September 21, 2012

Why did the BGI buy Complete Genomics?

Earlier this week, the world's leading sequencing services company BGI announced a takeover bid for its competitor Complete Genomics. That Complete Genomics is being acquired could have been expected, but that the buyer is the BGI may come as a surprise.

Complete Genomics' technology is well regarded, and their business model is unique in the industry. Rather than building sequencing machines and selling them, they offer sequencing as a service. This means that researchers, and potentially clinicians as well, send their samples to the company and receive the sequence data back without ever having to enter a lab.

The reason why Complete Genomics has chosen this path is probably that their technology benefits from economies of scale, which would not be applicable otherwise.

Complete Genomics charges around $5,000 to sequence a human genome, which is a fair price considering that researchers save the capital cost associated with purchasing a sequencing machine, and the hassle of acquiring the expertise to run them.

Nevertheless, Complete Genomics has been struggling financially for some time. They have not been profitable in any period since they were formed, and instead they incurred significant quarterly losses that showed no sign of improvement. This depressed their share price, and as a result made it more likely that they would eventually be taken over.

Why is Complete Genomics doing this?

The advantage for Complete Genomics of being bought by the BGI is that they're not going to go bust. Understandably, the board of Complete Genomics decided against playing hard to get and has accepted BGI's offer of £3.15 per share, which is 18% more than the share's closing price the previous business day. Not all shareholders are happy about this. Some strongly feel that $3.15 is not enough, although most analysts seem to disagree with that.

Why is the BGI doing this?

If Complete Genomics' motivation for this deal is clear, there are at least two potential motivations for the BGI.

The first one is that they are currently dependent on Illumina's sequencing technology. Access to Complete Genomics technology will ease that dependency, and enable them to offer additional value to their current customers.

Secondly, although they are the market leader in research services, their presence in the United States is not as strong as it could be. Access to Complete Genomics' customer list will help them to expand their presence in that crucial market.

Is this good or bad for the market as a whole?

Considering that Complete Genomics in the medium term would have kept struggling, and in the long run may well have gone out of business, this deal is probably beneficial to customers. It means that Complete Genomics technology will still be available, as the company is likely to continue its operations based at its current Silicon Valley headquarters.

Thanks to Joshua Randall at the Sanger Institute for his insights on this.

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