Good morning, and welcome to Oxford Nanopore's full year 2021 results call. I'm joined today by Tim Cowper, our Chief Financial Officer, and after the presentation, we'll both be happy to take your questions. Oxford Nanopore, as you all know, has introduced a single molecule sensing platform for DNA/RNA sequencing.
The life science research tools market, which is the focus of our revenues, is a $5.8 billion market, with the potential for tens of billions of dollars for applied market testing. Currently, we are in over 120 countries, and at the heart of everything we do is delivering continuous, relentless, agile innovation to our customers. We have a manufacturing facility that we opened in 2019, and we expanded it in 2021 to meet the ever-increasing demands from our customers. We grew company headcount from 600-800 people in 2021.
Diving straight in here to our revenues for 2021. Our headline revenue was GBP 133.7 million. GBP 6.7 million of that was a one-off COVID-19 legacy diagnostic payment, which left us with a life science tools revenue of GBP 127 million versus GBP 65.5 million for life science research tools in 2020, which giving us growth of 94% year-on-year. Now,
Tim will get into details of these numbers, but there were some tailwinds. In the pull forward on our Emirati Genome Program and also some strong growth in the second half of the year Omicron variant sequencing demand. In addition to revenues, one of our KPIs is the number of publications.
Since our launch of our early access program in 2014, we have published over 2,500 publications, 1,000 of which alone were published in 2021. That really gives you a sense of the growing momentum in the user community and the technical validation those publications bring. In 2021, we launched our flagship Q20+ chemistry.
On the sample side, we continued to respond to customer needs, launching our Rapid Barcoding Kit, our Ultra-Long DNA Sequencing Kit, and our ARTIC Midnight kit for COVID-19 sequencing. On the back-end software, we launched the ability for customers to do their own workflows with EPI2ME Labs, our COVID-19 push-button workflow in EPI2ME, and Remora, which is a plug-and-play methylation base caller. The Q20 results have been replicated in the hands of our customers.
The left-hand box talks about the high accuracy, even for the R9.4 chemistry, and with the improvements with Q20+, we see Mads Albertsen reporting near perfect bacterial genomes and Alexander Wittenberg talking about equivalency to PacBio HiFi reads. Real customer use cases replicating what we launched the product with.
Those innovations, that continuous, relentless innovation, have really driven the user community and our growing revenues. As I've said, we have over 1,000 papers published in 2021. We have over 6,500 accounts. We have scaled our ultra-high throughput genome program, and we've kicked off a series of pilot human genome programs as we really start to push forward on showing how the breadth and depth of Nanopore data brings much, much greater insights into genomics.
On that point, I just wanted to remind you the highly differentiated features that Nanopore sequencing brings to the genome. We read the native DNA, which is very different to all other sequencing by synthesis technologies. This provides direct methylation without additional cost, complexity, and bias of bisulfite sequencing.
The read length can be short, long, or ultra-long. The data is streamed in real time. We've got a picture of a color copy of Abbey Road here to illustrate why direct native DNA is so important.
There are no labels, no optics, no chemical reactions and fluidics which simplify the sequencing platforms. This allows us to design the tech to fit the biological question. Genomes and complex genomic biological questions do not come in one size. Genomes come in tens of thousands of bases for viral genomes, millions for bacterial.
Humans and plants run into 3 billion for humans and tens of billions for plants. Our strategy is to have devices that fit the tech to answer the biological question. Focusing on native DNA versus sequencing by synthesis, the richness of content of native DNA is only provided for by cost effectively by nanopore sequencing.
Traditional short-read sequencing by synthesis, as does nanopore, gives you single nucleotide variants and insertion deletions. For the same price in the same experiment, we get direct methylation.
In addition, long reads enable us to gain significant biological insights in structural variation and copy number variation, again, without cost and complexity. If you add all of this up and put this in the context of a human genome, first and foremost, 8% of the genome is completely unmapped with short-read sequencing.
More significantly, at least a third of all disease-causing variation is made up of variants that are larger than single base pair substitutions. When we talk about the cost of a Nanopore genome, which at scale is $325 with a roadmap to getting us below $250, that includes the whole of the genome.
There is no additional cost for bisulfite methylation. There is no additional cost and complexity for synthetic long reads, which add hundreds of dollars to the cost of a complete genome. In 2021, we also saw strong growth in the use of Nanopore sequencing in infectious disease in fighting the pandemic. We have so far in this pandemic completed over 970,000 COVID genomes in over 85 countries. Some of these countries are new to sequencing.
Continuing with that theme of rapidly mutating infectious disease pathogens, we have been working with FIND and Unitaid to develop a genomic workflow for drug-resistant strains of TB. In 2021, we completed a 400 clinical sample evaluation and hit or surpassed FIND's targets for specificity, sensitivity, clinical accuracy, and turnaround times.
The next step in this program will be to run this at 3 centers with 900 samples. In 2021, we also commenced a clinical proof of concept trial to screen patients who develop respiratory infections in the ICU on a metagenomic workflow, returning results in less than 4 hours versus typically 4 days for a path lab. Of the first 100 samples completed, one-third had a drug-resistant infection, including one with Whipple's disease, which is a hard-to-grow pathogen in a culture-based path lab.
Continuing with the theme of rapid clinical insights on the same day, you and Euan Ashley at Stanford sequenced a human genome returning clinically accurate DeepVariant analysis in 7.5 hours. That is a Guinness World Record. The sequencing time was 2.5 hours, and that was for 60x coverage.
