Complete Genomics: Say No To Sale

| About: Complete Genomics, (GNOM)
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We knew the likelihood of Complete Genomics (NASDAQ:GNOM) remaining an independent company was low. Given its low trading price, difficulty in gaining access to capital and its pending lawsuit with Illumina (NASDAQ:ILMN), a sale almost seems inevitable. Today comes the news that indeed Complete Genomics is selling itself to a Chinese company that I have never heard of. This company, BGI-Shenzhen, is also a DNA sequencing company that is primarily engaged in the sequencing of animal DNA. As you may know, Complete Genomics is an early stage biotech company engaged in human DNA sequencing using proprietary machines, process and analytics. According to its CEO, Cliff Reid, GNOM currently owns about half the human DNA sequencing business in the United States. In other words of all the human DNA that is sequenced in the United States each year, GNOM performs about half of them. This sounds impressive, but the total number of human DNA sequenced per year remains very low. But it is also growing rapidly.

On August 8, 2012, Complete Genomics announced that it would not host a conference call to discuss its Q2 financial results. In its Q2 press release, the company stated "We will not be hosting a conference call to discuss our financial results for the second quarter, due to our ongoing review of strategic alternatives with our financial advisor Jefferies & Company, Inc." This press release for most observers, including me, meant that a buyout may be imminent. In fact, I bought more shares on that news. Sure enough, six weeks later we get the news that our beloved company is being sold to a Chinese company for what amounts to a fire-sale price - $3.15 per share or about $117 million - Wow!

If you are one of my few followers, you probably have read my previous article on GNOM showering praise on its technology, CEO and high ethical standard. I believed in this company. I believed in the technology and I believed in the future of the DNA sequencing space. In my mind, GNOM simply needed a little bit of money, luck, CLIA certification and a small increase in revenue to dramatically increase shareholder value. It was sputtering but also appeared to be on a good track.

In June, the company announced that it was restructuring itself and laying off 55 employees in order to reduce its then burn rate of nearly $30 million per quarter. In July, it published a research paper in regards to its Long Fragment Read (LFR) technology, which "for whole genome sequencing dramatically improves accuracy, enables fully-phased genomes and significantly reduces the amount of DNA required for testing." In August, it released Q2 results. The numbers were not eye popping but they were at least in line with what was expected. We saw revenue growth, expense growth and a widening net loss - nothing special, although the company did also announce a decrease in the amount of DNA that it will require for sequencing. I was proud of the company. By all accounts, it was a company on the vanguard of a biological and medical revolution and doing it despite surreal obstacles. It was a company to be admired. Now, it's giving up.

I never liked Jefferies and Company. Now I liked them less. A price of $3.15 per share is an insult. Its technology alone is worth significantly more than the selling price. This isn't a fair deal. GNOM is not a rotting tomato that has be sold today or thrown out tomorrow. I say take a chance and wait to see the results of the patent lawsuit with Illumina. The trial begins in May. If GNOM is successful, money will be pouring to its coffers from the sky. If it fails, it can appeal the verdict. I am sure that the pending lawsuit played a significant role in GNOM's inability to find enthusiastic suitors. However the good news is that in these kinds of litigation, the plaintiff is successful only about 30% of the times, meaning there is a 70% chance that GNOM will win its argument.

Pending litigation notwithstanding as a shareholder, I don't want to sell at this price. It is absurdly low, especially given the M&A activity that we have witnessed in this space over the last 12 months, including Roche's unsuccessfully bid for Illumina (ILMN) and Human Genome Sciences (HGSI) sale to GlaxoSmithKline (NYSE:GSK). The future of DNA sequencing is bright, but GNOM's sale price is low - very low. I can't believe that GNOM leaders and board thought this was a fair deal.

There are three reasons why this bid needs to fail. First, for the above mentioned fact that the price is way too low. Second, this news is likely to ignite some bidding war; keep in mind that GNOM still has one of the best technologies in the industry. Third, there is a good chance that GNOM can survive over the next few quarters on its own by further restructuring its business and demonstrating real success. No matter how you look at it, GNOM is better off than selling to BGI-Shenzhen. I own 2,000 shares of GNOM. I am a voter. And I will vote HECK NO to the sale! If you too are a shareholder, you should vote no as well.

Disclosure: I am long GNOM. I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.