Genomes-R-Us: Is BGI now Complete?

Here's a post-Morton on Complete Genomics (GNOM). I'm surprised that BGI didn't go public on the basis of CGOM's public listing. I guess that they don't want the people who put up $1.5B to finance BGI to find out that BGI is worth ony a fraction of that amount.

Genomes-R-Us: Is BGI now Complete?

September 25th 2012 

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 paperpublished 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

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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

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in a phone interview that "If CGI has a healthy factory, it could crank out 1000 genomes a month—a not insignificant number." BGI will need that capacity and more. A reliable industry source told me that the Mayo Clinic deal is expected to require sequencing of 200,000 human genomes over the next five years. Too bad for CGI that they could not hang on long enough to do all that sequencing!

Become a clinical laboratory: This is perhaps the most important reason. CGI applied in July to the U.S. government to attain status as a CLIA lab. The decision, expected to be positive, should come in late 2012 or early 2013. The decision to buy CGI echoes the recent $50 million acquisition of former personal genomics company Navigenics by the second-largest sequencing manufacturer Life Technologies (NASDAQ LIFE). In its acquisition announcement, LifeTech declared that it will shut down the Navigenics consumer business while maintaining its CLIA lab. (Illumina has had a CLIA lab since 2009).

Growing up and being clinical

If sequencing goes clinical, BGI will be able to play sooner and better based on its pickup of CGI. Although BGI already has a U.S. sales presence, it has no way of serving clinical customers in the United States. If the CLIA lab designation comes through, then BGI will be able to sell clinical sequencing right away. One of the immediate drivers of the deal may have been Illumina's predicted hesitancy (according to my industry sources) to sell clinical-rated instruments to BGI rather than research-only instruments once Illumina receives its expected 510(k) clearance from FDA.

There is also a cultural aspect. BGI has built a stellar reputation as a provider of genome sequence data. But it is not a U.S. company. By keeping CGI up and running as a U.S. subsidiary, BGI can—assuming that the deal goes through—sell its services more easily as it competes with U.S. players like Illumina and LifeTech.

The race for improved sequencing hardware will not slow down. But as this acquisition shows, the more interesting battlefield, at least for the healthcare field, is in the interpretation of clinically obtained genomic data. The same week that CGI was acquired, Foundation Medicine secured a $42.5 million financing (funded in part by major clinical diagnostics players Roche and Laboratory Corporation of America) to pursue forward-looking genomic medicine in oncology; and the University of Texas M.D. Anderson Cancer Center announced an up to $3 billion "Moon Shots" initiative to significantly improve cancer care outcomes, in part by paying closer attention to genomic data.

Clinical sequencing is coming, first in diagnosing especially pediatric diseases of unknown origin and in oncology, then later in gastrointestinal disease (gut microbes…), and perhaps even, much later, in population screening. It just (barely) did not arrive in time to make a success of Complete Genomics. I suspect that BGI and its patient investors will have a better chance.

Original Page: http://xconomy.com/boston/2012/09/25/genomes-r-us-is-bgi-now-complete/

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Posted 2 days ago by synbio

Amazon.com & genomics

Amazon.com? Isn't this a biotech blog?

In the last month I've commented on mainstream players like GE and Google getting involved in making our molecular future a reality. (Hint: it's a good thing.) Continuing this theme is the news that Amazon is hosting the 200TB of data for the (misnamed) 1000 Genome Project (really 2,500 genomes.)

(Best news coverage here.)

One of Amazon's side businesses (besides selling books, music, etc.) is selling computing power on demand. By publicly hosting the datasets from thousands of genomes, Amazon is making available immensely powerful computing resources to anyone with a laptop and a credit card who wants to do some genomic data mining.

(AMZN isn't being entirely altruistic (@ <$100/TB storage costs, Amazon is only committing $20k in assets) - their hope is that researchers will use their on demand computing capacity, but the bill for any particular research project is likely to be <$1000 (depending on computing intensity. The press release makes mention of a big pharma project using supercomputer-like power for ~$1,300/hr.)

