10x Genomics Inventory Plummets: Why We’re Not Nervous

“Each cell in your physique has the identical DNA. Besides it doesn’t.” That was the title of a 2018 New York Occasions article that talked about how “the genome doesn’t simply fluctuate from individual to individual, it additionally varies from cell to cell.” That very same yr, an article was printed by Science discussing a landmark research which exhibits how mind cells can revamp their DNA over time, one thing that might doubtlessly trigger Alzheimer’s. In different phrases, there’s a transparent want for scientists to realize mobile decision for DNA sequencing which may solely occur with instruments like these on provide from 10x Genomics (TXG) and others.

Conventional next generation sequencing (NGS) strategies look at DNA taken from a set of cells in order that it turns into “the common of the inhabitants.” Such strategies are known as “bulk sequencing” versus “single cell sequencing” which is what it says on the tin. That’s based on an article by Expertise Networks which breaks down the only cell sequencing course of into 4 steps.

1. Isolation of single cells from a cell inhabitants.
2. Extraction, processing and amplification of the genetic materials of every remoted cell.
3. Preparation of a “sequencing library” together with the genetic materials of an remoted cell.
4. Sequencing of the library utilizing a next-generation sequencer.

That fourth step is the place Illumina comes into the image given they’re the dominate supplier of NGS machines. Right here’s a diagram taken from a 2021 weblog put up by Illumina exhibiting how the 10x Genomics workflow interacts with Illumina sequencing machines.

As all the time, we need to put money into the only cell revolution by discovering the main supplier of instruments, and that appears to be 10x Genomics.

10x Genomics – A Single Cell Chief

The final time we checked in with 10x Genomics was again in August 2019 after we wrote about The 10x Genomics IPO and Single-Cell Sequencing. Since that piece, we exited our place in Berkeley Lights – one other firm dabbling in cells – and went lengthy 10x Genomics. In the present day, we need to examine in with the corporate and ensure they’re wholesome and proceed main the pack. With shares having fallen -68% because the starting of the yr (in comparison with a Nasdaq fall of -23% over the identical time frame), checking in additionally helps present us with confidence within the face of heavy paper losses.

At any time when potential, we like to search out subject material consultants to do the heavy lifting on the analysis aspect. In keeping with the intense people at DeciBio, 10x Genomics is rising as a pacesetter in serving to scientists perceive cells. 10x Genomics prospects embrace all the high 100 international analysis establishments as ranked by Nature in 2020 based mostly on publications and all the highest 20 international biopharmaceutical firms. No single buyer accounts for greater than 10% of revenues. Two key metrics to observe – supplied within the 10-Okay – could be seen beneath.

The variety of machines offered wants to extend for apparent causes, whereas “consumable pull-through” represents whole consumables income for the given time-frame divided by the variety of machines deployed. Basically, it’s a metric that ensures prospects are utilizing the machines they’re buying.

With capital drying up, we additionally need to consider survivability for any firm we’re holding. 10x Genomics gross margins are practically 85% which implies the platform and consumables are extremely worthwhile. With $540 million in money and marketable securities on the books exiting Q1-2022, the corporate has a runway of about three years given final quarter’s working lack of $41 million.

Stumbling Income Progress

The final word floor reality for management in a total addressable market (TAM) is income development. That’s the place 10x Genomics seems to have stumbled in Q1-2022.

Right here’s what the corporate stated in regards to the slowdown of their filings.

We imagine revenues within the quarters ended December 31, 2021 and March 31, 2022 have been negatively impacted by sure of our prospects’ staffing capability points, slowdowns and common elevated uncertainty round near-term operations. We imagine these impacts have been notably related for tutorial prospects who make up the massive majority of our income.

Whereas 10x Genomics compares each quarter to the identical quarter within the earlier yr, we wish to see how every quarter compares to the one instantly previous it. Right here’s how that income slowdown seems after we break it out by income phase.