That is a whole human genome every 2.5 minutes. Think back in 2003. Wasn't that long ago? It took 10 years and cost $3 billion to sequence a genome. This really highlights how the technology flexibility can bring breakthrough use cases. Just to focus on one of the 12 patients that they looked at, it was a 90-day newborn with severe epilepsy. The gold standard clinical panel returned a result that was inconclusive after 2 weeks.
Euan and his team were able to determine mutations that were driving the epilepsy and provide the right medication for this newborn. Now, we are really in the foothills of this journey, and our focus is to really provide our platforms and that relentless continuous innovation into the discovery science and the translational human research phase.
It has only been five years since Nanopore was established, and that richness of content combining single nucleotide variants, insertion deletions with methylation, with long reads, providing structural variation and copy number variation, will really bring forward these applied market tests that we will ultimately be able to translate to patients, translate to practice, and into the community. That journey, the second half of that journey, is a two-to-three-year program. We have set up, as I said at the beginning of this call, Oxford Nanopore Diagnostics.
It's a team that is focused on really starting to raise awareness and pull through this discovery science, this translational work, and start to bring it closer, ever closer to the patient. Now, with that, I am going to stop and hand over to Tim, who will get into a deeper dive on the results.
Thank you, Gordon. Good morning. I'd like to start by reminding you about our highly differentiated business model. We don't sell devices. We sell starter packs. A starter pack consists of the use of the device and all the consumables that you need to become familiar with the technology.
These starter packs are priced to drive customer adoption. Our entry-level starter pack, the MinION Mk1B, is available for $1,000, and in many cases, this will be the first time that a customer has sequenced a sample for themselves. Other starter packs include the MinION Mk1C for $4,900, the new P2 Solo from just over $10,000, the GridION starter pack at $50,000, the PromethION 24 at $225,000, and the PromethION 48 starter pack for $310,000.
Just to reiterate, our model is to introduce the customer to the technology through starter packs and then drive sales of consumables, that is kits and flow cells. We focus on our customers and segregate them by revenue size into three categories: S1, S2, and S3. Our S1 customers have annual revenue less than $25,000. These are the genomic explorers, our innovators, and the core of our user base.
We typically interact with these customers electronically through our online portal and in our community. In 2021, we had just over 5,500 customers in this range. At the other end of the scale are the S3 customers with annual revenues greater than $250,000. Typically, these are traditional sequencing projects performed in large centers.
During 2021, these S3 numbers include a large contribution from the Emirati Genome Program. I will refer to this as the EGP from now on. As I'll be showing you, excluding the EGP, we've almost doubled the number of customers in this range while maintaining average revenue size of approximately $630,000 each.
In between these two groups are the S2 customers with revenues between $25,000 and $250,000. These are typically medium scale, multi-month projects. In many cases, they have relied on using core sequencing labs in the past, but now they're doing the sequencing for themselves. We see these as our sweet spot that will drive medium-term growth in both revenue and profitability. During 2021, the number of customers in this range grew by 70%, which was partly due to the pandemic.
We expect this customer base to continue to expand, driving growth over the medium term. How has this customer-focused approach contributed to our top-line growth? Total revenues for the financial year 2021 were GBP 133.7 million, which consisted of GBP 127 million in our core life science research tools business and GBP 6.7 million in our legacy diagnostic sales related to COVID.
Focusing on our life science research tools business, growth was 94% in sterling terms. This was considerably higher than we anticipated at the time of the IPO. In particular, this was driven by three factors. First, the second half growth in the consumables used in the EGP was much higher than expected.
Looking at revenue trends over the last six months, I believe that between GBP 5 million and GBP 7 million was pulled forward into 2021 that was expected in 2022. Second, COVID sequencing revenues were much higher than expected. These were heavily influenced by the sequencing of COVID variants.
We estimate that total revenues in the year were GBP 15 million-20 million. Based on where we stand today, we anticipate a significant decline in 2022. Finally, there was a continued strengthening in our underlying customer base across all geographies and all customer types.
This was particularly driven by customers moving from starter packs to purchasing consumables. This chart shows that our growth in life science research tools was driven by strong consumable sales from our large customer base. I previously mentioned that our overall growth was 94% in sterling terms.
Starter pack revenues grew by 68% in 2021, while consumable sales grew by 116% in the year. This has resulted in consumable sales representing two-thirds of our total revenues in 2021, compared to only 60% in 2020.
Let's look at these numbers by customer type. This chart shows the breakdown of life science research tools revenues by customer type. On the left are the S1 customers, our innovators. Total revenues in this group grew by 24% with an increase in average revenue size to $5,800 per customer. Revenue from the S2 customers grew by 62% in 2021. We had over 780 customers in this range, spending on average just over $67,000 per year each.
Finally, the S3 customers drove our growth in the year, which we expect to continue at least over the short term. The EGP came in higher than expected, and total revenues were GBP 30.6 million, which was heavily skewed towards the last four months of the year. If you look at the S3 customers excluding this project, we had 55 customers with an average spend of approximately $630,000 each per customer.
That represents a revenue growth of 80% in this top category, excluding the EGP. As well as increasing the number of customers across our customer groups, we continued to diversify customer revenues by geography. As I mentioned at the IPO, we have been strengthening our commercial teams across Europe and the U.S. This has been reflected in stronger sales growth in these regions.
