The first mover’s advantage is a widespread concept in business. The idea is that a company can gain a competitive advantage by being the first to enter into an untapped market; by being first, a company can create “sticky” products to quickly gain market share and maintain dominance, benefiting from a network effect. However, there are risks to being first, such as the threat of copycats that improve on the initial concept and the possibility of rushing a product to market without being fully aligned with customer interests. Having said that, conventional wisdom posits that being a first mover confers an advantage; but this isn’t always the case. In some life-science research tool markets, such as NGS and single cell technologies, there seem to be some select cases where the follower has the advantage.One possible explanation as to why we see a “follower’s advantage” is due to the way biotechnology companies are valued. Biotech differs from the tech sector in many ways, but three factors seem to be critical. First, a large amount of initial cash is required to start an innovative biotech company. Whether it’s developing a new therapeutic or a novel type of life science tool, biotech companies require a large R&D budget. Many tech startups raise massive amounts of funding, but this cash is used to either acquire customers or develop products; in biotech, it’s used to carry out the requisite basic research. Second, the length of product development and lack of value in the event of a failed product is significantly delayed in the biotech space. For example, a failed tech app can be refitted or marketed to a different audience, but a failed biotech product likely kills the idea and potentially the company itself. Third, biotech companies often market technologies and applications, as opposed to the company itself; for example, focusing on the applications of single cell analyses as opposed to marketing Fluidigm the company. As a result of these differences, biotech companies are valued differently from tech companies. When evaluating biotech companies, the lack of active cash flows and stark differences in product and market outcomes change the process of valuation from the classical discounted cash flow approach to models more reliant on scenarios, and ultimately valued against competitors.Investors are attracted to novel companies due to their potential future returns but remain wary of risks. First movers in the research tools space have the burden of educating both customers and investors about their novel product; that’s especially true for enabling technologies that open up new spaces. As a result, followers can commit less time and resources (i.e., money) to engaging with their consumer and investor bases. Furthermore, followers that enter an established market have lower levels of risk than a first mover entering an unknown market. As a result, followers have more resources available at an early stage than a first mover; resources that a follower can use to develop products or engage in M&A.
However, in most cases in biotech (specifically novel drugs), the first mover will get to launch their product and enjoy advantages in product uptake and sales; these advantages far outweighs the advantages followers receive. This tends to be the case in many spaces in the life science industry, but this becomes complicated in some novel areas in life science research tools where methods of analyses are still evolving. A follower in these spaces has the opportunity to incorporate newer advancements into products and better align with consumer needs. In the early stages of a tools market, it’s nearly impossible to predict scientific advancements or future consumer needs; in other words, specific applications that gain traction when a market expansion is underway can be hard to forecast. A following entrant has the capacity to disrupt markets by quickly pairing recent technological advancements with an unmet customer need to take market share away from an established player. These advantages, coupled with higher levels of funding, can create situations where a “follower’s advantage” plays out in the research tools space. In this post, we explore two real life examples of this: 454 Life Sciences vs Solexa (Illumina) in the NGS market and Fluidigm versus 10x Genomics in the single cell analysis market.
Case 1: NGS Market - 454 Life Sciences vs Solexa
In 2005, 454 Life Sciences, a spinoff of Curagen, commercially produced the first ever next generation DNA sequencer (the GS20). The GS20 had roughly ten times the level of throughput than other modes of sequencing at the time and was also scalable, granted with a more complex workflow involving emulsion PCR. As a result, 454’s GS20 both built and commanded the next generation sequencing (NGS) market as the only viable option for large scale research applications. This market leadership only lasted until late 2006, when Solexa launched the Genome Analyzer using sequencing by synthesis technology.Solexa’s instrument had roughly three times the throughput of GS20 and considerably better accuracy. As a result, consumers rapidly switched to Solexa’s sequencer, and 454 Life Sciences, the pioneer of NGS, was left in the dust. Illumina would go on to acquire Solexa in late 2006 for a whopping $600 million1, which turned Illumina into the giant it is today. Incidentally, this acquisition was arguably one of the most lucrative in the research tools space, given Illumina’s current ~$50B valuation. It’s been impressive to see how well the sequencing by synthesis (SBS) chemistry has scaled. 454 Life Sciences was acquired by Roche in 2007 for $155 million2; Roche subsequently discontinued operations in 2013 and stopped supporting the instrument in 2016.At first glance this may seem like superior technology outcompeting an inferior product, and this is the primary reason why consumers switched. However, the circumstances that led to Solexa creating their instrument had a lot to do with the levels of capital they were able to raise before product launch. This was capital that was only really available once investors realized the potential of NGS, largely due to 454’s ostensible success. Solexa used this cash to develop R&D internally, but they had also made two crucial moves (acquisition of technology from Manteia and a reverse merger with Lynx Therapeutics) to inorganically speed up the development process and eventually create a product that was aligned with customer needs. To Illumina’s credit, the company also recognized the importance of accelerating the launch of their sequencers to secure some accounts.