What's exciting to me - besides the message that another mainstream business like AMZN, GE, or GOOG recognizes the molecular future - is that Amazon is substantially reducing the capital required to conduct bioinformatics R&D. Instead of building expensive computing clusters and hiring an IT staff just to keep the system "up," you can now conduct informatics research with virtually zero start-up costs. It may cost you more to incorporate your start-up than to do your first project.

Amazon will impact more than genomic analysis - their on-demand computing will be very helpful for many other computational-intensive areas of life sciences, like rational drug design.

You can learn more about Amazon's efforts in life sciences here.

(btw: I hope no US Federal government employees hurt themselves falling all over Amazon's announcement trying to gain credit. The sub-headline to the press release states "Project is exemplar of new White House Big Data Initiative," and the Scientific American article pointedly states "The deal is a part of a new initiative from the Obama administration that will invest $200 million…." (in genomic R&D), The NIH press release credits "at least" six different federal agencies for working together to make this happen. Does it really take 6 agencies and the executive branch to convince Amazon to invest ~$20,000 to make a whole lot more money? The cost of press coverage (including press contacts at BOTH NHGRI and NCBI) on the part of AMZN & the NIH represented almost as much of an investment as the storage capacity.)

PATENT MELTDOWN! OMG!

In two cases over the last week, the US Supreme Court substantially clarified the IPR related to genes. (Good summaries here (NYT). The outcomes in both cases were decidedly anti-gene patent holders, and the biotech world is FREAKING OUT! 

The fear is that the court has greatly reduced the incentive to develop gene-based medical advances, since neither the gene-focused test or the gene-related intelligence (diagnosis or prognosis) can now be patented.

I'm 100% in disagreement with this point of view - I think the court rulings are spot on, an overdue realization of reason, and great news.

The practical impact of these decisions is that:

1) the developer(s) of therapeutics will have to take on more of the burden of gene-focused testing/diagnosis/prognosis. It will be in the best interest of any pharma to promote gene tests to include or exclude particular patients.

2) developing and rolling out personalized medicine just became a LOT easier. Imagine if a tech platform could generate heaps of patient-specific, gene-specific actionable data. (This could be a sequencing platform, a gene expression platform, or even a multiplexed PCR approach.) No longer will the platform company (or its' customers) have to cross-license heaps of gene-specific IP holders just to get their assay to market.

3) The expected value of passively held gene-IP has dropped to zero. (Sorry, patent trolls.) If you were holding Incyte or HGSI stock just for the residual value of their gene IP generated a decade ago, you were just zeroed out.



Ultimately, there are two takeaways:

1) in business, it doesn't really matter what formal granted IP you have, it matters what you do with what you know, and how you use it to meet a customer need. (I've said often (but not on this blog) that IPR is massively overrated in the biotech world.)

2)  the court established that genetic medical knowledge is no different than say temperature sensitive medical knowledge. (In the Prometheus decision, Prometheus wanted to patent the knowledge that presence or absence of a metabolyte would guide more or less application of a drug. Likewise, a patient with a temperature of say 96 degrees requires a different medical response than one with a temp of 102 degrees.) Somehow, medicine has advanced this far without being able to patent temperature diagnoses.



(Incidentally, I'm not one to regularly contribute to the ACLU, but being in agreement with their stance on gene patenting, I have contributed in a small way since 2008.)

$1,000 genome a BAD idea?

So postulates Ezra Klein, policy wonk extraordinaire, in the Washington Post.

Klein worries that cheap sequencing could harm the health insurance industry:

"Those with a clean genomic result might go for a cheap catastrophic plan, while those with a high risk of developing pricey illnesses will opt for more comprehensive insurance…….The result would be, in insurance terms, an 'adverse-selection death spiral,' as the healthy opt out of expensive insurance, the sick opt into it, and premiums spin out of control."

Klein also argues that cheap sequencing guarantees an eventual individual mandate.

I call bull-feathers to all the above. Here's my reasoning:

-Our genome is not our pre-destination. (especially what epigenetics research keeps telling us).

