GNOM feature
GNOM isn't doing too well on NASDAQ. Is the future of Complete Genomics grim, or just under-valued?

Mo’ genomes, mo’ problems – it’s as true for Complete Genomics as it was for Biggie Smalls. The Silicon Valley startup has a revolutionary approach to sequencing the complete DNA of a human being, lowering costs and raising the potential capacity of the industry considerably. They want to be the first company to sequence a million human genomes…but they may have hit a snag. Complete Genomics (NASDAQ: GNOM) saw an enormous fall in its stock price last week after releasing its earnings report for the second quarter. News of rising costs may have driven investors to flee from the stock lowering it to around $8 a share.
That’s less than two thirds of where GNOM was just a month ago, and less than half of its peak value from early this summer! Complete Genomics’ Q2 earning report was quick to point out the areas in which it was performing well. Despite the disappointing news in costs, almost every other major indicator for the company showed positive results. They’re sequencing more genomes than ever before, they have millions of dollars in orders, and their capacity is increasing steadily. So, has Wall Street panicked itself away from a now under-priced stock, or is Complete Genomics truly facing a crisis point in its development?

Let’s take a look at the main figures from Complete Genomics’ 2011 Q2 report:

  • The company recognized revenue for over 900 human genomes
  • Revenue of $5.9 million compared to $1.1 million in the second quarter of 2010
  • Costs and operating expenses were $20.8 million compared to $12.9 million in the second quarter of 2010
  • Net loss was $16.0 million compared to $12.6 million in the second quarter of 2010

Clearly the rising costs and net loss are disappointing, but were things so bad as to warrant more than a 33% drop in stock price? Well, comparing to Q2 2010 is only half the problem, it’s the difference between Q1 and Q2 of this year that may be more concerning. As we discussed in May, the first quarter of 2011 was very good to Complete Genomics. They sequenced 600 genomes, had $6.8 million in revenue, and a net loss of only $12.5 million. You can see the issue. Despite sequencing 900 genomes in Q2, Complete Genomics wasn’t able to increase its revenue according to investor expectations.

GNOM
GNOM soared to more than twice its IPO after Q1 earnings were reported. Now Q2 reports have brought it all the way back down.

What’s the cause of Complete Genomics’ clipped revenue? Spit and blood. Companies that order whole genome sequencing must provide Complete Genomics with the DNA samples they want examined. If they don’t send those samples promptly, then the revenue stream gets stymied. In a conference call following the release of the Q2 report, CEO Cliff Reid pointed to delays associated with the Institute for Systems Biology as a major cause of the drop in revenue. ISB has ordered 600+ genomes from Complete Genomics, but apparently is running into trouble collecting the samples they want. They have the money, they’ll be able to pay Complete Genomics when its time, and Complete Genomics will be able to sequence those samples when they arrive. Until that happens though, things may look worse than they are.

As a young company with relatively few customers (over 80), our quarterly revenue is quite variable. It was higher than analysts expected in the first quarter and lower than analysts expected in the second quarter. We expect this variability to continue until we see a smoothing effect from having many more customers.
—Complete Genomics CEO Cliff Reid

Complete Genomics is painting the irregularity in sample delivery as just one more hurdle they have to clear as they build their new position in the sequencing industry. They still aim on delivering 4000 genomes to customers by year’s end, they’ll just have to clump things up towards the second half of 2011. According to their outlook from the report:

The company shipped approximately 1,600 genomes to its customers in the first half of 2011. In the second half of 2011, the Company expects to ship over 2,400 genomes to its customers including over 600 genomes in the third quarter of 2011. The variability in genomes shipped each quarter reflects the timing of sample arrivals from a few large orders. We expect this variability to decline as order volume grows and provides a smoothing effect on sample arrivals.

So you’re going to drop to 600 genomes in Q3, then jump up to 1800 genomes in Q4? That’s not the kind of steady growth that investors like to see – it’s really no surprise they dropped GNOM.

But I think Wall Street may have moved in error. Complete Genomics may not have properly anticipated (or prepared its investors) for fluctuations in sample delivery, but they are still at the top of their game. Their current capacity for genomes is 600 month, and they look to push that to 800-1200 per month by the end of the year. Of the $20.8 million in costs, $8 million was spent in R&D, representing the biggest single rise in expenditures for the company (up from $4.9 M from Q2 2010 and $6.8 M Q1 2011). In other words, Complete Genomics is still in high growth mode.

Besides, it looks like the research community (those that actually buy bulk whole genome sequencing) are very interested. Complete Genomics pulled in $30M in orders this year (as of July 30th) for some 5700 genomes. A large chunk of those will be for the National Cancer Institute/SAIC-Frederick and the Inova Translational Medicine Institute, representing approximately $14 million in services and 2700 genomes. Complete Genomics’ backlog alone is worth $12 M (2200 genomes), and turn around time is now down to less than 70 days.

What I’m trying to say is, I still believe in Complete Genomics. Or, at the very least, the economic pressure that is pushing Complete Genomics to succeed. Whole genome sequencing is the key to unlocking some of the vast potential of genetic research, and the market for scientific breakthroughs in this field is going to be worth billions of dollars in the years ahead. The company that can cheaply, reliably, and quickly sequence a human’s complete DNA is going to be a billion dollar company, no doubt. Complete Genomics looks like it can win that race. Its capacity is growing steadily, its customer base is growing along with it, and the price per genome is falling – just $4000 for bulk orders of 50 genomes or more. Unfortunately, that decline may be partially responsible for driving some investors away as well, but if so it was likely a shortsighted reasoning:

Prices of complete human genome sequencing has fallen faster than analysts expected, but this price drop is what enabled us to land the Inova deal – a landmark event in personal medicine.
—Complete Genomics CEO Cliff Reid

Maybe Wall Street investors see a different story, but I think GNOM’s recent stock woes are simply a sign that the genomics industry is too new, and too volatile for the mainstream. I hope that Q2 2011 was just a hiccup, but even if I’m right, there’s going to be further hiccups in the next few years. If you’re looking for a sure thing, Complete Genomics probably isn’t the way to go. But if you’re looking for a company and an industry that has an absurdly vast potential…well, then it’s your lucky day. There’s a sale going on, and you can snag some GNOM stock for the same price as the IPO (give or take). If that doesn’t seem like a smart decision to you, keep your eye out for other companies in this field. Even if Complete Genomics crashes and burns, someone else is going to fill this space. The world wants millions of genomes at $1000 or less a piece, and I think that future is nearer than we imagine.

[image credits: Complete Genomics, Google Finance]
[source: Complete Genomics]