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Are Wine Tastings a Thing of the Past?

Gino Rossi – Healthcare Analyst

U.S. company Vinome has recently launched a new personalised wine shopping experience. But how does the company do this without ever meeting its customers or getting them to taste test wines? The answer is through Deoxyribonucleic acid, or DNA. Vinome claims to be able to analyse a person’s DNA to reveal their personal wine palate. Taking a sample of a customer’s saliva, Vinome tests the DNA for variants (mutations) in 10 genes, which studies have suggested are associated with taste and smell.

Whether or not Vinome has a successful business model remains to be seen, but it does highlight an important trend. The cost of genetic testing has fallen rapidly, opening up new business models and opportunities for innovative companies and scientists. Illumina, the world leader in DNA sequencing equipment, has done a remarkable job at improving the affordability of its products. The advancement in DNA sequencing technology almost puts the Information Technology world to shame. The first human genome, published in 2001, took 15 years to sequence and cost nearly US$3 billion. Today, Illumina’s HiSeqX Ten, which was released in 2014, can sequence over 45 human genomes per day at a cost of less than US$1,000 per genome.

Source: National Human Genome Research Institute

With DNA sequencing now more affordable, faster and accurate, companies such as are marketing this capability directly to the consumer. According to research from UBS, only 0.04% of the world’s population has taken a consumer genomic test. First movers in this space could build a network effect and gain dominant positions in this high growth category. There are also significant applications in agriculture and pharmaceutical development. Research and development has been supercharged and our understanding of what role various genes play, the complex interactions between them, and how they respond to drugs, is rapidly evolving.

The most promising near-term opportunity for DNA sequencing is in cancer therapy. Here, Illumina’s next generation sequencing allows for faster and more accurate testing of multiple genes with links to cancer, or even an entire genome. Patients can be tested for hereditary (germ line) or somatic (errors in DNA as cells multiply) variants in DNA as a way of assessing the risk of cancer. Tumours can be tested to understand what is driving the tumour and which medications could be used to tackle it. This ‘personalised medicine’ is being used increasingly in oncology as new drugs are often being approved with associated biomarkers to test for specific proteins or antigens on the tumour. Longer term, DNA sequencing could even allow for routine testing of circulating tumour DNA, which results from small pieces of malignant cells breaking off into a patient’s bloodstream. This could provide real-time monitoring of a patient’s cancer, with the blue sky possibility of being able to detect cancers at Stage 1 with a routine test. At this point, the application of DNA sequencing for this type of liquid biopsy is speculative, but it does highlight the future potential of the technology.

Source: Company Data
We continue to monitor Illumina closely as a potential investment given its dominance in such a high growth industry. Currently the share price is assigning a low probability of success in some of the more blue sky opportunities such as liquid biopsies and widespread consumer testing, and even modest penetration in oncology applications. Nevertheless, we remain cautious for the time being. The company has had a string of earnings downgrades and we have concerns that penetration into new markets may take longer than the market anticipates. To date, Illumina’s penetration of the non-invasive pre-natal testing market has fallen well short of expectations, and we expect this is one of the easier markets for Illumina to tackle. As Illumina transitions from the Government and academia setting to the clinic, it must overcome the diagnostic industry leader Roche, and other large competitors such as Thermo Fisher, with their superior product breadth and large sales forces.

There are also credible threats to Illumina’s dominance. Pacific Biosciences, a small Californian company which has partnered with Roche, has developed a technology that has greater sequencing accuracy which is of particular importance to the scientific community. The company’s SMRT (Single Molecule, Real-Time) sequencing system is significantly more expensive than Illumina’s system, but as its price continues to fall with each new generation of product, it is likely to gain share with Government and academic customers who still represent over a third of Illumina’s revenue. Another threat comes from nanopore technology being developed by Oxford Nanopore and Roche. This technology has the opposite problem, being very affordable but at this stage lacking the required accuracy.

Beyond these problems, there is also the issue of ethics, exposing Illumina to political and regulatory risk. Genetic testing is a minefield of moral and ethical challenges, which we will have to face sooner or later as a society. Should we test newborns for disorders that we cannot treat? Is there a moral obligation to inform the rest of the family of a disorder? What factors should we allow parents to screen their embryos for? Could you handle the knowledge that you were at an elevated risk of developing cancer? And, are you willing to relinquish your wine choice to a DNA test

This article has been prepared by Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484. It pays no regard to the specific investment objectives, financial position or particular needs of any specific recipient. You should seek your own professional advice in relation to any financial product referred to. You should also obtain the product disclosure statement relating to any financial product referred to and consider the statement before making any decision about whether to acquire the financial product. This article, including the information contained herein, may only be copied, reproduced, republished, or posted if done so in whole with original disclaimer included. © Arnhem Investment Management, 2016