-I suspect that even if it were, our health care costs have more to do with our behaviors than our pre-disposition. (Does someone's pre-disposition to Alzheimer's have a greater cost than their really bad diet and sedentary behavior resulting in diabetes?)

-You'd have to believe that treatment guided by sequence is a bad thing, because someone who lives longer ultimately costs more. If you've read any of the early impact stories from clinical sequencing, you see how detecting and treating childhood genetic diseases have the opposite and hugely positive impacts - both in terms of lives and $$$.


As for Klein's point about the necessity of individual mandates: Like a good wonk, Klein intends to see everything in healthcare in black or white - you're either fully covered, or you're not. I've argued for a long time that health insurance should be broken into 2 products "everyday, regular health insurance," and "catastrophic care insurance."

Everyday insurance is targeted towards things like broken bones, torn ACLs, delivering babies, or even diabetes treatment. Some would want to just pay "everyday" costs out of pocket, but if not, this insurance product would be VERY affordable, and the 'free rider' problem would be minimized.

The bulk of healthcare costs are driven by "catastrophic care." (I think the stat is that more than half of healthcare spending is for the last 6 months of life, or something equally eye-popping.)

If you're convinced that your predisposition to Alzheimer's means you don't have to worry about cancer, then you need not buy catastrophic insurance (likewise if you had neither predisposition), but I think most would buy some form of catastrophic insurance.

No matter, even with future health clarity driven by genomics, most would want at least one of the 2 insurances, greatly mitigating the adverse selection problem and obviating the need for an individual mandate.

So you need some DNA sequencing? (pt 3 conclusion.)

I've stretched this topic out farther than intended, so I'll conclude directly:

-from looking at the map, there seems to be 4 types of sequencing centers, each with different strategies and hardware needs:

1) medium-large installations (Broad, BGI)
2) fee for service centers
3) genomic (academic) centers with a commitment to genomic research (5-10 sequencers.)
4) academic centers with a small exposure to genomics (1 or 2 sequencers.)

Each of these will have different rates of adoption of NGS technologies. Here's how I'd characterize each of these centers future behaviors:

#1) medium-large centers: all about throughput and cost, with less regard for specialized instruments or needs, these centers also already have a substantial investment in hardware and informatics, so the winning hardware providers will be the ones that plug in best into the existing hardware and informatics. It will be a whole lot easier to integrate the latest generation of Illumina technology than to pivot 90 degrees to integrate a novel technology.

I expect that the number of medium-to-large centers rises, as the cost/sequencer falls and the start-up cost of a new sequencing center falls. I don't know if research demand for such centers is here yet, but I think several institutions will launch ~$10M fundraising efforts for a new genomic research center, as much for their economic development/headline value as their scientific value. (Example: the former Ignite Institute, which landed at Fox Chase.)

2) fee for service centers: I selected the first 5 US service providers that I could think of (Asuragen, Beckman Coulter, Cofactor, Expression Analysis, Seqwright), and was surprised to see their total capacity was 26 sequencers among them. The absolute number could be outdated or inaccurate for a number of reasons, but the point is that the service centers aren't big consumers of technology. (I'd guess, though, that they run at higher capacity utilization than most academic sequencers.)

The fee-for-service centers also tend to have more than one technology platform in-house.  As demand grows, the fee-for-service centers will add capacity in a nimble, savvy, but serial fashion, spread among whichever technologies are requested by their customers, and which provider has the best performance/value proposition at any given time.

3) academic genomic research centers. much of the research at the genomic centers will be tied to clinical trials, so this group will be very sensitive to FDA approval of a sequencing device, and not very sensitive to throughput/performance though turnaround time may matter if the clinical trials are looking for the sequencing data to guide treatment. I'd expect this group to hang with the Illumina technology for the foreseeable future. They're the most likely platform to receive FDA approval. (Unfortunately, this isn't likely to happen soon, if the FDA approval of microarray platforms is any indication. As a forerunner to sequencing, Affy got their microarray platform approved by the FDA (in 2009?) for clinical diagnostic use, but I've heard that it wasn't easy, and the approval is not too broad.)

