Recently, MGI (688114. SH) released its 2024 annual performance report, which shows that the company's annual operating income was 3.21 billion yuan, a year-on-year increase of 10.28%; The net profit loss attributable to the owners of the parent company was 599 million yuan, which is still in the red after 2023.

As a leading enterprise in domestic gene sequencers, MGI is facing what challenges and opportunities are it facing in the development process? And how will it break the situation and achieve profitable growth?

Source: MGI's 2024 Annual Results Report

The revenue of the laboratory automation business fell by more than 80%, and the sales expenses increased by 12.78% year-on-year

Since its listing, MGI's performance has fluctuated greatly. During the epidemic, with the laboratory automation business, the company ushered in an explosion of performance. In 2020 and 2021, the revenue of laboratory automation business will reach 2.062 billion yuan and 2.193 billion yuan respectively, accounting for 74.17% and 55.81% of the current revenue.

With the end of the pandemic, there has been a huge shift in market demand. In the first half of 2023, the company's revenue will only be 1.443 billion yuan, a year-on-year decrease of 38.86%, and the non-net profit will be a loss of 136 million yuan. The 2023 annual report shows that the demand for laboratory automation products has shrunk sharply, with the revenue of this business being 218 million yuan, a year-on-year decrease of 82.53%, and the gross profit margin decreasing by 13.9 percentage points, accounting for 7.5% of the company's total revenue.

Entering 2024, although the company is actively adjusting, from the financial report, the net profit attributable to the parent company is still a loss of 599 million yuan, although the loss has narrowed, but the continuous loss state is extremely unfavorable to the development of the enterprise, if it cannot achieve large-scale profitability in the short term, it will limit its market expansion and technology iteration speed.

In terms of the reasons for the performance loss, R&D investment and selling expenses are the two key factors affecting profits.

MGI's core competitive advantage lies in its complete industrial chain layout and deep understanding of the local market. The company has self-developed sequencing technology and equipment, which can provide one-stop solutions from sequencers, reagent consumables to bioinformatics analysis. In order to further consolidate and enhance its competitiveness, MGI will continue to increase R&D investment. In the first three quarters of 2024, its R&D expenses will be as high as 554 million yuan, accounting for 29.64% of operating income.

In terms of sales expenses, with the intensification of market competition, MGI has increased its marketing efforts in order to expand its market share. Investments in various areas, from the expansion of sales staff, the holding of marketing activities to advertising, have increased. Although this series of measures has enhanced brand awareness and market influence to a certain extent, it has also inevitably caused sales expenses to climb and further compressed profit margins. According to the data, the company's sales expenses in the first three quarters of 2024 will be 632 million yuan, a year-on-year increase of 12.78%.

Competition in the industry intensifies, and Illumina has more than 80% of the market share

From the perspective of the industry, as a high-end equipment in the field of life sciences, the core technology of gene sequencer involves biochemistry, optics, algorithms and other disciplines, and the technical threshold and patent barriers are extremely high.

In the global gene sequencer market, Illumina is still the undisputed hegemon. According to 2019 data, Illumina has a global share of about 81%. Although MGI has performed well in the market share of newly installed capacity in the domestic market, reaching 47.3% in 2023, ranking first for two consecutive years, and has become one of the few companies in the world that can independently develop and mass-produce clinical high-throughput gene sequencers, there is still a gap compared with Illumina.

China's gene sequencing equipment market competition pattern (calculated by the number of new units sold in the year).

2021~2023

Although the Ministry of Commerce recently added Illumina to the list of unreliable entities and banned it from exporting gene sequencers to China, it has brought market opportunities to MGI. However, if there is a policy shift or international relations ease in the future, international companies such as Illumina may return to the Chinese market through technology licensing and joint ventures, which will weaken MGI's competitive advantage in the domestic market.

Not only that, Illumina has a long history of suppressing competitors through patent litigation and other means. Since 2019, MGI has initiated a number of patent infringement lawsuits against MGI in 20 countries and regions, involving sequencing technology, trademarks and other fields, in an attempt to curb MGI's overseas expansion. Even though MGI has won some patent battles, such as US$334 million in compensation in 2022, the long-term patent disputes have consumed a lot of time, energy, and money, which has greatly disrupted the company's overseas expansion plans.

In addition to Illumina, other international players such as ThermoFishe may compete by differentiating their technology routes. At present, there are three main technical routes for gene sequencing. First-generation sequencing technology, characterized by high precision, low throughput, and high cost. However, first-generation sequencing technology cannot meet the growing sequencing demand in terms of throughput, cost, and sequencing speed.

The second-generation sequencing technology is currently the most widely used sequencing technology, which combines high throughput and low cost. The main feature of next-generation sequencing is sequencing while synthesizing, which has the characteristics of high throughput, low cost, and fast speed, and the disadvantage is that the read length is short. In the next-generation sequencing market, Illumina's HisSeq platform accounts for 70%+ of the market share, followed by Thermo Fisher Scientific and MGI. As for the third-generation sequencing technology, the read length is longer, but the sequencing accuracy needs to be improved.

Different technical routes have their own advantages in terms of sequencing throughput, cost, read length, etc., and users may choose products with different technical routes according to their own needs. If MGI fails to keep up with the development trend of diversification of technology routes in a timely manner and make breakthroughs in new technology fields, it may be at a disadvantage in market competition, resulting in market share being eroded by competitors.

The threat of new entrants has increased, and more than 70 companies have emerged

According to the data and forecasts of CIC, the global gene sequencer and consumables market size will increase from about US$2.8 billion in 2017 to about US$5 billion in 2023, with a compound annual growth rate of about 10.2%, and is expected to reach about US$20.2 billion in 2032, with a CAGR of about 16.8%.

The size of China's gene sequencer and consumables market will increase from approximately RMB 3.0 billion in 2017 to approximately RMB 4.6 billion in 2023, at a CAGR of approximately 7.5%, and is expected to reach approximately RMB 23.8 billion in 2032, at a CAGR of approximately 20.0%.

As the gene sequencing industry booms, so does the threat of potential new entrants. Although there are high technical barriers in the gene sequencer industry, with the continuous progress of technology and the gradual maturity of the industry, some enterprises with relevant technical background and financial strength have also entered this field.

According to incomplete statistics, there are currently more than 70 gene sequencer R&D and manufacturers with different technical paths, most of which are in the early stage of research and development. From 2022 to 2023, emerging sequencer companies that have launched commercial mass production sequencers include ElementBiosciences, SingularGenomics, Zhenmai Biologics, and Sail Biotech, most of which have launched medium-throughput sequencers with a daily output of gigabytes of data to meet the scientific research needs of small and medium-sized laboratories, as well as the growing demand for in-hospital testing. There are also equipment that focuses on high-throughput research and central laboratory delivery, such as the UltimaUG-100.

Although MGI has made certain achievements in technology and market, it still needs to actively respond to the challenges of finance, market competition, technology and policy in order to achieve sustainable development. Companies need to continuously improve their core competitiveness in order to be invincible in a complex and volatile market environment.