This chart shows revenue growth in America of 69%, most of which was in the U.S. Growth in Europe was 45%, while in the rest of the world excluding UAE, growth was 52%. We intend to continue to strengthen our resources across the U.S. and Europe, as well as focusing on key hubs with particular revenue opportunities.
How does this diversified top-line growth affect our profitability? 2021 growth has mainly been driven by increased consumable pull-through, reflecting our growing and established customer base.
As a reminder of our strategy, starter packs are designed as a short-term investment in our customers in order to grow our customer base. While recurring high margin revenues are achieved through consumable sales once the customer is established. Starter packs vary, but typically we make a 30% margin over the range, including our CapEx offerings.
However, established consumables achieve margins of greater than 65%. These include MinION flow cells and many of our sequencing kits that we have been manufacturing for many years.
Moving towards these high margins is the PromethION flow cell, which has had its first full year in full production. PromethION flow cell margins have improved during the year, and we expect this to continue to follow the trends set by the MinION flow cell as it becomes established in full production.
Further improvements in margins will be achieved through innovation, increased automation, improved design, and further recycling of components. Gross margin for life science research tools was 53.8% in 2021, an increase from 42.9% in 2020.
This was mainly driven by two factors, the increased proportion of our revenues from consumables compared to starter packs, and the increase in margins from PromethION Flow Cells during the first full year of full production. Gross profit contribution in 2021 was GBP 68.3 million.
That's growth of 143% from GBP 28 million in 2020. Let's look at how this affects our income statement. Our income statement for 2021 shows our overall revenues increasing from GBP 113.9 million to GBP 133.7 million. Just to remind you that in 2020 we had GBP 48 million of revenue from our legacy diagnostic COVID testing, which was less than GBP 7 million in 2021.
Overall gross margin has increased from 41.2% in 2020 to 54.8% in 2021. Overall gross profit increased from GBP 46.9 million in 2020 to GBP 73.2 million in 2021. Gross profit grew by 56% on a revenue increase of 17.4%.
Operating expenses increased to GBP 237.8 million in 2021 from GBP 120 million in 2020. This was mainly affected by factors relating to the IPO, and I will explain these in full later. The resultant loss before tax was GBP 166 million in 2021 compared to GBP 73.2 million in 2020. Our focus is on Adjusted EBITDA.
As well as adjusting for depreciation, amortization, and certain finance costs and income, we have also adjusted for costs directly related to becoming a public company. We've adjusted for share-based payments related to the founder LTIP, as well as Social Security costs on all pre-IPO share awards. These were GBP 37.6 million and GBP 39.3 million respectively. In addition, we have adjusted for the IPO costs charged directly to the income statement of GBP 4.8 million.
Under this alternative performance measure, our Adjusted EBITDA was a loss of GBP 57.7 million in 2021 compared to a loss of GBP 55.2 million in 2020. At this point, I think it would be helpful to further analyze operating expenditure.
Total research and development costs in 2021 were GBP 76 million compared to GBP 48.6 million in 2020. This is after deducting development expenditure that was capitalized under IAS 38. We continue to invest heavily in research and development.
Innovation is at the core of everything we do. In 2021, average head count in R&D increased to 291 people from 235 people in the previous year. We intend to continue to recruit talent in our innovation area to drive further product improvements.
Included within net R&D expenditure in 2021 are share-based payment charges and provisions for Social Security costs on share awards of GBP 26 million compared to just over GBP 3 million in 2020.
Excluding these charges, both of which were related largely to share price movements, total R&D costs were GBP 49.6 million in 2021 compared to GBP 45.5 million in 2020. R&D costs continue to grow year on year, but growth will not be linear.
Some years' expenditure includes additional projects such as late-stage chip development costs, such as in 2020. Selling, general, and admin expenses increased to GBP 161.8 million in 2021 from GBP 71.4 million in 2020. 2021 SG&A costs included GBP 75.3 million of share-based payments and social security costs related to share awards compared to GBP 3.7 million in 2020. A substantial amount of these charges relate to share price movements and revenue growth.
For this reason, they were adjusted for in our alternative measurement on Adjusted EBITDA. Depreciation and amortization was GBP 15.6 million in 2021 compared to GBP 10 million in 2020. We continued to invest in our commercial infrastructure, and total selling and distribution costs were GBP 24 million in 2021 compared to GBP 20.7 million in 2020.
We expect sales and marketing expenditure to increase substantially in 2022 as we return to face-to-face meetings and international travel. In addition, the full year cost of the increased commercial infrastructure will be realized in 2022. As a reminder, 95% of our revenues in the life science research tools business are exports. Other general and admin costs increased from GBP 36.9 million in 2020 to GBP 42 million in 2021.
This is as a result of strengthening our corporate teams to prepare for becoming a public company, together with improving our IT infrastructure and capabilities. In addition, we incurred GBP 4.8 million of one-off IPO costs in the year that were charged directly to the income statement.
Average headcount in 2021 increased to 280 people from 186 people in the year before. Recruitment focused on sales and marketing, information technology, and in improving the professional infrastructure required for a public company. We've continued to invest in the business in 2021.
We spent GBP 8.8 million on purchasing property, plant, and equipment. This was split between additional and improved laboratory facilities and production expansion. In addition, we spent GBP 12.7 million on assets under lease. These are the PromethIONs and GridIONs that are held at customer sites.