#4) small-time centers: the largest market in number but smallest in $$$. This market won't grow significantly until clinical adoption of DNA sequencing becomes widespread, and even then the biggest customer may be the pathology labs, not the bench researchers. In this case, I'd expect this category to largely adopt either the nanopore or Ion Torrent technology, as much for simplicity as for throughput and cost.


After this analysis, I am surprised that the opportunities for new platforms such as Oxford Nanopore are not as obvious. The newcomers may still be a success, but I think we're still a few years away from the inflection point in the growth of sequencing hardware.

So you need some DNA sequencing? (pt 1.)

There's an absolutely brilliant map and website devoted to taking a census of DNA sequencers around the world, and through it, you can monitor the tug of war between the placement of instruments in large DNA sequencing centers, and in individual labs (or core labs) on a onesie-twosie basis.

(The map may be a little dated - it shows only 15 sequencers @ BGI, for example - but the brilliance of the map is in how the data was generated. Do a little web surfing for the WWII spy technique that spawned the map.)

Anyway, a VERY interesting story is told when looking at the USA map (select USA under the country pull-down. Unfortunately, I can't link to this specific page.) The sequencer census really indicates who and what are on the edge of the genomic revolution.

A rough read of who's ahead by sequencer placement:

Boston: 129 (Broad Institute = 104)
St. Louis: 85 (includes 11 at Monsanto)
San Francisco Bay Area: 58
Washington, DC area: 51 (with an additional 23 in nearby Baltimore and Frederick, MD.)
NYC area: 47 (includes 18 @ CSHL on Long Island.)
RTP, NC: 37
Houston: 35 (driven by MD Anderson.)
Toronto: 33
Southern California (LA + SD): 27
New Haven, CT: 23 (birthplace of 454 and IonTorrent.)
Philadelphia: 22
Albuquerque, NM: 19 (Sandia)
Montreal: 18
Memphis: 12
Seattle: 5

most other US metropolitan areas and universities had 1-5 DNA sequencers listed.

(Note: some of the math above is fuzzy, as figures change slightly depending on how far you drill down on the map. Plus, the math is skewed by self-reporting and non-reporting. For example, there is a paucity of hardware listed in 'PharmCountry' (NJ & eastern PA) and there's virtually no privately owned sequencers in the Bay Area, but you can be sure that both Big Pharma and Genentech have some sequencing hardware on campus.

What does this all mean:

-you can see which cities are in position to lead the genomic revolution, and which are likely to be laggards. For example, according to the map, there is only 2 DNA sequencers in the city of Chicago. There's roughly 25X more genomic activity on the i-270 corridor outside DC.

• I was surprised by the strong figures in St. Louis and RTP. Both locations have strong ag-bio efforts, so you might be able to extrapolate that the earliest exciting NGS uses will come from ag-bio, and not cancer genomics.
• Anyone else as surprised as I am that NYC was in the top 5? Certainly there is great science at places like Rockefeller, MSKCC, and such, but I wouldn't have guessed top 5. With some announced initiatives, NYC should stay near the front.

-you can see funding philosophies in action (if you squint). There is a tremendous amount of hardware in Canada relative to population, representing governmental support skewed towards hard assets rather than funding annual research. (And the good work of bodies like Genome Canada.) However, with the rate of technological innovation in sequencing, hardware represents a quickly depreciating asset. Maybe the better use of the funds was to pay for outsourced sequencing. (Perhaps this was the case in California, where the inverse was present - less hardware than you might expect.)

-if I had to bet which institution will lead in the adoption of DNA sequencing in patients, MD Anderson would be my first bet. My quick survey suggests that they're the practicing center with the most NGS hardware. Yale isn't far behind.

-on the other hand, some NCI comprehensive cancer centers were extremely lame, including my hometown University of Virginia, Northwestern U, and OHSU. 1 sequencer each? Lame!


