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Innovation, visibility and survival
November 2012
by Ilene Schneider  |  Email the author


MOUNTAIN VIEW, Calif.—Financial analysts are clear on the reasoning for Complete Genomics Inc., a company engaged in whole-human genomic sequencing, to recently sign a merger agreement with BGI-Shenzhen, an international genomics company based in China.
What's less apparent to observers is BGI's reasoning. Neither company is talking to the media, but various other people knowledgeable about the industry have commented on the merger, in which a wholly owned U.S. subsidiary of BGI will launch a tender offer to purchase all outstanding shares of common stock of Complete for $3.15 per share in cash, without interest. This price represents approximately a 54-percent premium to the $2.04 closing price per share of Complete common stock on June 4, just before Complete said it was evaluating strategic alternatives to secure the financial resources needed for continued commercialization of its technology.

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

What do the companies expect to accomplish together? According to the press release issued in September, BGI CEO Dr. Wang Jun said, "Complete has developed a proprietary, whole-human genome-sequencing technology that, together with other sequencing platforms used by BGI, will fit well with our research and business requirements and position Complete to become an even more successful global innovator. We look forward to growing the business to improve medical research and, when clinical services are provided, support better disease diagnosis with tools that can be used by doctors and hospitals to treat their patients."

Dr. Clifford Reid, chairman and CEO of Complete, added, "The combination of the companies' resources provides an opportunity to accelerate our vision of providing researchers and physicians with the genomic information needed to prevent, diagnose and treat cancers and other genetic diseases."

According to Daniel S. Levine in the Burrill Report, Complete provides whole-human genome sequencing that is used by research centers to conduct medical research. The company plans to focus on clinical applications for its whole-genome scanning. BGI operates international genome sequencing centers around the world to support researchers. The companies claimed that the combination brings together complementary scientific and technological expertise and R&D capabilities.

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

"Complete Genomics had built a large-capacity operation, but could not fill it with orders," explains Keith Robison, who has worked with various financial companies. "Mostly, this seems to be due to fierce competition with Illumina, who had set up its Illumina Genome Network to similarly sequence human genomes. Another real threat to CG is Illumina's HiSeq 2500 instrument, which can turn around a human genome in less than two days. There is a lot of excitement around rapid sequencing, since in medical cases, that has the most opportunity to make a difference, and in cancer, clearly you need to make a call very quickly."

Art Wuster, a postdoctoral fellow at the Sanger Institute in Cambridge, England, and former management consultant, speculates, "The reason why Complete Genomics has chosen this path is probably that its technology benefits from economies of scale, which would not be applicable otherwise." He adds that Complete Genomics' technology is well regarded.

Robison believes BGI wanted to reduce or eliminate its dependence on Illumina, explaining, "most BGI sequencing is on Illumina, and right now Illumina & CG are the most price- effective technologies for sequencing human genomes." He also thinks that BGI wanted the CLIA lab that Complete built and its Long Fragment Read technology.
Wuster says BGI's access to Complete's technology will enable BGI to offer additional value to its current customers. In addition, he believes that access to Complete's customer list will help BGI to expand its visibility in the U.S. market, where BGI is not currently well known.

Court rules in favor of Complete Genomics in Illumina patent case

SAN FRANCISCO—In early October, the U.S. District Court for the Northern District of California issued an order granting Complete Genomics' motion for partial summary judgment of invalidity in the patent infringement lawsuit filed by Illumina Inc.
Illumina's lawsuit, filed in August 2010, alleged that Complete Genomics infringed patents related to DNA sequencing by parallel oligonucleotide extensions, the use of arrayed biomolecules in sequencing and methods and compositions for ordering restriction fragments.

Magistrate Judge Elizabeth LaPorte found these claims were not novel over the prior art. The summary judgment ruling did not address a number of additional patent claims being asserted by Illumina against Complete Genomics that were not the subject of the validity motion.

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

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

Code: E111217



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