Genome Sequencer Industry Evolution

Genome Sequencer Industry Evolution TABLE OF CONTENTS 1. Introduction ................................................................................................................. 3 2. History of Genome Sequencing Technology .............................................................. 3 3. Industry S-Curves........................................................................................................ 4 4. Value Chain................................................................................................................. 6 5. The Role of Uniqueness and Complementary Assets in Creating and Capturing Value ................................................................................................................................... 6 6. Porter s Five Forces .................................................................................................... 7 Rivalry among existing firms: None .............................................................................. 8 Supplier power: Very low .............................................................................................. 8 Buyer power: Medium ................................................................................................... 8 Threat of new entrants: Very low................................................................................... 9 Threat of substitute products or services: Low .............................................................. 9 7. Industry Evolution....................................................................................................... 9 8. Future Challenges Facing ABI.................................................................................. 11 TABLE OF FIGURES Figure 1. Chronology of genome sequencing technology and the genome sequencing tool industry........................................................................................................................ 4 Figure 2. S-curves for the genome sequencing tool industry............................................. 5 Figure 3. Value chain for the genome sequencing tool industry........................................ 6 Figure 4. Uniqueness vs. Complementary Assets Matrix. ................................................. 7 Figure 5. Porter's five forces analysis for the genome sequencing tool industry. .............. 8 Figure 6. Schematic diagram of SNPs based diagnostics. ............................................... 10 Figure 7. Sequencing Tool Sales Plot Over Time. ........................................................... 11 TABLE OF TABLES Table 1. ABI's uniqueness and complementary assets....................................................... 7 Table 2. Industry Evolution from 3G to 4G. .................................................................... 10 2 1. Introduction The genome sequencer industry has a short yet fascinating history. The Human Genome Project created the first commercial pull for high performance genome sequencers. Applied Biosystems, Inc. (ABI), innovated faster than its competition, creating a first mover, technological advantage that has allowed it to capture a monopolistic market share that is still in force today. Nonetheless, a successful past does not a guarantee a successful future in a market place that faces new customers and customer requirements. This paper describes the past and present dynamics of the genome sequencer industry and provides a hypothesis for industry evolution. In addition, the paper evaluates ABI s strategy of investing in diagnostics in order to position itself to compete in future genome sequencing tool generations. 2. History of Genome Sequencing Technology The Sanger method of genome sequencing is a widely accepted technique developed in 1977 by Professor Fred Sanger of the University of Cambridge. Professor Sanger successfully sequenced the 5,386-letter genetic code of the virus PhiX174, winning him a Nobel Prize in Chemistry in 1980. The Sanger method was a highly manual process with a cycle time of about one day and a throughput of only 100 base pairs (bp) per day. In the wake of Sanger s scientific breakthrough, many researchers attempted to automate the process. Some players included the Wada Project (a Japanese consortium of academia, government, and industry), DuPont, and the Department Of Energy. ABI was established in 1981 by Professor Leroy Hood and Dr. Mike Hunkapiller of California Institute of Technology with the goal of designing and manufacturing an automated DNA sequencer. In 1986, using the four-color dye method invented by Mike s younger brother Tim, ABI launched the world s first automatic DNA sequencer, Prism370A, which had a cycle time of 6 hours and increased the daily throughput to 1,000bp nearly 10 times the speed of the original Sanger method. ABI also led the development of the next generation of DNA sequencing tools by replacing the inefficient slab gel electrophoresis with a multi-capillary electrophoresis technology. Overcoming intense competitive pressure, ABI released the Prism3700 in 1997. For ABI s latest model, ABI3730xl, the cycle time is only 1-2 hours and the sequencing throughput is nearly 600,000bp per day. This genome sequencing tool paved the way for human genome research and the International Human Genome Project. Figure 1 illustrates the historical development of the genome sequencing technology as well as the genome sequencing tool industry. Upon the release of Prism370A, ABI successfully built a monopolistic market position in the sequencing tool industry. In spite of entrants like Molecular Dynamics (currently Amersham Bioscience), ABI grasped almost 90% of the market share by 1995. While the market was specialized, 3 Hunkapiller s enterprise was exploiting its dominant position so freely that its customers grumbled that the abbreviation stood for Arrogance Beyond Imagination. 