Tomorrow I'll do some analysis based on the type of hardware, and take a guess at what this means for adoption. I'm especially interested in analyzing the question of what the distribution in sequencing is likely to be between CRO/service providers and sequencing with internal assets.

Great leap for DNA sequencing. Small step for early stage financing?

Wow. Just wow.

Oxford Nanopore went public last week with details of their DNA sequencing platform. It is a stunning advancement for sequencing in terms of access, cost, and performance, and represents some pretty amazing chemistry and engineering advancements.

(Great coverage of the science involved here and here and general coverage here.)

A decade ago, sequencing a single human genome cost a billion dollars and required a warehouse full of expensive machinery. Oxford Nanopore's new platform uses a handheld unit and about 5 machine-hours, at a total cost of ~$1,000 to generate a genome. Other technologies are may be capable of reaching the performance levels of Oxford Nanopore in one dimension (cost, read length, turnaround time, etc.), but no technology is as complete as what Oxford announced.

We will be sorting through the impact of the technology for a long time, but one business implication needs to be promoted in light of Oxford Nanopore's success: how a tiny financial brokerage company with a tiny amount of scientific expertise launched Oxford Nanopore.


University tech transfer offices have a thankless job - maximizing the return on young, immature IP, with little capital available for research to de-risk emerging technologies. This is especially true in the UK, where good science is abundant, but early capital is not.

In the early part of the last decade, Oxford University's tech transfer group struck an interesting deal: it sold a half-interest in all spin-outs from the chemistry department for a decade or so for £20M cash up front (~$37M).

The investor in this deal was a new entity (IP2IPO) founded by a small financial brokerage in London. IP2IPO (since renamed IP Group, and listed here) was a new fund dedicated to investing in university IP, and went public on the AIM on the basis of the Oxford agreement, and not much else. (Though after the Oxford deal, IP2IPO struck roughly similar deals with other UK universities.) IP Group is effectively a publicly traded VC firm.

In 2005, IP2IPO seeded what became Oxford Nanopore. (It is interesting to read the press release - there's zero mention of DNA sequencing, which means that either they were being coy, or weren't aware of the potential application for the chemistry technology.)

At the founding of Oxford Nanopore,  IP2IPO received a ~5% chunk of equity per their agreement with Oxford. They also injected start-up capital boosting their ownership interest. Seven years and a few more financing rounds, including a strategic investment by Illumina IP's share of Oxford Nanopore is still 21.5%.

Today IP Group's market cap is £413M or $654M (US), having jumped 12% (+$70M market cap) following the Oxford Nanopore (ONP) news. (IP Group has ~$30M in cash on hand, so EV= $624M).

Unpacking this for a second: Ion Torrent - a DNA sequencing firm with a very cool platform - was sold last year to Life Technologies for $725M. Given this comparable, plus inflation and ONP's advantages, ONP is probably worth $1B today, making IP Group's interest worth $215M, and suggesting that the OTHER 59 companies in IP Group's portfolio are worth $409M in aggregate.)


I am happy to see that such long-term investing has paid off for IP Group, but I would be curious to know today if IP2IPO, its' investors, or the universities would redo the arrangements if given the opportunity. I think if you could reliably find investors with 10+ year time horizons that the IP2IPO model would work on a greater scale, but a look at IP Group's stock chart (with a stock price about even since its' 2003 debut) suggests that the market is not a fan of the IP Group model, even with the Oxford Nanopore development.

(You also need access to stellar tech centers. It is a low risk bet that Oxford's chemistry department will invent something world-changing over the 10-12 years covered by the IP & Oxford agreement. But how many schools and departments can you say that about?)

For the IP2IPO model to work, the investors' value of the university technology should roughly match the university's determination of the value of cash in the present. But there is an inherent disconnect between the high-beta present value of a long term technology and the certain value of short term cash. Blanket agreements like IP2IPO's reduces risk slightly by spreading the risk across multiple spin-outs across multiple sectors.

