Yin/Yang of Compete Genomics
I noted before that one of my guidelines in the Helical portfolio would be to not lose more than 2% of the port on any single holding. This was challenged recently, as Complete Genomics, a company that I foolishly (small f) added in June when I was otherwise increasing cash got clobbered with the most recent quarterly results and market rollercoaster. While it has recovered a bit off its low, I have still lost ~$750 (if I sold today) with this buy to date, and that makes it worthy of review.
Before reviewing what has so far gone wrong, let me serve up some of my own words to eat.
As an investor, I am not often all that crazy about service businesses, though there are exceptions, like the CROs I own where the specialty project nature of the business makes it less prone to commoditization. Sequencing services are prone to this issue, but I do think there is a question with new technologies becoming practical where the enablement makes market expansion overrule the commoditization aspect. For a time anyway. DNA synthesis services were like that early on, but it doesn't often last a long time.
As for GNOM itself, it still doens't make money, and there has already been a response from Illumina to lower prices on their sequencing services. So, I'm still hesitant to go for a pure service industry while prices are still dropping, but it does look like we are at current price points where the market is expanding and not yet at 'commodity' pricing -- generally a good (but often brief) time to invest.
So what has been happening is related to the concern I expressed. Prices for whole genomic sequencing are decreasing rapidly. While this is not yet a commodity market, neither is it at the inflection where the current price is growing the business fast enough to compensate for the fall. The recent quarters played out as follows:
Rev Genomes Price/Genome
Q1 $6.8M ~690 $9855
Q2 $5.9M ~950 $6210
So despite sequencing over 35% more genomes in Q2 vs. Q1, revenues dropped due to pricing. Furthermore, the press release for Q2 notes "The company’s backlog as of June 30, 2011 was approximately $12 million and 2,200 genomes" and the math there works out to under $5500 per genome. The company also notes they intend to be pricing at ~$3K per genome at the end of 2012. While they are increasing capacity, and should soon be to ~3K genomes per quarter, that is only $9M in revenues at the $3K pricing.
One bright spot was the announcement of Inova Health for one of the large recent genome contract signings. The customers here are mostly academic research centers i.e. 'government funded'. I need to see industry playing more of a role, as we all know government spending will face ever increased pressure. While clinical trial work is starting to be done, it is a small % of the genomes. The company noted that they don't see pharma as a significant player in the whole genome market for a couple of years. And to be honest, kudos to GNOM for what now appears to be a well timed secondary offering.
I did get one thing right. Recognizing this as a speculation (and the key reason why), I did over commit to the investment, and it therefore took about a 50% drop in the stock price to challenge my guidelines. I'll hold this for awhile, unless the market gets wiggy again, but am not looking to add on the price weakness. This needs to prove it can increase the business and grow revenues ahead of falling prices.
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