These assets will continue to drive consumable growth and profitability over the next few years. Let's look at the rest of the balance sheet. I'd like to highlight two aspects of the balance sheet.
Inventory has increased to GBP 63.1 million, principally due to our long-term agreements with key suppliers focused on core components. In particular, inventories relating to flow cells have increased by GBP 14.8 million, and devices have increased by GBP 4.5 million.
Total cash resources at the end of 2021 were approximately GBP 618 million. This comprised cash and cash equivalents of GBP 487.8 million and short-term investments of GBP 130.6 million. These are principally deposits at banks with a duration of less than 12 months.
We completed 2 fundraisings in the year, including raising net funds at the IPO of approximately GBP 407 million. Before talking about our guidance, I'd like to recap on revenues for 2021. Our life science research tools revenues in 2021 were GBP 127 million compared to guidance that was updated on the 7th of January of greater than GBP 120 million.
As I mentioned earlier in my comments, there were 2 elements of 2021 revenues that distort the underlying growth from 2021 to 2022. First, we estimate there will be a significant fall in COVID revenues in 2022. Second, we estimate that a proportion of the EGP revenues were pulled forward from 2022 to 2021, resulting in lower quarter 1 revenues this year for this project.
Factoring in this timing effect, we now expect EGP revenue in 2022 to be in the range of GBP 20 million-GBP 30 million. We believe that revenues for 2022 will be between GBP 145 million and GBP 160 million. With a continuing growth story, we expect our revenues in 2023 to be between GBP 190 million and GBP 220 million.
Please note that next year we will only be giving guidance for one year, which we feel is appropriate for an established public company, i.e., this time next year I will only be talking about 2023 revenues and margins. Our overall gross margins in 2021 moved towards 55% from nearer 41% in 2020.
We expect this trend to continue and margins to be greater than 60% in 2023, with the expectation they will be greater than 65% in the medium term. Based on that business plan, we are still targeting EBITDA breakeven by 2026. Finally, I feel I must point out some of the risks we face.
I explained at the IPO how we manage key suppliers through a risk-based approach. This has served us well so far, and we've been able to increase our inventories in many of our core components from key suppliers.
However, the current climate facing the company is challenging. Inflationary pressures exist across all commodities and components. Shipping products around the world is increasingly difficult and expensive. The uncertainty in Ukraine has come at a time when we are recovering from Brexit and the pandemic.
I am pleased that we had limited direct exposure to these areas. We are not seeing any immediate reasons to change our plans or our guidance, but we remain highly vigilant whilst we monitor developments. At this point, I'd like to hand you back to Gordon.
Thanks, Tim. I'm sure you all agree we've had a good year and made great progress in 2021, and you can see from our 2022 guidance, we expect to see continued strong growth. Now, as I said earlier in my presentation, our focus is to really ramp up this innovation engine in life science research tools, in discovery, in translational research, to really bring the native DNA, bring the tech to the customer stories to life through a transition into clinical verification, then validation, and then near the patient and directly into the community.
That is a medium-term goal. The short-term vision is to continue to pull this relentless innovation into this ever-faster spinning wheel to create the use cases that really take us and power us to the next level of genomic biology. Now we will open up for questions. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will take our first question from Stefan Hamill of Numis. Please go ahead. Your line is open.
Morning, folks. Congrats on a strong maiden year. I've got two questions. First for Gordon, and then a follow-up for Tim. Gordon, I guess sort of H2 growth stood out for me. It was a big driver, up 62%.
You know, you've recently opened up pre-orders on the P2. Can you just give us a sense of what demand's been like for that? Are you on track with that for 2022? Could that be a potential accelerator? Just any comments on the impact on the GridION?
Sure. If you look at the gap between a GridION and a PromethION 24, there is quite a big gap there where we think customers want to play. We know that because we can see the utilization patterns on P-24 and P-48. Remember, this is not batch-based. You can run one flow cell or you can run 48.
The P2 will allow us to not try and figure out whether we need a four-channel or a six-channel or a 12-channel because they can daisy-chain them. We think it will be both a driver in the S2 segment, which you're absolutely right. There is a real, you know, demand underneath that central core laboratories that we think we have with our value proposition of affordable, accessible, no CapEx. The P2 demand has been strong.
We're on track for the second half, getting it out into the hands of customers. What's interesting is, we've actually had strong interest from our MinION customers. This really illustrates that if you make it at low enough price points, you will probably allow people to do more powerful biology.
I mean, think about a computer, right? What it took to put somebody on the moon, there's more compute in your washing machine today. The more power you give these people, the more genomics they can do. I think in an affordable, accessible manner, it'll stretch across because at the other end, on the S/3s, I think they'll daisy-chain 2, 4, 6, 8 or 12 P/2s and do significant stuff there. We see it getting across all of the segments.
With respect to cannibalization of GridION, you didn't say that, but that's not going to happen because they're completely different outputs. You're looking at short, sharp panels and amplicon sequencing and viruses, which as I said in my presentation, that's a different segment to doing higher throughput, which is where PromethION flow cells come in. That's all about the tech fitting the biology.
Thanks. Yeah, that's interesting on those MinION users sort of extending to P2. I guess that's a Solo or is it all the way to the full-on P2?
We don't know yet because we haven't really delineated that in terms of interest and where they might go. The other thing to remember is you can plug the Solo into GridION compute.
