For genomics to achieve its expected market growth, the industry will evolve from custom hardware/software/applications, where companies are almost fully vertically integrated into an ecosystem where entrepreneurs can leverage others’ innovations. The total amount of genome sequence data generated is doubling every 7 months and the market is expected to quintuple, to over $15 billion, by 2020., While some skeptics doubt the every day utility of genomic information, it’s difficult to argue that with so much data generated, new clinically important applications will be discovered. Commercializing new applications will require a re-organization of the industry.
As industries evolve, they often fragment. The early computer companies were vertically integrated, manufacturing everything from the processors to the software applications. As it matured, the industry fragmented into layers, and specialized companies came to dominate their layer. Early examples include Intel and microprocessors, and Microsoft and operating software. Recently, we’ve seen the same fragmentation with web infrastructural businesses: Twilio and cloud communications, AWS and cloud storage, Slack and managed collaboration.
The genomics industry will do the same. First, we are seeing the hardware/software separation: the sequencing layer, led by Illumina, and the computing layer, led by AWS. Next, we will see bioinformatics fragment. For example, Spiral Genetics and data compression, DNAnexus and genome assembly, Bina (Roche) and data processing, SolveBio and the reference data layer. The companies that currently own the customer channel – like Invitae, Counsyl, and Foundation Medicine – will go from vertical integration to a focus on the application layer, outsourcing the rest of the stack. This will free tremendous working capital to focus on the new applications enabled by the data explosion. Without focusing on the new apps, these pioneers of genomic testing will be disrupted by nimbler competitors building the future. We’ll also see new categories of applications like genomic interpretation apps and pharmaceutical R&D applications. These will be built on top of an outsourced, fragmented, and more nimble stack.
At Healthy Ventures, we are investing into this fragmentation. We love companies that are creating the infrastructural backbone for the new genomics industry. We look for layers/fragments least likely to be commoditized and where the time-to-maturity is shorter; examples of which include the reference data layer. The company must have more than just a product, it must have the vision and ability to ‘own’ its layer, creating a durable business with a large absolute market, like OneCodex is doing in microbial genomics. Perhaps most difficult, the company must be relevant today, in a highly concentrated market with few end-users doing very high throughput analysis, and also relevant tomorrow in a much larger, but much more distributed market where bioinformaticists are in short supply yet everyone has access to a sequencer.
 Stephens, Zachary D, et al. “Big Data: Astronomical or Genomical?” PLOS Biology, 7 July 2015.
 Genetic testing for cancer alone is expected to be $9B. Source: Foundation Medicine.
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