Complete Genomics, A Complete Future?

| About: Complete Genomics, (GNOM)

With the cost of whole-genome sequencing (WGS) rapidly declining from millions to mere thousands today, medicine is in the midst of a major revolution. Imagine a world where newborns, through a pinprick blood draw, have their DNA sequenced to predict disease susceptibility. Recently, Roberts et al. concluded in a best-case scenario that WGS would alert most people to at least one disease predisposition. Picture the same world where cancer patients have their tumors sequenced to identify mutations and determine appropriate therapy. Roychowdhury and colleagues have begun applying WGS (as well as targeted exome and transcriptome sequencing) clinically for ~$3600 in 24 days. However, a note of caution: the technology is not necessarily ready for the spotlight. Instead, it has reached a tipping point between fantasy and reality.

Underlying the promise of WGS, however, lay the threat of legal action. In other words, does WGS violate patents such as Myriad Genetics' gene patents on BRCA1 and BRCA2? In his article, Christopher Holman concludes essentially "No." First, some "gene patents" do not even claim a DNA sequence corresponding to a gene. Second, WGS would unlikely reproduce the claimed DNA molecule and, finally, most gene patents do not claim genetic testing. Therefore, gene patents pose little, if any, threat to the viability of WGS. Interestingly, the opposite may actually be true in which WGS threatens diagnostic development.

While companies including Illumina (NASDAQ:ILMN), Life Technologies (NASDAQ:LIFE), and Roche (OTCQX:RHHBY), who recently tried to buy Illumina, vie for market domination, little attention, it seems, is paid to Complete Genomics (NASDAQ:GNOM) with a market cap less than $100 million. Unlike other companies that sell expensive sequencing machines like the Hiseq 2000 and the Ion Personal Genome Machine Sequencer, GNOM provides an outsourced service where DNA is sequenced, assembled, and analyzed. In providing end-to-end service, Complete Genomics alleviates the need for costly equipment, expertise, and computing power.

For $4000 today, a research customer can have a blood (or now, saliva) sample sequenced with 99.9998% accuracy. In fact, their current technology permits one false variant per 100 kilobases. Last year, Lam et al. concluded Complete Genomics sequencing technology is more accurate but less sensitive than Illumina's HiSeq 2000.

Recently, Complete Genomics announced its Long Fragment Read (LFR) technology. LFR permits one error in 10,000,000 bases or 600 total in the genome representing a 10-fold increase in accuracy. Furthermore, it could eventually be used in disease tracing to identify people who are affected by from those who are mere carriers of a disease. Finally, it requires only 10-20 cells worth of DNA and could be applied diagnostically to detect cancer or screen embryos.

However, Complete Genomics is not a Clinical Laboratory Improvement Amendments-certified lab, meaning it cannot deliver clinical-grade genomes. Therefore, it cannot enter the clinical market, particularly genetic testing and molecular diagnostics, valued at $15 to 25 billion by 2021. According to their last conference call, though, they have begun taking the necessary steps and expect certification in the third quarter of this year.

Complicating matters, Complete Genomics is engaged in two ongoing lawsuits with Illumina regarding patent infringement, though it appears its LFR technology is not in question. In fact, the U.S. Patent and Trademark Office has already issued it two separate patents on its LFR technology with additional patent applications pending. In spite of active litigation, Complete Genomics continues to expand its business presence recently signing distributor agreements in Australia, China, Japan and Korea. In the US, it now services the Mayo Clinic in addition to its other 125+ customers including the Inova Health System and Scripps Translational Science Institute with half of its customers reordering. However, it has a backlog of 5700 genomes and a growing turnaround time of 80 days.

Complete Genomics may represent a long-term investment as it continues to maximize its factory approach. The prospects of its LFR technology alone may entice some risk prone investors in this competitive market. At the very least, its share price relative to its book value notwithstanding, its patent portfolio makes GNOM an attractive company, not to mention the possibility of a sale or merger.

Disclosure: I am long GNOM.

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