On DNA and Transistors

Here is a short post to clarify some important differences between the economics of markets for DNA and for transistors. I keep getting asked related questions, so I decided to elaborate here.

But first, new cost curves for reading and writing DNA. The occasion is some new data gleaned from a somewhat out of the way source, the Genscript IPO Prospectus. It turns out that, while preparing their IPO docs, Genscript hired Frost & Sullivan to do market survey across much of life sciences. The Prospectus then puts Genscript's revenues in the context of the global market for synthetic DNA, which together provide some nice anchors for discussing how things are changing (or not).

So, with no further ado, Frost & Sullivan found that the 2014 global market for oligos was $241 million, and the global market for genes was $137 million. (Note that I tweeted out larger estimates a few weeks ago when I had not yet read the whole document.) Genscript reports that they received $35 million in 2014 for gene synthesis, for 25.6% of the market, which they claim puts them in the pole position globally. Genscript further reports that the price for genes in 2014 was $.34 per base pair. This sounds much too high to me, so it must be based on duplex synthesis, which would bring the linear per base cost down to $.17 per base, which sounds much more reasonable to me because it is more consistent with what I hear on the street. (It may be that Gen9 is shipping genes at $.07 per base, but I don't know anyone outside of academia who is paying that low a rate.) If you combine the price per base and the size of the market, you get about 1 billion bases worth of genes shipped in 2014 (so a million genes, give or take). This is consistent with Ginkgo's assertions saying that their 100 million base deal with Twist was the equivalent of 10% of the global gene market in 2015. For oligos, if you combine Genscript's reported average price per base, $.05, with the market size you get about 4.8 billion bases worth of oligos shipped in 2014. Frost & Sullivan thinks that from 2015 to 2019 the oligo market CAGR will be 6.6% and the gene synthesis market will come in at 14.7%.

For the sequencing, I have capitulated and put the NextSeq $1000 human genome price point on the plot. This instrument is optimized to sequence human DNA, and I can testify personally that sequencing arbitrary DNA is more expensive because you have to work up your own processes and software. But I am tired of arguing with people. So use the plot with those caveats in mind.

What is most remarkable about these numbers is how small they are. The way I usually gather data for these curves is to chat with people in the industry, mine publications, and spot check price lists. All that led me to estimate that the gene synthesis market was about $350 million (and has been for years) and the oligo market was in the neighborhood of $700 million (and has been for years).

If the gene synthesis market is really only $137 million, with four or 5 companies vying for market share, then that is quite an eye opener. Even if that is off by a factor of two or three, getting closer to my estimate of $350 million, that just isn't a very big market to play in. A ~15% CAGR is nothing to sneeze at, usually, and that is a doubling rate of about 5 years. But the price of genes is now falling by 15% every 3-4 years (or only about 5% annually). So, for the overall dollar size of the market to grow at 15%, the number of genes shipped every year has to grow at close to 20% annually. That's about 200 million additional bases (or ~200,000 more genes) ordered in 2016 compared to 2015. That seems quite large to me. How many users can you think of who are ramping up their ability to design or use synthetic genes by 20% a year? Obviously Ginkgo, for one. As it happens, I do know of a small number of other such users, but added together they do not come close to constituting that 20% overall increase. All this suggests to me that the dollar value of the gene synthesis market will be hard pressed to keep up with Frost & Sullivan estimate of 14.7% CAGR, at least in the near term. As usual, I will be happy to be wrong about this, and happy to celebrate faster growth in the industry. But bring me data.

People in the industry keep insisting that once the price of genes falls far enough, the ~$3 billion market for cloning will open up to synthetic DNA. I have been hearing that story for a decade. And then price isn't the only factor. To play in the cloning market, synthesis companies would actually have to be able to deliver genes and plasmids faster than cloning. Given that I'm hearing delivery times for synthetic genes are running at weeks, to months, to "we're working on it", I don't see people switching en mass to synthetic genes until the performance improves. If it costs more to have your staff waiting for genes to show up by FedEx than to have them bash the DNA by hand, they aren't going to order synthetic DNA.

And then what happens if the price of genes starts falling rapidly again? Or, forget rapidly, what about modestly? What if a new technology comes in and outcompetes standard phosphoramidite chemistry? The demand for synthetic DNA could accelerate and the total market size still might be stagnant, or even fall. It doesn't take much to turn this into a race to the bottom. For these and other reasons, I just don't see the gene synthesis market growing very quickly over the next 5 or so years.

Which brings me to transistors. The market for DNA is very unlike the market for transistors, because the role of DNA in product development and manufacturing is very unlike the role of transistors. Analogies aretremendously useful in thinking about the future of technologies, but only to a point; the unwary may miss differences that are just as important as the similarities.

For example, the computer in your pocket fits there because it contains orders of magnitude more transistors than a desktop machine did fifteen years ago. Next year, you will want even more transistors in your pocket, or on your wrist, which will give you access to even greater computational power in the cloud. Those transistors are manufactured in facilities now costing billions of dollars apiece, a trend driven by our evidently insatiable demand for more and more computational power and bandwidth access embedded in every product that we buy. Here is the important bit: the total market value for transistors has grown for decades precisely because the total number of transistors shipped has climbed even faster than the cost per transistor has fallen.

In contrast, biological manufacturing requires only one copy of the correct DNA sequence to produce billions in value. That DNA may code for just one protein used as a pharmaceutical, or it may code for an entire enzymatic pathway that can produce any molecule now derived from a barrel of petroleum. Prototyping that pathway will require many experiments, and therefore many different versions of genes and genetic pathways. Yet once the final sequence is identified and embedded within a production organism, that sequence will be copied as the organism grows and reproduces, terminating the need for synthetic DNA in manufacturing any given product. The industrial scaling of gene synthesis is completely different than that of semiconductors.