Still, there seems to be an oversupply of high-risk capital, at least in the US, when including IT/internet investments. Perhaps the IP Group "product" will take off now that there is an obvious big win in ONP to sell to investors.



One other thought on Oxford Nanopore's news: if the disposable USB MinIon unit really does sell for $900, I can see myself buying one this year just to try it out AT HOME. I can't say that about a MiSeq.

Well done, Genomic Health!

When writing about the proposed acquisition of Illumina by Roche I mentioned that I didn't think a $6B acquisition of a hardware maker was the best strategy for Roche to bring their molecular diagnostics business into the DNA sequencing era. (Instead I recommended large-scale, aggressive partnering to grow the molecular diagnostics business.)

In contrast, one company with what I think is EXACTLY the right strategy to advance their molecular diagnostics business into the sequencing era is Genomic Health.

Genomic Health's existing product (Oncotype DX) is a 21-gene PCR test to predict breast cancer recurrence, and a similar product for colon cancer is late stage development. Both of these tests may someday "graduate" to a sequencing basis, if either NGS becomes more economical, or additional value is seen in collecting genomic data beyond the 21 genes of interest. 

But Genomic Health understands the need to augment or match product innovation with platform innovation.

For $20M (or about .03% of the Illumina acquisition price) Genomic Health will be launching a wholly-owned subsidiary devoted to developing sequencing-based tests. This is brilliant on so many levels:

-GHDX kept the founding/leadership team in place, while allowing them to pursue new, more exciting fields. The continuity of the team will be important here, while the new venture won't have to invest in some of the infrastructure already covered by GHDX (such as CLIA certification)

-$20M - while a good-sized investment in R&D - is a more smart-sized play when compared to other NGS-diagnostic players, like Foundation Medicine, which launched with an "A" round of $34M, without even a product strategy. (~15 months after founding, Foundation has just won CLIA certification. This is not an insignificant accomplishment, but still represents the company just now 'reaching the starting line.' )

-For GHDX, the $20M represents about 18 months of operating cash flow. It's a serious investment into (potentially) cannibalizing their own business. If you're a fan of Clayton Christensen and his "Innovator's Dilemma" line of thinking, you'd praise GHDX for being willing to take this initiative, where other former market leaders have treated their existing markets as sacred and protected.

-GHDX is banking on the idea that though their R&D investment will crimp earnings in the short term, equity value akin to that seen in Foundation medicine is likely to result. To illustrate this, imagine if Foundation's $34M seed round valued the company at $50M (post-money, without anything more than a business plan.) For $20M, GHDX has essentially generated $14M in net equity value ($50M enterprise value less $34M cash), and I'd argue that GHDX's venture is worth more than Foundation without spending a dime yet.)

(in fairness, some finance types would argue that with GHDX having a P/E ratio of 126x, reducing operating profit by $10M/yr costs something like $1.26B in foregone equity value, but 1) GHDX's market cap is only $850M, and 2) GHDX is down only 5% since their press release announcing the sequencing initiative.)

-many other companies in GHDX's position might realize the opportunity that NGS diagnostics represent, but instead decide to survey the field of start-ups and trade equity to acquire such products rather than invest in R&D to dilute earnings. GHDX's approach insures that NGS will be a core competency for product development, while still maintaining the option to spin out the subsidiary at any  time. (Continuing to riff on the GHDX echoing some brilliant business strategists like Christensen, I'd say that this represents GHDX's commitment to a Jim Collins 'built to last' culture."

Kudos to GHDX!

-finally, one curiosity: in the press release announcing the initiative, GHDX only once used the word "genomics." (Besides in their corporate name.) Many millions of dollars have been flushed over the last decade by start-ups pursuing genomic solutions. For this reason, I think GHDX has spun their news away from genomics.

Illumina - Roche

I am having a hard time rationalizing the Roche bid for Illumina. Not that Illumina isn't a great company (it is) or that Roche isn't a great company (it is too), but the Roche press release announcing the hostile merger rationalized the potential Illumina acquisition as to "enable the discovery of complex new biomarkers improving drug discovery and the selection of patients most likely to respond to a targeted treatment with high clinical relevance. In addition, by building on Illumina’s capabilities Roche will be able to use its scale, global distribution and diagnostic test development expertise to develop new diagnostic tests that serve patients and customers even more effectively.”