Above you may see how evaluating Q1-2022 to Q1-2021 doesn’t look half unhealthy, however evaluating Q1-2022 to This fall-2021 exhibits a significant drop in revenues throughout each devices and consumables. The corporate blames a few of this drop on a chilly chain failure that passed off in Europe. Some prospects obtained product that was spoiled and solely found this after operating their experiments. Consequently, orders have been placed on maintain as the corporate labored to determine the issue and resolve it. Certainly, we see that Q1-2022 revenues for Europe dropped sharply by 40% in comparison with different areas which skilled development – besides North America.

The 23% drop in North American revenues is regarding and will relate to what the corporate stated about “uncertainty round near-term operations” for tutorial prospects. If three quarters of 10x Genomics revenues come from tutorial prospects, and tutorial establishments are deciding to chop again their budgets as a result of the financial system is hitting the skids, then that’s an issue that may persist all through the rest of the yr. Certain, the corporate expects that business prospects would be the majority income contributors sooner or later, however that’s going to take a while. And that’s solely a profit if business utilization is extra resilient to price range cuts than tutorial utilization.

On the intense aspect, the breadth of purposes that 10x Genomics touches signifies that traction will possible proceed. Right here’s a take a look at the distribution of three,300 peer-reviewed articles which were printed based mostly on information generated utilizing their merchandise. 

The 10x Genomics Chromium platform consists of a number of options which are being developed in response to buyer calls for.

The final merchandise within the above desk – Visium – is a pure consumables providing that’s utilized by Chromium prospects. Revenues from Visium are blended into Chromium consumables to type a single consumables phase. Not seen above is a 3rd platform referred to as Xenium, a flexible instrument, consumables, panels, and software program, that may enable researchers to create gene expression maps at mobile and subcellular decision. Anticipated to launch on the finish of this yr, the brand new platform was talked about 23 instances within the Q1-2022 earnings name implying that analysts have excessive expectations for it.

Our 10x Genomics Place

We’ve been including shares of TXG over the previous rolling yr and are closing in on the utmost quantity of capital we allocate to any single place. For these traders sitting on the sidelines, chances are you’ll need to see how Q2-2022 outcomes want to see the ultimate impression of the European chilly provide chain downside and whether or not North American revenues proceed to say no. Market volatility has elevated which implies concern is within the air. In instances of uncertainty, budgets usually get lower as establishments of every type turn into extra price acutely aware. 10x genomics appears to be main the pack in what they do, however a falling tide impacts all boats. With a easy valuation ratio of 13 based mostly on final quarter’s outcomes, there’s nothing protecting TXG shares from taking a giant dump if Q2-2022 disappoints the lofty expectations of traders. Should you’re opening a place or including to 1, accomplish that slowly over time versus attempting to time the market. You’ll by no means purchase on the backside, and also you’ll by no means promote on the high.

Even when tutorial budgets are lower throughout the board and 10x Genomics’ income development flatlines for some time, they’ve the gross margins wanted to outlive if money begins to run dry. Administration talks about persevering with enlargement in 2022 with plans to rent upwards of 100 salespeople. We anticipate they’ve their finger on the heart beat of the market and don’t see a lot trigger for concern following their Q1-2022 income stall. Whereas the European chilly chain hangover might carry over into Q2-2022, they’ve set expectations for a resumption in development for Q3/This fall 2022.

We proceed to anticipate our full-year 2022 income to be within the vary of $600 million to $630 million representing development of twenty-two% to twenty-eight% over full yr 2021.

10x Genomics Q1-2022 Earnings Name

If that doesn’t occur, then we’ll begin to fear.

Conclusion

In case your tech portfolio appears to be crumbling earlier than your eyes, that’s as a result of volatility goes each methods. Beginner traders panic and promote at a loss. A battled hardened investor has the temperament to stay with their authentic thesis by way of instances of turmoil. Should you put money into high quality firms, they’ll survive powerful instances and thrive when the mud settles. Robust gross margins, broad market penetration, and stable key metrics imply 10x Genomics will possible keep the course and proceed to execute no matter what their share worth does.

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