Gene sequencing: the new battleground

“We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations.

We are involved in numerous class action lawsuits and other litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, financial condition, or results of operations.”

These were the statements in Facebook’s S1 regulatory filing just before its 2012 initial public offering (IPO), as Yahoo! sued it for infringement of 10 patents covering advertising, privacy controls and social networking. This was a repeat of the strategic attack Yahoo! had made against Google eight years earlier when it was on the eve of going public. Yahoo! had actually inherited that lawsuit when it bought Overture and Google decided to cede the fight, settling quickly for a generous allocation (almost three million shares) of its pre-IPO stock worth $290 million.

The timing of Yahoo!’s attack applied strategic pressure to Facebook’s management and investment banking team – who were forced into a game theory calculation as they tried to figure out the cost of resistance. What was the least expensive option out of settling the lawsuit or entering into a fight that could potentially reduce the IPO's value. Facebook surprised a lot of people when it made a clear statement of intent by pursuing an alternative approach, acquiring almost 1,000 patents from IBM and Philips (and later from Microsoft/AOL) and then countersuing with 10 matching sniper shots against Yahoo!.

A new battleground
A similar story is now being played out in a very different arena. As the United Kingdom's great unicorn hope Oxford Nanopore Technologies (ONT) gears up for a £1 billion London Stock Exchange IPO, it has found itself sued by US rival Illumina, the dominant force in gene sequencing (with a market share of over 60%) and the operator of a very different technology. However, in the past couple of years Illumina has become the licensee of some patents that it claims are being infringed by ONT’s nanopore technology.

ONT’s technology sieves DNA molecules through a filter with pores that are so small that only a single nucleotide (A,C,T or G) can squeeze through. As it passes, it creates an electrical signal in the pore that is unique to the nucleotide and allows the letter to be decoded. 

Illumina’s technology (ironically developed in the United Kingdom, at Cambridge University) was acquired when it bought Solexa in 2007. The so-called 'sequencing-by-synthesis' approach creates DNA libraries of partially synthesised strands of DNA, each different by only one nucleotide. The library of fragments is then amplified and read by a sophisticated imaging analysis that captures the one letter difference between each strand in the sequence.

A battle worth winning
Given the exponential growth in the genomics industry that is driving the global health system towards personalised medicine, this is a battle worth winning. It is therefore as much about who owns the future of gene sequencing as it is about a patent for an obscure bacterial protein (mycobacterium smegmatis porin A (MspA)) that may or may not underpin ONT’s trade secret methodology.

Because of this extraordinary economic opportunity, battles have erupted over gene editing technology (for further details please see "CRISPR: creation, commercialisation and conflict"), and of course the biological world’s version of Alice over the ability to patent a gene itself. 

It is all about business
To many readers, these legal machinations may seem rather obscure, but make no mistake: this is highly strategic and all about business.

Yahoo!’s attacks against Google and Facebook were not opportunistic trolling, but rather a board-approved deliberate rearguard action as it lost first its search function and then its function as a primary portal for users to its rivals. Yahoo! found itself unable to adapt to the market shift away from its core business model and became stranded.  

As a result of its inability to adapt, despite a user base of 210 million, it has now been relegated to a third-tier provider as users have migrated to smartphones and social networks, and away from Yahoo! pages as their homepages. The acquisition-led fight back ever since has, at best, saved some shareholder value by creating a technology holding company (an Ali Baba tracking stock), but even the Tumblr acquisition has failed to move the needle.

Illumina’s attack on ONT is a similar deliberate response to a genuine threat to its existence. Like Yahoo! in 2000 it had a dominant market position, but the platform and usage model for DNA sequencing is changing. Portable, low-cost sequencing machines present a real threat to the large, super-accurate models with which Illumina dominates the market. It feels like mainframes versus laptops all over again, and even has echoes of Intel versus Arm. As Andy Grove himself would observe, we are at an inflection point in the genomics industry and “you have to be paranoid to survive”.

Comment
Facebook and Yahoo! eventually agreed to cross-license all of their patent holdings for zero net cash. This deal seemed one-sided given that Yahoo!’s portfolio was roughly 20 times the size of Facebook’s when the lawsuit was originally filed. However, by spending up to $1 billion on patent acquisitions rather than paying royalties of any amount, Facebook created a long-term strategic win for itself and gave Yahoo! the face-saving measure of expanding a pre-existing partnership, driving deeper integration of Facebook’s tools into Yahoo!’s content pages. 

How the Illumina/ONT face-off will work out remains to be seen, but it is clear that what is at stake here is the future of both companies. Given the prior history of collaboration between the firms, this can be read like a lovers' tiff, but that is misreading the situation. This is life or death, and the primary skirmish in a major war for ownership of the industry for this century.