The sad endgame in the acquisition of Complete Genomics (NASDAQ: [[ticker: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: [[ticker: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