Case 2: Single Cell Analysis Market - Fluidigm vs 10x Genomics
Fluidigm was founded in 1999 as a leading company in microfluidics. Fluidigm leveraged their capabilities to better analyze single cells. At a time when single cell analysis was still nascent, Fluidigm had created an assay that could analyze ~100 individual cells with a readout primarily via qPCR. In this respect, they were pioneers in the field, and Fluidigm almost single handedly built the case for the importance of single cell genomics. “What would you not want to analyze at the single cell level?” (be on the lookout for our single cell report coming soon!) In the late 2000’s, the single cell genomics field had picked up speed as people began to see the value in the single cell approach, driven by Fluidigm’s education of the market.
Consequently, consumers demanded higher throughput systems (i.e., more cells) and more unbiased approaches for downstream expression analysis (e.g., next generation sequencing). Around the same time, a newer technology based on gel beads had been developed. In 2012, 10x Genomics was founded and, in 2016, had commercialized a single cell platform based on this gel bead technology with a throughput of 80,000+ cells and downstream compatibility with sequencing. This would enable researchers to characterize thousands of cells in an unprecedented manner. A number of other platforms with similar high throughput capabilities launched thereafter (ie. Bio-Rad and Illumina’s ddSEQ). As a result of new entrants, but primarily 10x, Fluidigm saw its single-cell genomics business shrink significantly and have since gone on to deprioritize this aspect of their business (see figures 4 & 5). Today, 10x Genomics users can analyze millions of single cells.
Fluidigm had an 11-year head start but had spent most of that time educating consumers on single-cell analysis and convincing skeptical investors of this opportunity. When 10x Genomics had come on the scene with novel technology that met a clear need in the market, the educated consumer base quickly switched products. As a result, 10x Genomics had easier access to capital, had the opportunity to invest heavily in R&D, and made value-add acquisitions in the space to create an even better product. The only option Fluidigm had was to quickly develop a high throughput technology, which would require a large amount of capital that Fluidigm would likely never receive given the age of the company.
Though a first mover’s advantage is a common concept in business, in specific circumstances in life science research tool markets, there are times when followers experience an advantage. In essence, this is due to de-risking and reduced development timelines which drastically increase valuations for followers. This higher upfront valuation increases the cash followers have on hand. This cash can be used to develop technologies that better address consumer needs or further improve upon product design, either organically or through acquisitions. Furthermore, the follower often enters a primed market with sophisticated consumers and enthusiastic investors, removing the need to spend as much time educating the market about novel technologies. In these scenarios, an agile, cash-rich follower has a good chance of overtaking a first mover. We see real life examples of this in the NGS market between 454 Life Sciences and Solexa (acquired by Illumina) and in the single-cell market between Fluidigm and 10x Genomics. Though the first mover advantage does hold true in many cases, certain aspects unique to life science research tools create environments where followers have a better competitive position than first movers.Interested in other insights into life science research tool markets? Check out our Select 2019 Trends and Discussions and our Spatial Omics Year in Review blogs.References:
Hari is an analyst at DeciBio with a background in biochemistry and asset management. At DeciBio, Hari’s project experiences include life science market research, clinical diagnostics market research, and commercial due diligences. Connect with him on LinkedIn or email him at firstname.lastname@example.org.Disclaimer: Companies listed above may be DeciBio clients and/or customers