1 By this time, ABI had been acquired by Perkin Elmer Corporation, a manufacturer of analytical and optical instruments. In 1997, when the high-throughput multicapillary DNA sequencer ABI3700 was released, the CEO of Perkin Elmer decided to bet the firm s future on this cutting edge technology. He spun off ABI from Perkin Elmer and established Celera genomics to start a new genetic information business powered by the high throughput DNA sequencer.2 ABI provided the ABI3700 sequencer not only to Celera, but also to the International Human Genome Project, a competing genome research program. Figure 1. Chronology of genome sequencing technology and the genome sequencing tool industry. 3. Industry S-Curves Figure 2 is a graphical representation of the industry S-curves for the genome sequencer industry. The plot compares daily throughput (the most important current performance measure) as a function of time. The three S-curves correspond to the original Sanger method (first generation), the four color dye method developed by ABI (second generation), and the fully automated multicapillary DNA sequencer (third generation). The peak daily throughput was 100 bp/day, 1,000 bp/day, and 600,000 bp/day for each 4 generation respectively. Each generation is considered to be disruptive due to the fundamental differences in technology and corresponding intellectual property as well as to the exponential increase in throughput. The industry is likely to be subject to natural technological limits. The 3G systems have been maturing for the past 8 years. Historically, the 1G method was displaced in 6 years by 2G and 2G was displaced in 10 years by 3G. It is not hard to imagine that a new disruptive technology is just around the corner. In fact, various next generation sequencing technologies have already been studied in many organizations.3 These 4G technologies include both the straight extension of the current Sanger-type technology (e.g. Microelectrophoretic sequencing by Whitehead BioMEMS laboratory) and new sequencing methods based on alternative technologies (e.g. Hybridization sequencing by Affymetrix and Perlegen and Pyrosequencing by 454 Corporation). Genome sequencing tool customers, like the Broad Institute, are currently working with some of these research groups to assess when the new technologies are ready to be applied to high throughput genome sequencing production facility. Sequencing Throughput [ bp/day] ABI has maintained a very strong position in the 2nd and 3rd generation products. Interestingly, however, ABI has not played a significant role in developing the next generation sequencing technology. Without any preparation for an emerging disruptive change it seems very challenging for the company to maintain the competitive edge in this industry in the future. Chapter 8 discusses these challenges in more detail. 1m MultiCapillary (3G) 100k Next Gen (4G) 10k Four color (2G) 1k 100 Original Sanger (1G) 1964 1977 1986 1998 2001 Figure 2. S-curves for the genome sequencing tool industry. 5 2005 [Year] 4. Value Chain Figure 3 illustrates the general value chain for the genome sequencing tool industry, and ABI s positioning in the chain. In addition to its strength in basic research and product packaging, ABI has developed a strong sales capability including both customer support and consumable sales. In addition, through its collaboration with Hitachi, ABI also maintains an integrated manufacturing capability. Through this vertical integration and by being the dominant player, ABI has created a substantial percentage of the industry value. Compo­ nents R&D, Design Assembly Sales, Support ABI Hitachi ABI Customer Vertical Integration Figure 3. Value chain for the genome sequencing tool industry. 5. The Role of Uniqueness and Complementary Assets in Creating and Capturing Value As previously mentioned, the genome sequencing industry was born out of the work done by Professor Sanger. Based on Sanger s technological breakthrough, ABI was able to innovate and establish itself as the industry leader. ABI was the first to market with both the 2G and 3G sequencing tools and was shielded from competition with its tightly held intellectual property. The main sources of technological uniqueness were the four color dye labeling, self coating polymers, the multicapillary detection system, and a precisely controlled automatic operations system. All of these technologies were patented by ABI and its collaborator Hitachi. In addition to uniqueness, ABI has also developed a set of complementary assets in an effort to create and capture value, and to pose an additional barrier to entry (see Table 1). ABI s business model is beyond simply selling the instruments to the customers. ABI also provides aftermarket consumables such as the polymer solution, running buffer, and standard DNA samples for testing. These consumables are not well understood by the customer or by competitors. Due to the nature of the research, however, customers need to be able to trust the quality of the consumables. There are alternative suppliers of consumables for which the quality and consistency of the genome sequencing results cannot be guaranteed. As a result, ABI is able to charge a premium for providing high 6 quality consumables and ensuring reliable results. In addition to consumables, ABI also provides on-site customer support for its large customers. Another complementary asset is manufacturing capability which ABI has acquired through its partnership with Hitachi, a leading Japanese electronics maker. Finally, through its critical role in the human genome project, ABI has developed strong brand awareness among the biotech industry and research communities. Table 1. ABI's uniqueness and complementary assets. Uniqueness Proprietary