Genomes-R-Us: Is BGI now Complete?

9/25/12

The sad endgame in the acquisition of Complete Genomics (NASDAQ: GNOM) came last week: having failed to create a sustainable business, CGI was put up for sale in June of this year, culminating in a takeover by sequencing powerhouse BGI for $117.6 million in cash plus $30 million in bridge financing.

Behind that headline is a fascinating story: a U.S. company losing despite being right about its market; a Chinese company succeeding by vigorous price competition and then buying its rival; and a glimpse of the future of genomics-driven medicine.

On the surface, the sale of Complete Genomics looks like a case of overreach by the company’s investors and management coupled with poor execution. Complete, founded in 2005, had early on identified a superior business model for the coming era of cheap and frequent sequencing: take the sequencing activity and much of the interpretation out of the hands of hospitals and other healthcare providers and instead provide it on an outsource basis—both the sequence data itself as well as the all-important interpretation. For an apt analogy, think of Google’s core search business: why own a server farm when what you need are the search results?

I strongly remember meeting the late, visionary venture capitalist Alex Barkas of Prospect Ventures at the JP Morgan Healthcare Conference in early 2008 and hearing him forecast a glorious future for Complete Genomics. Even though the market was at that time buzzing about the next high-speed sequencing technology play, Pacific Biosciences (NASDAQ: PACB), Barkas was supremely confident that CGI’s innovative business model would rule the day. That vision, driven by Complete Genomics CEO Cliff Reid as well as by Barkas and other investors, brought in VC and public investment of more than $250 million. The company went public at $9 a share and sold for as much as $17 a share before plummeting into the $2 a share range, where PacBio also now languishes. BGI’s purchase price correlates to $3.15 a share.

There were some momentary triumphs along the way, including technical breakthroughs, such as increasing the accuracy of sequencing. But, as Technology Review put it, “Though a 2011 paper published in Nature Biotechnology found that Complete Genomics produced more accurate DNA data than competitors, superior accuracy never translated into financial success.” CGI scored some small commercial successes along the way, such as landing the Mayo Clinic as a client in February of this year. Along the way, CGI was able to drop the price of a full human genome sequence to $4,200 in 2011, down from $12,000 in 2010.

But CGI’s revenues and, presumably, its margins dropped along with the price and the company never made up the difference on volume. Even worse, the company lagged in processing the genomes it had promised to sequence. The backlog in the end numbered in the hundreds of genomes. And even if CGI had been able to keep up with the influx of genomes it had, the customers did not come in sufficient numbers to create growth. A CGI business development executive told me in February that … Next Page »

Steve Dickman is a former venture capitalist and the CEO of boutique consulting firm CBT Advisors as well as the author of the blog Boston Biotech Watch. Follow @

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  • http://twitter.com/Nanostring Nanostring Founder

    Author:
    “Complete, founded in 2005, had early on identified a superior business model ”

    Could you, please, elaborate what you mean by that? There is nothing new or unique, and certainly nothing superior in the service business model. There had always been service shops in sequencing but none have prospered exceptionally. Perhaps the best early example was Lynx Therapeutics – the mother of all so called “next-gen” platforms, that came from Sydney Brenner’s lab – which went nowhere, among many others.

    This has always been and still is an instrument business. If we look at your article, you say that BGI is doing great, sequencing 10-20K enomes last year. OK great, but at $4K per pop, that’s $40-80M in revenue. Compare that with ILMN, which had close to a $1B in sales and you see that we are talking different orders of magnitude.

    CGI’s story is much simpler, indeed: a CEO who was an industry outsider (came from online video background) and who was (1) talking-up misleading nonsense about millions and gazillions of genomes sequenced,(2) enjoyed the support of the VCs on the Board (particularly his buddy Chad Waite) (3) earned tons of money for himself while the Board was watching and protecting him, while (4) the investing public (incl. pensions funds, etc.) lost tens of million$$.