Okay. One for Tim. Just can you help us overall with the underlying growth rates and guidance? I guess you've been quite clear on the EGP, just, but just if we strip out the EGP and the COVID tailwinds, can you just give a sense on 2021 and then just forward guidance for 2022?
Thank you, Stefan. We've been showing how our diversified customer base has really contributed to our growth. You just mentioned the 62% growth in the S/2 revenues. If you look at the S/3 revenues, excluding the EGP, it's 80% growth in that category.
We feel confident about where the underlying growth is going. When you look at the COVID sequencing in the U.S., we estimate to be between 15-20 million GBP. That is across all of those customer regions and all geographies. It's very spread out. We've actually had COVID sequencing in 85 countries.
Stripping out the EGP and stripping out the COVID sequencing and making similar adjustments to those that were in 2020 as well, we see strong and diversified growth of a rate greater than 30%, between 30% and 40% in 2021. We remain committed to the guidance we gave at the IPO of medium-term growth of greater than 30%.
Okay. Just to clarify on that final point, 'cause I guess you just said that your forward guidance is gonna revert to one year, but beyond that to the midterm, you're still committed to 30%+.
We believe that's how we are intending to run the business. That's correct. That is our guidance, not our ambition.
Other way around. Thank you. Cheers.
We will take our next question from Charles Weston of RBC. Please go ahead.
Hello. Thanks for taking my questions. I have three, please. The first is on the S3 customer category. Excluding the EGP, it seems like you had a very big step up in the number of customers. I would imagine that the more mature customers would pull through more consumables. Can you give us a sense of what the difference might be between a mature customer pull-through versus, say, year one customer pull-through?
Thank you, Charles. Yeah. When we start with a new customer, it typically starts with a starter pack. They would very much be focused on the starter packs for the PromethIONs and the GridIONs in particular can last for 12 months. They have use of those consumables for 12 months.
With the numbers of consumables that we give with those starter packs, they can use those consumables quite quickly, and it varies from customer to customer. You know, the GridION is plug and play, so very often they will get through their starter pack revenues quickly and then move on, and that's perfectly possible in the PromethION as well.
It is once you get past the starter pack stage, all of our revenues really, apart from a little bit of licensing, are consumable-based. That is the basis of the business, and that's where we focus. That would always be where we expect mature customers to go.
Okay. The second question please, on your investment plans for 2022. Just in terms of, you know, how much you're expecting to increase your investments in the business, in staff, in CapEx, et cetera.
Okay. We made a commitment to significantly increase our sales and marketing and commercial operations and we continue to do that. We've recruited some senior leadership since the IPO and just before the IPO. We feel as though we're making good progress in that respect.
Other sales and marketing costs will also increase as I mentioned just because we're back to face-to-face contact and people are traveling again and we're getting to meet our customers. There will be significant increases there. We continue to spend money on R&D and to really try and increase the talent that we have within our R&D team and continue to work on that.
That will also be an area of where we expect expenditure to increase significantly. As far as CapEx, the real area of CapEx that we focus on is the one that really drives the growth, and that's placing PromethIONs and GridIONs at customers. Those are the assets that really drive the consumable growth.
If you look at ordinary CapEx, we have a large manufacturing facility. There's always improvements you can make to laboratories and things, but similar levels to this year would be my expectation for ordinary CapEx. We will continue to invest in the hardware that the customers need in order to purchase consumables and be successful with our product.
Just clarifying that. Do you have a sense of how big the team might be in, let's say, a year's time in terms of number of employees?
It's a moving feast, Charles. We've set out the sort of 2- to 3-year headcount improvements, like we said, 18 months. We've made good progress since the IPO. The cadence of the hiring and onboarding and training kind of makes that not a linear process. We're pleased with our hiring process.
You know, we strengthened the team there and some senior leadership on the hiring side. Being a public company helps. We're able to offer very competitive PLC packages as well. Right now we've said we've grown from 600 to 800 and what that looks like this time next year, we'll report back to you in September and this time next year.
Thank you. Just last one, please. I know that, your technical differentiation goes kind of beyond just read length, but have you heard any customers talk about synthetic long reads, either from Illumina or Element? Obviously, both have been talking about that recently.
I don't think they're out there yet. The only thing that we can do is dig into the well and look at Moleculo. We have some senior leadership in marketing from 10x Genomics, so we know something about that. We will hold our counsel until we've seen the products in the hands of customers.
I will emphasize, if you could choose between a synthetic long read and a native long read, native always wins. Remember, particularly because you get methylation, and bisulfite sequencing is pretty nasty. There are certain labs who won't even let you do bisulfite sequencing because of the carcinogenic agents required to get the results out. Notwithstanding the cost and complexity of bisulfite sequencing and the biases it brings in.
Okay. Thanks very much.
We will take our next question from James Gordon of J.P. Morgan. Please go ahead.
Hello. James Gordon, J.P. Morgan. Thanks for taking the questions. A couple of questions, but I'll ask them one at a time. One question was, so LSRT revenue growth in H2. SF3 was a big driver and partly because of UAE as you've broken out. But I think S1 grew a bit more slowly in the second half. If that's right, why did S1 slow, and how are you thinking about the growth if we look through COVID and UAE contributions, how are you thinking about the growth of the three different segments in 2022 and 2023? That's the first question, please.
