the only thing that would drive a higher stock price would be when the company proved its value and thereby showed big revenue gains. That executive has since left the company and, far from being able to build a sustainable business around this model, CGI first had to downsize and then had to be sold. And the buyer, in what must seem to insiders like a bitter irony, is a former competitor, the U.S. subsidiary of Shenzhen, China-based BGI.
BGI is not just any competitor. In fact, BGI had arguably represented the biggest obstacle standing in the way of Complete’s success. As CGI tried to increase its market share by cutting prices, BGI responded by cutting them still further. BGI, using sequencers from Illumina, had a lower cost of capital due to the patience and strategic orientation of its investors. Like Amazon.com, the company and its investors focused not so much on quarterly earnings statements, but rather on BGI’s market share. They chose to operate BGI at what must have been a loss for several years and succeeded at driving CGI to the auction block. (BGI was founded in 1999, and in 2010 it received $1.5 billion in funding from the China Development Bank to expand its operations, according to Isaac Ro of Goldman Sachs.) BGI apparently succeeded in a big way. In January, 2011, Nature estimated that of the 30,000 human genomes that would be sequenced that year, BGI would be responsible for 10,000 to 20,000 of them. The lower prices were good for customers but bad for competitors (bye, bye, CGI).
A transition waiting to happen
So if BGI emerged triumphant from the bruising price war, why did it buy its former rival? Several reasons, all of them interesting. Like every other player in the commercial world of genomic sequencing and analysis, BGI is on a journey from research to clinical applications. BGI hopes that the market finally (finally) expands once sequencing becomes a routine clinical activity ordered by physicians and reimbursed by insurance companies. In other words, like CGI was, BGI is eagerly preparing for sequencing to become part of routine disease diagnosis and determination of therapy.
The transition to clinical adoption of sequencing has been “just about to happen” for the last five or six years. If and when it does (and I am still betting that it will), BGI needed to be prepared. It was facing several obstacles, all of which can be overcome or at least reduced with the pickup of CGI:
Reduce or eliminate dependence on Illumina: Illumina is increasing and speeding up its service offerings. BGI had become dependent on sequencers from Illumina, the market leader in sequencer sales with over 60 percent share, which had provided most of its 100-plus machines. (According to a research note published by Wall Street analyst Peter Lawson of Mizuho on Monday, Sep. 24, Illumina’s market share has actually reached 66 percent.) Now that Illumina is moving into sequencing-as-a-service in a much bigger way, it will be more of a competitor to BGI. Thus, owning CGI and its proprietary sequencing technology (and different reagent suppliers) will give BGI an advantage.
Improve turnaround time: Shipping samples across the Pacific was not an efficient way for BGI to deliver data to customers in the U.S. market. Research institutes might have put up with it but clinicians will not. By buying Complete Genomics and its California-based sequencing “factory,” BGI is moving closer to its customers.
Add customers and capacity: BGI picks up not just CGI’s customers (like the Mayo Clinic) but also its 25 or so sequencers. Isaac Ro of Goldman Sachs last week told GenomeWeb that the deal accelerates BGI’s expansion into the U.S. and gives it “an immediate infrastructure and service offering that will complement the facilities in China.” Former CGI developer Zhanzhi Hu told me
