Innovation, visibility and survival

MOUNTAIN VIEW, Calif.—Financialanalysts are clear on the reasoning for Complete Genomics Inc., acompany engaged in whole-human genomic sequencing, to recently sign amerger agreement with BGI-Shenzhen, an international genomics companybased in China.

 

What's less apparent to observers isBGI's reasoning. Neither company is talking to the media, butvarious other people knowledgeable about the industry have commentedon the merger, in which a wholly owned U.S. subsidiary of BGI willlaunch a tender offer to purchase all outstanding shares of commonstock of Complete for $3.15 per share in cash, without interest. Thisprice represents approximately a 54-percent premium to the $2.04closing price per share of Complete common stock on June 4, justbefore Complete said it was evaluating strategic alternatives tosecure the financial resources needed for continued commercializationof its technology.

While some shareholders feel that $3.15per share is not enough, most analysts seem to disagree with that.Overall, analysts seem to support the merger, because it allows forcontinued innovation in genome sequencing, enables the technology ofa struggling company to survive and creates more sequencing optionsworldwide.

What do the companies expect toaccomplish together? According to the press release issued inSeptember, BGI CEO Dr. Wang Jun said, "Complete has developed aproprietary, whole-human genome-sequencing technology that, togetherwith other sequencing platforms used by BGI, will fit well with ourresearch and business requirements and position Complete to become aneven more successful global innovator. We look forward to growingthe business to improve medical research and, when clinical servicesare provided, support better disease diagnosis with tools that can beused by doctors and hospitals to treat their patients."

Dr. Clifford Reid, chairman and CEO ofComplete, added, "The combination of the companies' resourcesprovides an opportunity to accelerate our vision of providingresearchers and physicians with the genomic information needed toprevent, diagnose and treat cancers and other genetic diseases."

According to Daniel S. Levine in theBurrill Report, Complete provides whole-human genomesequencing that is used by research centers to conduct medicalresearch. The company plans to focus on clinical applications for itswhole-genome scanning. BGI operates international genome sequencingcenters around the world to support researchers. The companiesclaimed that the combination brings together complementary scientificand technological expertise and R&D capabilities.

Complete Genomics, which has beenworking through a service-based business model, announced arestructuring in June that included the termination of 55 employees,saying it was running out of cash, Levine says. The agreement withBGI will give Complete as much as $30 million in bridge financing forits operations. Complete will continue to operate as a separatecompany with headquarters and operations remaining in Mountain View.The companies expect to complete the transaction in early 2013.

"Complete Genomics had built alarge-capacity operation, but could not fill it with orders,"explains Keith Robison, who has worked with various financialcompanies. "Mostly, this seems to be due to fierce competition withIllumina, who had set up its Illumina Genome Network to similarlysequence human genomes. Another real threat to CG is Illumina'sHiSeq 2500 instrument, which can turn around a human genome in lessthan two days. There is a lot of excitement around rapid sequencing,since in medical cases, that has the most opportunity to make adifference, and in cancer, clearly you need to make a call veryquickly."

Art Wuster, a postdoctoral fellow atthe Sanger Institute in Cambridge, England, and former managementconsultant, speculates, "The reason why Complete Genomics haschosen this path is probably that its technology benefits fromeconomies of scale, which would not be applicable otherwise." Headds that Complete Genomics' technology is well regarded.

Robison believes BGI wanted to reduceor eliminate its dependence on Illumina, explaining, "most BGIsequencing is on Illumina, and right now Illumina & CG are themost price-effective technologies for sequencing human genomes." Healso thinks that BGI wanted the CLIA lab that Complete built and itsLong Fragment Read technology.

 

Wuster says BGI's access toComplete's technology will enable BGI to offer additional value toits current customers. In addition, he believes that access toComplete's customer list will help BGI to expand its visibility inthe U.S. market, where BGI is not currently well known.

SAN FRANCISCO—In early October, theU.S. District Court for the Northern District of California issued anorder granting Complete Genomics' motion for partial summaryjudgment of invalidity in the patent infringement lawsuit filed byIllumina Inc.

 

Illumina's lawsuit, filed in August2010, alleged that Complete Genomics infringed patents related to DNAsequencing by parallel oligonucleotide extensions, the use of arrayedbiomolecules in sequencing and methods and compositions for orderingrestriction fragments.

Magistrate Judge Elizabeth LaPortefound these claims were not novel over the prior art. The summaryjudgment ruling did not address a number of additional patent claimsbeing asserted by Illumina against Complete Genomics that were notthe subject of the validity motion.

Jay Flatley, Illumina's CEO, said ina statement, "We strongly disagree that any of the claims of ourpatent are invalid, and we intend to appeal the court's ruling. Webelieve that this patent covers important and novel inventions thatComplete Genomics has misappropriated."

Illumina said it will continue tovigorously protect its rights under a second patent that Illuminamore recently asserted against Complete Genomics in the U.S. DistrictCourt for the Southern District of California.