I read that as "we (Roche) want to transform our diagnostic presence in "old" technologies (like IHC assays) into way-cool sequencing-based molecular diagnostics, and the best way to do that is to buy a hardware company that is just now being usurped by LIFE's Ion Torrent sequencing solution."


This doesn't make sense to me, as Roche could probably get such biomarker & diagnostic discovery expertise for 1% of the price of acquiring Illumina by striking 100 x $600k partnerships with biomarker/diagnostic focused companies.

One other problem: Illumina doesn't do any biomarker/molecular diagnostic  discovery/development. 


As of Ilumina's July SEC filings, 94% of Illumina's revenue is derived from hardware or consumable sales. The other 6% is service revenue, largely revenue from companies like 23andMe that contract with Illumina to perform very standard genotyping on their behalf.


(Incidentally, molecular diagnostics and DNA sequencing represents ~4% of Roche's business, by revenue.)


Illumina may be the best in the world at building, selling, and servicing genome sequencers (though LIFE's Ion Torrent technology may have just leapt ahead. For now.) However, because Illumina doesn't compete with their customers, they don't do biomarker discovery, development of diagnostic tests, or performance of FDA-approved clinical diagnostics. 


(I believe that Illumina has gotten their hardware platform certified by the FDA, facilitating the development of clinical diagnostics by their customers, but no specific tests approved by Illumina or their customers.)


I could understand Roche's pursuit of Illumina if they were looking to augment or replace their 454 sequencer business. 454's pyrosequencing platform is widely perceived to be past peak and far behind Illumina and LIFE's sequencing platforms (and also behind Complete Genomics and PacBio's platforms in terms of value). However, hardware is a low-margin business compared to Roche's drug & diagnostic business, and Illumina's sales growth has run full speed into a wall, as of the most recent quarter, falling about 20% short of analyst revenue expectations.


Roche has offered $44.50/share for Illumina, but the market has already upped ILMN's stock to $51, valuing Illumina at a crazy level:


66x P/E
6X price/revenue
2.5X PEG ratio
19X enterprise value/EBITDA
18X EV/OCF


So Roche is willing to pay a high price to grab ILMN. If it is not for biomarker/diagnostic discovery expertise, why in the world is Roche interested? Here's my guesses:


-Roche's 454 technology is cooked, and it is better to spend $6B to buy $1B in new revenue to "pave over" the future financial hole that the 454 business represents. But Illumina's sequencing technology  while an improvement over 454, is still behind the leader, Ion Torrent (LIFE).


-Roche is "skating to where the puck is going to be" w/r/t NEXT next-generation sequencing (Nngs), as they (Roche) like ILMN's positioning for Nngs (Likely nanopore sequencing.) Possible, but not likely, since as a hostile offeror, Roche hasn't had a look at ILMN's R&D. Plus, Roche cut their own nano pore technology deal last fall


-Roche already has biomarker/diagnostics discovery talent & expertise (especially from the old Genentech), and they really just need hardware and sequencing talent. Makes sense, except there's no reason to spend $6B to get access to hardware, especially when the technology is changing so fast. Roche could buy 100 sequencers for 2% of the acquisition price, or just partner with a sequencing provider like BGI.

Or, most likely: following the earnings & revenue stumble by ILMN in the 3Q, in spite of the resulting valuations, Roche is trying to buy low on the apparently mis-priced ILMN asset.

This would make sense to me, and I think it would be acceptable rationale for a press release, but Roche has not taken that tone. Perhaps this is to dissuade other potential suitors, like GE. (GE might say when considering an Illumina bid "nice asset, but we don't have any therapeutic or diagnostic expertise.")

If not Roche looking to get a deal on Illumina, I can't buy into other rationale, unless I am missing something. If I am, please let me know in the comments section.