Sure. The way to think about the MinION, it really is almost like a direct-to-consumer play, direct-to-the-genomic-researcher play because it's a $1,000 consumable pretty much, yeah? Over the 5 years since we launched the product, we see people come in, do a PhD, run for a while actively and then disappear, then reappear as an adjunct professor and so on. You've gotta look at them in isolation.
You know, they really are very different go-to-market strategies, customer spend patterns. Underlying 25% year-over-year, that's something we've seen since the dawn of MAP, and when we continue to see that. That's where it should be, and it's where it is. It's difficult to compare that to an S2 and an S3. They're very different types of customers.
There's a technical reason for S1 as well. That, you know, as customers grow, and we're in a growing position with our customers, there's a natural tendency to move from S1 to S2 as well. Some of those larger customers that were in S1 have moved to S2, and it's contributed to the S2 growth.
Thank you. Maybe just to follow up on that. Would you think that the three segments would grow at a similar pace? If we're taking out UAE and COVID, would you think they'd grow at a similar pace to each other in 2022 and 2023 or quite different growth rates?
Yeah. We think like
More money on that basis.
30%. Sorry to interrupt. 30% across the board. You know, whether one ends up 33 and another ends up 22, 23, it's 30% across the board.
Thank you. The second question, if I heard correctly, UAE contract in 2022, you're thinking that could be GBP 20 million-GBP 30 million. But you've given 2023 guidance. What does the 2023 guidance assume? Will it be a similar amount?
We signed a $68 million contract last November, which technically can last for up to three years. As we've seen, customer targets can sometimes accelerate or change the cadence there.
We're estimating GBP 20 million-GBP 30 million in the current financial year, and there's no reason to assume it will be any different the year after that. Just to sort of emphasize, we have this focus on all of our customers, and we have a risk-based approach to how we do our planning. We're working on opportunities that will affect the S3 numbers, and there'll be
We have assumed percentages of success and those move up and down over time, and it's the diversification of the customers that really is gonna build our growth, and that's where our focus is.
Thank you. Final question from me because I know you're having your London Calling event in May. Is this gonna be more about application of your existing products, interesting places people have used them or where they could use them? Or could we see material new product updates? Could there be some unveils in terms of products or new iterations of products?
The relentless agile innovation drive tends to be how do we make adoption happen more quickly. That's a confluence of platform enhancements, existing platforms, new platforms like P2, chemistry updates, kits responding to what users need. It'll be across the board. It'll be, you know, similar to previous years. We're excited actually. It's gonna be hybrid this year, so we're looking forward to meeting customers face to face. Hello?
We'll take our next question from Patrick Wood of Bank of America. Please go ahead.
Fabulous. Thank you very much. I'll keep it to one, I think, actually in this instance. And I'm just curious, you know, interested in the Oxford Nanopore Diagnostics team. You know, you highlighted obviously on the bacterial side, you know, you've got a very cost-effective solution there, and you solve a lot of the problems of culture and then ID and AST.
I mean, that workflow has been dreadful for a long time as the industry standard. So it's, you know, you've got quite a disruptive product here. I'm just curious, you know, whether it's within bacterial or just overall, what do you think needs to happen? 'Cause the cost and the price is kind of there. What do you think needs to happen to really drive that adoption over time, and how is the Diagnostics team gonna help push that?
Is it about familiarity with the technology and just awareness versus, you know, support? Or how do you view the biggest hurdle that's stopping us, given the cost and efficacy is basically there?
Sure. Thank you. We agree. The technology is really there to solve real-time point of care multi-drug resistance, and that's thematically an area that we will be looking at. The OND team is a separated out tech and commercial team that is really looking to publish, market these applications to the traditional big players to see where there is going to be traction.
Disrupting any diagnostic play is very challenging. You know, having previously experienced how difficult it was to change the world of blood glucose direct-to-consumer home testing, this is not a trivial challenge. What I can say is the company as a whole, from production through to regulatory, is geared to be able to do diagnostic products because we launched and released a CE-IVD regulated LamPORE diagnostic at the height of the pandemic.
We have the deep knowledge to do all of this. The real challenge is to now push through these applications, and we've been looking at this for a very long time because infectious disease and looking using genomics is something that, you know, we felt we should be able to break into this market.
I think the real important thing here is we've really realized through our customers that actually in critical care is where we think we might get traction quickly. That's kind of where we're going with this. I wouldn't say that that's a fully formed strategy and that's what we're going to do, but that is what OND's job is to explore, to understand, and then maybe to turn that into a product development pipeline. That has significant challenges, yeah.
We have to do verification. We have to win the hearts and minds of the path lab people. We have to do clinical trials. It is a journey, and it's expensive, and it takes time. Picking the right pathways here is what the OND team are tasked with doing.
Totally understand. Thank you for the answer.
We will take our next question from Odysseas Manesiotis of Berenberg. Please go ahead.
Hey, everyone. Congrats on the results, and thank you for taking my questions. I'll start with one and follow up with a couple more. Taking into account that you reiterated your gross margin guidance despite some of the cost pressures you highlighted, could you please take us through the profitability tailwinds that you're expecting to compensate for these pressures, and in particular the ones that look better than expected since the last time you set gross margin guidance? Thank you.
Thank you. Just to sort of reiterate, we've confirmed that we continue to look at gross margins greater than 60% in 2023 and greater than 65% over the medium term. There are many factors in our gross margins, including our manufacturing techniques, which improve over time as we get used to manufacturing, particularly with the PromethION, you know, which really did have its first full year in full production last year.
