjoyed a strong start, climbing to 108 by the end of 2020. The February-March market crash was tough on the stock, pulling it down 55%. But TXG enjoyed a steady recovery, making a series of higher highs and higher lows that have continued through today, when the stock trades at around the 123 level. With a strong story, impressive fundamentals, and a constructive chart TXG looks like an attractive stock to own now.
NeoGenomics (NEO)
According to Morgan Stanley, cancer testing is a roughly $6 billion market that’s growing in the high single digits. Tailwinds including people getting older, people living for longer with cancer, and more complex and frequent testing needs to help determine potential treatment options.
There are a lot of players in the market, including 10X Genomics. But in a large market with a lot of wrinkles there are numerous ways to fulfill demand.
NeoGenomics is working to address the underserved community oncologist market. These are businesses owned by physicians and which are not part of a hospital or academic/medical teaching institution. They don’t typically have access to the most advanced diagnostic tools and testing infrastructure, so they’ve been relatively slow adopters of next-gen sequencing (NGS). That’s a bit of a problem because roughly 80% of cancer care occurs in community-based setting.
This is where NeoGenomics comes in.
The cancer diagnostics and pharma services company operates a network of testing facilities in the U.S., Switzerland and Singapore. It offers molecular (including NGS) and non-molecular testing services. It has an extensive selection of advanced tests as well as one of the best turnaround times in the industry, not to mention an option for professional interpretation services.
In essence, NeoGenomics can be a one-stop-shop for community oncologists, who often need a wide range of tests and the ability to control what tests are ordered due to reimbursement dynamics.
NeoGenomics, which has a $3.9 billion market cap and has been around for almost 20 years, fits the bill.
In recent years NeoGenomics has made a major move into value-added service offerings through the combined acquisitions and investments in Clarient (acquired 2015), Genoptic (acquired 2018) and Inivata (2020 collaboration with option to buy).
These, along with investments in the NGS menu, have helped expand the company’s Clinical Services business while other transactions and expansion initiatives have boosted the Pharma Services business. NeoGenomics also has a COVID-19 diagnostic offering.
Stepping back, the big-picture story here is about a cancer diagnostic and pharma services specialist that’s been working on a number of fronts with the goal of driving steady growth in the 15% to 20% range, with the added hook of consistent profitability.
Revenue was up 48% in 2019 and should be up around 10% this year (to $450 million) before re-accelerating to 20% in 2021. Estimated EPS this year is $0.05, which should improve six-fold to $0.38 next year. NEO trades at a discount to peers, making the stock somewhat of a value stock in the sequencing space.
This is what the chart looks like.
Which is the Better Sequencing Stock to Buy Now?
Like many stocks that get lumped into the same group, 10X Genomics and NeoGenomics are similar, but different. They each offer investors exposure to different areas of the broader sequencing market, and each have their pros and cons.
NeoGenomics has the bigger revenue base right now and is profitable. 10X Genomics is growing much faster, is not profitable, and arguably has larger market potential given the companies’ respective focuses right now (though things can change).
The right choice likely depends on the type of investor you are.
Those looking for more growth should be drawn to 10X Genomics. Those looking for more of a growth-at-a-reasonable-price, or GARP-type stock, should be drawn to NeoGenomics.
Personally, I’m looking for growth when investing in the life sciences space, so 10X Genomics is the clear winner for me.
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