technology on electrophoresis Complementary Asset Customer support (7d/w) - Four color dyes labeling Total package offering, including consumables - Self coating polymer Quality assurance - Multicapillary detection system Manufacturing capability (through Hitachi) - Consumables Brand Automation technology (through Hitachi) Figure 4 displays the uniqueness complementary asset matrix for ABI. Uniqueness is easy to maintain because of patents and complementary assets are tightly held; thus ABI s genome sequencing tools qualify for the big win category. Complementary Assets Easy to Maintain Hard to Maintain Uniqueness Available Tightly Held The Inventor s Dream The Big Win Qualcom in CDMA, Biotech? Nylon, Viagra, Kodak, Windows ABI Few Returns to Innovation Comp. Assets Play Dell, P&G, Caldon, M.Lynch Linbeck, Int. Wind. Wiper Figure 4. Uniqueness vs. Complementary Assets Matrix. 6. Porter s Five Forces Based on the industry analysis presented above, a five forces analysis for the current genome sequencing tool industry was created. The five forces are illustrated in Figure 5 and discussed in the subsequent sections. 7 Threat of Entrant Very Low Rivalry None Supplier Power Very Low Buyer Power Medium Threat of Substitute Low Figure 5. Porter's five forces analysis for the genome sequencing tool industry. Rivalry among existing firms: None Currently, ABI has a near monopolistic position in this market and is protected from potential competitors by tightly held intellectual property and strong complementary assets. ABI offers the only technologically feasible solution for research institutes and faces no competition in today s market place. Supplier power: Very low From ABIs point of view, suppliers are simply vendors of commodities. Some components include: CCDs (charge-coupled devices), lasers, pumps, electric power units, plastics, and polymeric materials. Because ABI does not produce a large volume of sequencers, it keeps cost down by using off-the-shelf components and avoiding customization. For this reason, most suppliers are only differentiated by price. Buyer power: Medium Currently, customers are limited to public and private research institutions. Potential industry earnings (PIE) remain small and are even contracting due to the completion of the Human Genome Project and a reduction in governmental funding of genome sequencing research. Because many research institutions rely on governmental funding to purchase expensive DNA sequencing equipment, the government acts as an agent to help reduce prices. Nonetheless, there are no alternative products on the market and buyers rely solely on ABI. In addition, because DNA sequencers are complex and a high degree of reliability is required, buyers rely on ABI due to their good reputation for maintenance and consumable sales. 8 Threat of new entrants: Very low Because the market is small and now shrinking, there is little incentive for entrants. In addition, the current technology is relatively mature and ABI is protected by tightly held intellectual property creating a high barrier to entry. Threat of substitute products or services: Low At this point, the threat of substitution is fairly low. There are no current substitutes on the market. However, cheap alternative technologies are currently under development by several research organizations. These 4G products may replace ABI s products in the future. Based on the five forces analysis the industry looks very attractive and stable from ABI s point of view. All the forces are, however, expected to change when transitioning into the new technology generation with changed customer needs and requirements. These changes are discussed in detail in the next Chapter. 7. Industry Evolution Two radical transformations are expected in the genome sequencing industry: a change in the customer base and the emergence of a fourth generation technology. Although the current customer base is limited to public and private research institutions (predominantly those participating in the human genome project), companies in the healthcare industry, such as pharmaceuticals and hospitals, are expected to adopt genome sequencing as a means to address patient genetic concerns in the near future. The huge potential of this market shift has attracted much government and private equity funding. In the healthcare industry, the genome sequencing technology will be utilized for SNPs based diagnostics. SNP (single nucleotide polymorphisms: pronounced snip ) is the technical jargon for a single-letter mutation or coding error on the genomic code. SNPs are subtle and seemingly random variations among the smallest components of genes (nucleotides). Some inherited SNP variations are believed to cause genetically based disease, while others are responsible for genetically inherited characteristics like eye color. The SNP discovery challenge is to find the individual genetic building blocks that correspond to various illnesses; this information may then lead to cures through gene therapy.4 Figure 6 shows an example of a SNPs based diagnostic. Assuming that three SNPs determine risk of Alzheimer s disease, people with SNP1, SNP2, and SNP3 may have 20%, 10%, and 5% higher risk of Alzheimer s disease. A person who has all three SNPs may have 100% higher risk of the disease. Although SNPs account for just 0.1% of the human gene (99.9% of genes are common to all humans), that still corresponds to three million SNPs. Many researchers are now focused on discovering all the important SNPs. 9 Nonetheless, it will be quite some time before enough information is gathered to determine all of the interactions among SNPs. Reference ATCGATTACGATTA (Normal) SNP1 A T C G TT T A C G A T T A (20% Higher Risk) SNP2 A T C G A T T A GG A T T A (10% Higher Risk) SNP3 A T C G A T T A C G A CT A (5% Higher Risk) SNP1+2+3 A T C G T T