We will continue to get better at manufacturing that as it follows the same trend that we saw with the MinION Flow Cell. There's also we're bringing in automation across various manual processes that we have. We continue to work on that.
Recycling of components is really important to us for many reasons, one of which is margin. We continue to work at that. I think the thing that I've been pleased that we've managed to maintain this year is we have managed to grow our inventories.
We have managed to keep our core suppliers very close to us, and they've been helping us in order to help us grow our inventory. From a short-term point of view, we feel in a relatively strong place. We will continue to focus on growing those margins. All of those margins were greater than 60% and greater than 65%. You know, we can continue to work on those over time.
That's clear. Thank you, team. Could you please clarify what part of the share-based payments this year we should consider as non-recurring, as well as some color on how we should estimate these moving with regards to the share price? I just want to make sure whether and about GBP 25 million share-based payment annually will make sense for the years ahead.
That's a reasonable start to look at. The founder LTIP we treat as an adjusting event, but that will continue to incur share-based payment charges and national insurance charges over the course of it could be for up to five years from when they were granted last June. That entirely depends on revenue growth, and it's driven by revenue growth.
That will go up or down depending on how plans and actual revenues adjust. National insurance on share-based payments are entirely related to the movements in the share price at the period end. They're not predictable in that respect.
It's very hard to give any guidance on that at all without knowing what the share price is gonna be on 30th of June or 31st of December. We haven't adjusted for what we consider to be the normal course of business. It is about GBP 25 million that is in there that isn't adjusted for.
I think that's a reasonable way of going forward as we've introduced a new LTIP scheme for all of our employees. They will be receiving their first awards under that shortly. There will be an ongoing cost, and I think that's a reasonable way to look at the number in that sort of region that we won't be adjusting for.
Great. That's very clear. Last one. The Genomics England and the NIH projects. How far do you think we are from seeing these in full ramp-up mode? I think Genomics England was targeting a 200 flow cells per week run rate. When do you expect both to sort of maximize their contribution here? Thanks.
That's a very good question, Odysseas. The challenge is one of technology acceptance. I think we're beyond the technology validation phase. It's now, you know, you look at population scale genomics, they're geared up around a large monolithic machine in large central facilities, and that's safe for people.
Breaking that is challenging. Hence our strategy to really focus on getting the discovery piece and the translational research to make it so compelling that the richness of content that we talked about that, you know, reading the actual DNA and the long reads provides really makes people want to have to overcome that energy activation barrier to change how they do things. That's not trivial and very hard to predict when the dam will burst. I can reassure you, we have lots of little hammers breaking that dam down.
Understood. Thank you very much for the answer, Gordon. Yeah, this is for me. Thanks for taking my questions again.
We will take our next question from Hassan Al-Wakeel of Barclays. Please go ahead.
Thanks for taking my questions. I have three, please. I'll ask them in turn. Firstly, just following up on the EGP, your expectation of GBP 20 million-GBP 30 million this year and five to seven million from last year looks to be quite a strong start to this $68 million contract, which is set over three years.
Could you quite possibly get an increase to the size of this contract on the other side, given the potential to address, you know, a larger part of the local Emirati population? Related to population genomics sequencing, could you talk a bit about your progress and your confidence around potentially having some others under your belt in the short term, given your track record here?
The 68 million over three years is the kind of baseline. The program allows them to flex around in that. This is the second part of the contract, and we have momentum with them and we, you know, we like that.
Whether that leads to the next phase or is there another phase, I mean, you know, that will be something that we'll be obviously talking to them and working with them on. We're very excited about entering this next phase, and we believe we have the right level of beat rate in that program. With regard to other Pop Gen programs, as I said, you know, in the last question, there's a real activation barrier to switch.
Getting those pilot scale ones such as NIH, GEL and others, and really gaining technical momentum that makes it very compelling. You know, it's only 2019 when Evan Eichler talked about how 34% of all diseases are caused by other than single nucleotide variants.
That's a very short amount of time in science technology validation. We have seen strong growth in methylation papers and structural variation papers, and that growing momentum and acceptance will lead to others. We have a two-pronged attack. Look at large scale programs, and we have those in the opportunity funnel.
Also to really, really push small pilot scale because we're uniquely positioned to do that at an affordable, accessible way. That we think, you know, will be key as well in helping to make it compelling that, you know, Nanopore is not a nice to have. It's a necessity, and that's really the strategy.
That's helpful. Finally from me on guidance, could you help break down the extra GBP 10 million-GBP 15 million of revenue this year and GBP 20 million-GBP 30 million next year in terms of those three factors that you talked about? Are you assuming 0 COVID sequencing sales in 2023?
The COVID sequencing revenues, they are still happening. We are right now expecting a significant decline, but it is very hard to predict that one. Right now, let's assume there's gonna be a decline. Our focus on our broad-based growth across all of our customers and all of our regions, and that's how we look at it.
You know, there is obviously one large customer that we've talked about. Other than that, you know, we continue to grow with our customers, and they all contribute in many different ways and to the overall growth rate.
Okay, thank you.
We will take our next question from Kate Kalashnikova of Citi. Please go ahead.
Hello. This is Kate Kalashnikova from Citi. I've got two questions, one on the guidance and one on the competitive environment. Starting with the guidance. The midpoint of your guidance assumes quite a step up in underlying sales growth, excluding Emirati project and COVID surveillance benefits.
