Swiss drug giant Roche is reviving efforts to become a key player in the DNA sequencing business, two years after being frustrated in a bid for instant market dominance through a $6.7 billion buyout bid for San Diego, CA-based Illumina.
A leader in molecular diagnostics, Roche announced recently it is buying Genia Technologies of Mountain View, CA, one of the small companies hoping that their new systems will make DNA sequencing so fast and cheap that it will be used routinely in the doctor’s office.
The Genia acquisition—for $125 million upfront and a possible $225 million more for shareholders if all goes well—follows Roche’s partnership deal in September with another Bay area sequencing innovator, Menlo Park, CA-based Pacific Biosciences. PacBio (NASDAQ: PACB) could reap as much as $75 million.
“Our actions are a testament to the fact that the sequencing market is very attractive from a financial standpoint,” says Dan Zabrowski, head of Pleasanton, CA-based Roche Sequencing. “Sequencing is going to pave the way for new medical advances and advances in science.”
Roche currently markets dozens of diagnostic tests such as the AmpliChip CYP 450 microarray, which detects variations in two specific genes that make some patients respond differently to prescription drugs than other people. For years, Roche has also been trying to develop its own in-house sequencing system—not only as a product to sell to researchers, but also as a platform for its own future diagnostic tests that require fuller knowledge of a patient’s genome. That hasn’t been an easy goal to reach.
Five years before its offer for Illumina (NASDAQ: ILMN), was rebuffed in 2012, Roche bought 454 Life Sciences of Branford, CT—then one of the new companies vying to speed up sequencing. Roche has been selling the 454 sequencers to research customers, and has used them in its own research projects. But Roche announced in October it will phase out the 454 instruments. Customers may eventually be able to transition to a Genia or PacBio system, Zabrowski says. But Roche Sequencing may not place all its bets on those two new platforms, he says.
“We would be very interested to continue to build on our portfolio,” Zabrowski says.
Roche foresees a burgeoning future market as sequencers are increasingly used not only as genetic research instruments but also as diagnostic tools in the clinic. Roche, and its major oncology unit Genentech of South San Francisco, have been pioneers in targeting specific mutant tumor genes with novel cancer drugs. Increasingly, oncologists test their patients for tumor genetic traits so they can decide which drugs to prescribe. This “personalized medicine” approach is spreading to other disease types.
And testing is also moving beyond the identification of a few problematic genes to a wider “genomic diagnostics”—a more comprehensive analysis of a patient’s genome, or the genome of a tumor, or of a disease-causing microbe. Roche wants to be equipped with a proprietary sequencer so it can create these more comprehensive diagnostic tests.
However, cost is an obstacle that still limits the use of sequencing in routine medical care. Major research hospitals are using genome sequencing in cancer treatment, but they’re still struggling to get health plans to pay for it.
Contenders in a sequencing arms race have been trying to shave the price of reading an individual human genome to $1,000—down from $100,000 in 2009, and a vast savings from the estimated $300 million to $1 billion cost of the first human genome ever sequenced. Illumina, the market leader, said early this year that it had reached that $1,000 milestone. But Illumina’s low cost per genome can only be realized by organizations equipped with a $10 million bank of 10 Illumina sequencers working full tilt to scan thousands of genomes—thus benefitting from economies of scale.
Zabrowski says the sequencer Genia is developing has the potential to be faster and less expensive than existing systems, because it reads the DNA sequence electronically through the use of a semiconductor chip. Most other systems detect the individual “letters,” or nucleotide bases, in a DNA sequence using sensors that detect light. The Genia chip uses tiny bioengineered nanopores, each of which can sequence a single piece of DNA. The system can be scaled up to include many thousands of those nanopores, which could enable the experimental system to sequence large amounts of DNA quickly.
Genia and Roche are now plotting to produce the first desktop-sized prototypes of Genia’s sequencer with an expanded chip of as many as 128,000 sensors. Genia will remain a standalone unit at its current Mountain View location, but Roche plans to double or triple Genia’s current staff of about 35 to “turbocharge the development of the system,” Zabrowski says. Two staffers from Roche Sequencing will move over to Genia full-time.
Genia’s CEO Stefan Roever, who co-founded the company in 2009, will keep his title and his management team. He says the Roche offer arose while the company was in the middle of a fundraising round for up to $35 million. Genia’s representatives were sounding out strategic investors when Roche stepped up with a buyout bid.
“Roche has a really broad long-term perspective,” Roever says. “We thought they really understood where we are, and what needs to be done.” Genia gains access to Roche’s expertise in business development and manufacturing, he says.