    Simple story of fleecing the public market, using a crony Board as cover, same story you see everywhere, sadly…

    • Steve Dickman

      I see the future of sequencing not in the boxes (commodifying…) but in the data. IBM would have died as Microsoft rose had IBM’s main business been in PCs. And now look at Compaq/HP and Dell. They ARE dying. The success of Apple, which made itself about software and sales, speaks for itself. ILMN apparently agrees with me, given its recent move into offering sequencing services as well as boxes.

  • http://twitter.com/Nanostring Nanostring Founder

    Author:
    “Complete, founded in 2005, had early on identified a superior business model ”
    Could you, please, elaborate what you mean by that? There is nothing new or unique, and certainly nothing superior in the service business model. There had always been service shops in sequencing but none have prospered exceptionally. Perhaps the best early example was Lynx Therapeutics – the mother of all so called “next-gen” platforms, that came from Sydney Brenner’s lab – which went nowhere, among many others.
    This has always been and still is an instrument business. If we look at your article, you say that BGI is doing great, sequencing 10-20K genomes last year. OK great, but at $4K per pop, that’s $40-80M in revenue. Compare that with ILMN, which had close to a $1B in sales and you see that we are talking different orders of magnitude.
    CGI’s story is much simpler, indeed: a CEO who was an industry outsider (came from online video background) and who was (1) talking-up misleading nonsense about millions and gazillions of genomes sequenced,(2) enjoyed the support of the VCs on the Board (particularly his buddy Chad Waite) (3) earned tons of money for himself while the Board was watching and protecting him, while (4) the investing public (incl. pensions funds, etc.) lost tens of million$$.
    Simple story of fleecing the public market, using a crony Board as cover, same story you see everywhere, sadly…

  • Crooks Inc

    This is just the story of a totally incompetent, borderline fraudulent CEO in Cliff Reid. Why was he put in charge? Why was he LEFT in charge when it was clear he was unable to execute? Those claims of a million genomes — where are they? Any correct decisions made? Nope. Last I read Complete Genomics had a BACKLOG of genomes to sequence, exemplifying absolutely pathetic planning.

    I’m surprised there’s no lawsuit filed…yet.

    • http://twitter.com/Nanostring Nanostring Founder

      Well, you shouldn’t be surprised anymore. Two lawsuits filed yesterday:
      http://www.genomeweb.com/sequencing/shareholder-lawsuits-seek-stop-bgis-buy-complete-genomics

      I should say that Drmanac is a sequencing legend, and the technology was most likely very good. This is just truly horrible job done on shareholders (again, including pension funds, VC’s own LPs, etc.) by a crony Board/CEO…

      From one of the lawsuits:”certain of the Company’s named executive officers and board members
      will receive significant compensation in the form of severance payments
      and accelerated vesting of stock options and restricted stock – benefits
      that are not otherwise available to” shareholders” … and that’s after years of sucking down fat salaries and bonuses. I think Reid’s 2010 compensation was $1.8Mln and they never disclosed 2011…

      Like I said, your regular fleecing of the public investor by a crony Board and CEO.

    • Kenneth Rubenstein

      Reid is fine. The problem is part of a typically premature Silicon Valley VC mini-feeding frenzy. Occasionally they strike oil. More usually, they come up dry. Someday, whole genome sequencing may prove its value, but that’s a long ways off. Sequencing instrumentation is very valuable for basic research, but that’s about it for now.

  • Kenneth Rubenstein

    When it comes to genomics, personalized medicine, and sequencing, efforts at translation of basic research are laughingly premature. Only a decade ago, our view of genes, the genome, and its relation to biology and medicine were hopelessly naive. Today we’ve uncovered a vast abyss full of unknowns that will likely take decades to unravel via basic research. Furthermore, DNA is only one piece of a much larger systems biology puzzle. It’s really ridiculously early days for any sustainable personal genome effort.