T A GG A CT A (100% Higher Risk) Figure 6. Schematic diagram of SNPs based diagnostics. The market for genome sequencing tools used for diagnostic purposes will surely explode once SNP based diagnostics becomes useful in the treating of at least one disease. The advent of a fourth generation sequencing technology should facilitate gene diagnostics adoption. However, due to the tight cost controls health care providers face from HMO, insurance companies and governments, technology adaptation will only happen if SNP based diagnostics can be done with very low cost. Until now, due to the tight Human Genome project deadlines and secured government funding, technology was driven first by sequencing rate and only second by cost. Thus the main technology driver for the fourth generation sequencers is going to be cost. Additionally, quality, ease of use, and size are likely to become important performance dimensions. Table 2 summarizes the market transition from third to fourth generation sequencing technology. Table 2. Industry Evolution from 3G to 4G. Past Future Driver Human Genome PJ Genomic Medicine Customers Research Institutes Hospitals, HMOs, Healthcare Tech. Drivers Accuracy, Speed Low cost, Easy operation PIE Small Large Generation of Tech. 3G 4G 10 8. Future Challenges Facing ABI ABI has been an extremely successful industry player to date. However, due to the approaching industry disruption and shift to the fourth generation, the company is facing many difficulties if it wishes to maintain its position. As discussed earlier, ABI has excelled in previous industry shifts. Upon the completion of the Human Genome project, the company seems to have become complacent in their industry position. The previous technology generations were all based on the original Sanger sequencing, and arguably are only incremental improvements of the same technology base. Conversely, the next industry shift is going to be much more challenging. The new generation is emerging through the invention of entirely new sequencing technologies, driven by changed customer requirements, and organized around new supply chains. The reason why ABI s survival through the next disruptive shift seems challenging than before, is that this time ABI has not invested in basic technology research. Apprela, the holding company for ABI and Celera, has shifted the strategic focus towards diagnostics. A primary pressure is that the current governmental funding for the human genome project is drying up and ABI is not generating the revenue to reinvest into research and development that may provide a longer term payback in sequencing instruments. The market condition is shown in Figure 7. Under these conditions it will be very difficult for ABI to catch up with the next generation IP competition and to develop competencies in­ house. The industry need to wait ~5 years before next boom coming! Sales / Demand Genomic Medicine HGP 2005 Years Figure 7. Sequencing Tool Sales Plot Over Time. Considering ABI s current outstanding historical technological uniqueness and outstanding complementary assets, most importantly their brand name and resources, the company should try to remain in the sequencer game. One viable option might be to acquire the new SNP diagnostic uniqueness and technological know-how through an acquisition or a partnership. In order to become an attractive partner to a smaller start-up with 4G technology, ABI must develop its diagnostics capability and leverage this point of differentiation. ABI can become an attractive partner due to the synergies between an instruments business and a diagnostics business. Of the current competitors, we see GE Healthcare (formerly Amersham Biosciences) being considerably better positioned for the new sequencer markets. GE Healthcare was 11 the largest competitor of ABI in the early stages of the Human Genome Project. Additionally, GE Healthcare has strong pre-existing relationships with the new customer set which serves as a significant complementary asset and barrier to entry. This complementary asset can be leveraged in the event that GE Healthcare chooses to partner with a start-up with a product advantage. If ABI misses the sequencer equipment market, there might still be an opportunity to get a slice of the increasing consumables PIE. In the current environment ABI has managed to secure a lock-in from the customers due to the high quality requirements by the Human Genome project. Unfortunately, in the new customer environment, maintaining a similar lock-in strategy is likely to face significant resistance from HMO s side due to their push for open standard and dilution of any monopolistic positions. This is good news in that there will be room for multiple players and ABI will not have to achieve a fourth generation monopoly to be successful. ABI will, however, have to learn how to play in a competitive environment. ABI could also use the already known SNPs information to help potential new customers to estimate the disease occurrence risk more accurately. Although the number of known SNPs is still very low, cooperation activities would help the company to establish relationships for the future genomic diagnostic market. It is important to keep in mind, that while the fourth generation technologies have the potential to influence a variety of fields from preventive medicine for individual patients to cancer research and development of biowarfare sensors, several economic, social, legal and ethical issues need to be solved before a full take-off of the technology development.5 Additionally, since equipment development is based on entirely new technologies, it will take time before the industry S-curve is ready for acceleration. This gives ABI time to continue harvesting their current dominant market position and establish business relationships for the future. 12