The Genia acquisition gives Roche “a differentiated sequencing pipeline,” Zabrowski says. In its drive to offer its diagnostic tests on a sequencing system of its own, Roche doesn’t need to choose between the Genia instrument and PacBio’s, he says.
“It’s very possible the two platforms will complement each other,” Zabrowski says. PacBio is developing a new sequencer for Roche’s exclusive use in human genetic analysis, he says. “What we’ll see going forward is what are the best applications to be used with these technologies.”
PacBio remains free to sell its sequencing system already on the market, the PacBio RS II, which has developed a following among researchers seeking highly accurate sequences, or specializing in microbial genomes. PacBio’s equipment identifies the letters in a DNA sequence with light sensors, like traditional sequencers.
But both the Genia and PacBio systems can read the sequence of a single piece of DNA—a method that can increase the accuracy of results compared with most sequencers now on the market, Zabrowski says. Using most existing equipment, researchers must make many copies of a DNA sample before it can be analyzed. The polymerase enzyme used to duplicate the DNA strand doesn’t always make perfect copies, so the resulting sequence may also be inexact. Those multiple DNA copies are also chopped up into smaller pieces before being read by traditional sequencers. Computers then sort through thousands of DNA puzzle fragments to reconstruct the full sequence of the intact DNA strand.
Genia’s electronic reading of single DNA strands requires “a lot less informatics horsepower” to reconstruct a sequence accurately, Zabrowski says. Roever expects that the Genia instrument will initially be able to sequence strands that are a few thousand bases long. But later, the read lengths could increase significantly, he says.
Roever, a software entrepreneur before he founded Genia, envisions some day creating a handheld instrument that could sequence a human genome for $100—a sort of health care equivalent of Apple’s iPhone. He foresees that doctors will use such units to get quick answers during patient visits, and that public health workers in the field will quickly identify microbes causing infectious outbreaks.
Roever says the winners in the sequencing market will, like Apple, control all aspects of the user experience from hardware to diagnostic applications.
“That’s an opportunity that we have and Roche has,” Roever says.
Zabrowski says Roche wants its own sequencer so it can tailor its diagnostic tests to suit customer needs, without relying on an outside company to provide a platform that could accommodate all Roche applications.
“We believe that having a sequencer is a critical component to success in future molecular testing,” Zabrowski says.
The eventual sequencing market could far exceed current worldwide revenues. Illumina, whose total revenues were $1.42 billion in 2013, currently controls more than 70 percent of the global market for sequencers, Businessweek reported. The company recently predicted that the market could climb as high as $20 billion.
But Zabrowski says such a revenue escalation hinges on the development of faster, less expensive instruments.
“I do think that sequencing technology needs to continue to evolve and improve for us to see the upside in the market,” Zabrowski says. “We’re still relatively early in the marathon.”
Who will end up as the big winners in the race? Roche certainly has deep pockets to dig into if it wants to be a contender. Thermo Fisher Scientific (NYSE: TMO), the Waltham, MA-based lab equipment and supplies giant, acquired Ion Torrent, Genia’s rival semiconductor-based sequencing system, when it bought Carlsbad, CA-based Life Technologies (NASDAQ: LIFE) in 2013. And BGI-Shenzhen, a Chinese genome sequencing company, gained a proprietary sequencing system when it bought Mountain View, CA-based Complete Genomics (NASDAQ: GNOM) in 2012.
But these rivals will all have to take on Illumina, which hasn’t been standing still. The market leader has diversified its product line, from its latest high-end sequencer, the HiSeq X Ten, to its lower-cost model, the MiSeq. Illumina is also moving into diagnostics. For example, in 2013 Illumina bought reproductive testing company Verinata Health of Redwood City, CA, and this year it closed a deal with biotech giant Amgen to develop a companion diagnostic for Amgen’s colorectal cancer drug panitumumab (Vectibix.)
Illumina is also in a prime spot to scout the next crop of sequencing innovators. In February, it launched the Illumina Accelerator Program, a six-month program that will help entrepreneurs develop next-generation sequencing applications. Participants will receive guidance and lab space in San Francisco’s Mission Bay biotech region from Illumina, and $100,000 from noted technology investor Yuri Milner in exchange for convertible notes.
Roche’s Zabrowski says there will be room for a variety of companies and technologies.
“We believe that there’s opportunity within the sequencing market to provide differentiated product offerings that could potentially serve customers better than they’re being served today,” he says.