What gives you confidence to expect this underlying acceleration this year? And what needs to happen for Oxford Nanopore to deliver at the top end of the guidance in both years? Would this require a major new contract or extension of the Emirati project?
Thanks, Kate. We've said that we believe the growth in 2021 and 2022 will be greater than 30%. We've given you a guidance range. At this time, we can't give you any more granularity than that. What we've seen in Q1 leads us to be strongly greater than 30% and that range.
I guess I was just trying to understand whether the top end of the guidance is still possible in your view, without a major new customer contract for large scale population sequencing project.
Yeah. It's really hard to predict. Yes, it is possible without other. There's broad-based, diverse growth across all our segments. You know, one of the interesting things we did see in 2021, there was some latent pent-up demand, so that may come back. If you've really—like, we're trying to predict what happens post-pandemic here, and that's just quite hard to do.
Okay. I wanted to also talk about competitive environment. Roche is developing a novel chemistry sequencing by expansion to significantly improve accuracy and throughput of nanopore sequencing.
Also, Illumina is planning to launch its long-read Infinity technology, and of course, the company is keen to highlight it's not just a synthetic long read, but rather a completely new technology. How much this could be a threat to Oxford Nanopore, and to what extent this could potentially slow down adoption of your technology?
Okay. Let's deal with Roche Xpandomer first. Roche have been doing this for almost a decade when they acquired a Nanopore company, and then they shifted from trying to do sequencing to taking a base, expanding it ten times, and then reading it. It limits the read length.
It adds huge cost and complexity. It completely removes. It's a synthetic read by any length. What we have, as I've said, is and we are the only company today that measures the native DNA at any read length. I haven't talked about short read lengths today. Short, long, medium, super long, which retains a methylation, which is really important. I think that also is the differentiator with Illumina. Now, you mentioned Illumina have a non-synthetic long read.
It's not clear to us what they have and whether it's a kit that goes into existing instruments or something else. Notwithstanding all of that, right? As Euan Ashley pointed out, 34% of all clinical diseases are missed because you don't have the single nucleotide variants, plus the methylation, plus the structural variation, which you get from long reads, plus copy number.
We'll see how this plays out. We cannot predict what it will look like. We like that Illumina now finally think that long reads are important, but 10,000 base pairs is not a long read, not by any strength of the, not from a technical perspective anyway, and clinical perspective.
Understood. That's very helpful. Thank you, Mr. Sanghera.
We will take our next question from David Westenberg of Piper Sandler. Please go ahead.
Hi, thank you for taking my question. I'm gonna talk about the competitive environment here. How do you envision the prices of sequencing on maybe a cost per G or whatever metric you want in 2022 and 2023 with the launches of some competitive launches in the short read market?
Do you feel pretty isolated because, you know, maybe your technology is used more for read length, speed, and other kinds of things with the, you know, what I think would probably be pretty dramatic price decreases from what we've seen since maybe 2014-ish?
Okay. Two ways to think about pricing, yeah. Cost per gig is important to some customers, but there's a much broader church. Affordable, accessible sequencing with a MinION is a very different customer base to maybe somebody doing medium to high-throughput sequencing in labs. These new entrants claiming to be faster and cheaper than Illumina are direct generics to Illumina as it comes off patent.
There'll be an interesting game that gets played out in those highly concentrated sequencing centers today. Our commercial adoption is a much broader church, and it penetrates all the way down to PhD students right back up to large-scale programs such as EGP. I don't really think that some those price points will be competitive against us. Because remember, you've got to factor in the CapEx and the depreciation.
I mean, they talk about headline cost per gigabyte. They seem to ignore what the labs have to face and the procurement guys, which is the amortization and depreciation of the instruments as well, and notwithstanding the CapEx. In addition, and strategically, our mantra is affordable, accessible, broad. I don't think that where we position ourselves, this is a competitive threat to us. We are isolated in that respect, if you like.
I appreciate it.
Uniquely positioned rather than isolated is how I would put it.
Got it. I appreciate it. I'll just stop there. Thank you.
We will take our last question today as a follow-up from Stefan Hamill of Numis. Please go ahead.
Hi, folks. Sorry to sort of bug you with one more at the end. Just we covered most things, but just on the progress on taking silicon out of your chips, making your tech even cheaper and more portable. We saw some encouraging proof of concept at the NCM meeting in December. Just any update where you are with this and how far from the market these new products might be?
There are two ways we take silicon out of the chip. One is the short term, what we call the glass chip or plastic chip, I think it might have been referred to in the IPO. That's just refactoring and a cheaper way of manufacturing current products.
That is a foundry-based development program. The chips have to go off. We make a design change. It takes 16 weeks. 12-16 weeks, we get stuff back. That is an iteration-based process. With regard to the Voltage chip, which is the sort of step change, which allows us to do orders of magnitude more channels on the same silicon footprint. That is progressing well. That, you know, that is a real disruptor and a big, big step. We're comfortable with the progress we're making on that trajectory. We're excited about it for the medium to long term.
Got you. Thank you.
This will conclude today's question and answer session. I would now like to hand you back to Gordon for any additional or closing remarks.
I'd just like to thank you all and, you know, great questions. It's been an exciting six months for us. As you know, our maiden results, we're very pleased with the progress we've made. We want to thank you all for your continued support. Thanks very much, everybody.