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Investment Community Starts to Weigh in on Solexa. Should 454 Worry?

NEW YORK, Feb. 28 (GenomeWeb News) - In recent weeks, investment bank analysts have started to promote Solexa. Pacific Growth Equities has initiated coverage with a 'buy' rating, and Leerink Swann & Company has given the stock an 'outperform' rating.


The fact that Solexa has gotten the investment community talking is a notable feat because gaining access to capital from the public markets can help the company launch, manufacture, and market its sequencer if it chooses to do so without the help of a big corporate enabler.


John West, Solexa's CEO, predicted last fall that the investment community will warm up to his industry, if not his company. "I think there has been a growing awareness [in the investment community] that there is something new going on here," West told GenomeWeb News at the Genome Sequencing and Analysis Conference in October. "A lot of people were interested in the genomics area back in the 2000 era, and then a lot of people pulled out of it. What has been happening over the last year is that I think people are beginning to wake up and say, 'there is something new going on.'"


Solexa has said it expects to recognize revenue from its instrument in the first half of the year, and said it will be able to sequence a mammalian genome for $100,000 or less sometime in 2006. The investment community has taken notice.


Nate Cornell, the PacGrowth analyst who initiated the 'buy' rating, said he believes that, based on future revenue estimates, Solexa's stock is trading at a 34-percent discount. His analysis was based on a stock price at the time of $8.94. Cornell said the company will take market share away from Applied Biosystems and that the high throughput of Solexa's instrument will open up new sequencing markets.


"The breakthrough that I see, basically, is that the [Solexa] instrument will create an opportunity where you can increase throughput and you can reduce price by orders of magnitude," Cornell said.


The Cancer Genome Project, he says, is a "near-term catalyst" for sales of the instrument. About $100 million of the $1.5 billion project is committed to a three-year pilot project beginning in 2006.


Cornell's optimism for Solexa's stock is also based on the company's offering of other services. "I think there is a real opportunity for Solexa, because it is not only gene sequencing [and] personalized medicine, but it is also gene expression, and gene expression is estimated to be about a billion-dollar market in itself, so there's plenty of market opportunity here," he said.


Public Rivalry


Solexa, of course, has one significant rival in the next-generation sequencing market: 454 Life Sciences. The company, which is part of publicly traded CuraGen, has a leg-up on Solexa in that it has been selling its Genome Sequencer 20 since last March, and has the marketing muscle of Roche Diagnostics behind it.


What does Cornell think about the GS 20 developed by 454 Life Sciences? "I think researchers are generally excited about the fact that [with 454] you have increased throughput over the ABI instrument, but cost, at this point in time, is still a factor, in my opinion," said Cornell. "We know what the 454 machine does already, and that's about 20 million bases per run. Solexa anticipates being able to do one billion bases per run by the end of this year. In the long run, I think the Solexa machine will be more economical and have a higher throughput."


John Sullivan, the Leerink Swann analyst who initiated the 'outperform' rating, said he believes that one advantage Solexa has over 454 is that it is putting more of a focus on human resequencing. "I see more growth in resequencing," he said. Sullivan disclosed that, in the past 12 months, his firm has received compensation for providing investment banking services to Solexa.


Sullivan also said he believes Solexa has an advantage over 454 in the stock market, because Solexa, unlike 454, is a pure-play company. Individuals interested in 454 must invest in Curagen, which is a drug-discovery company. "Investors can understand more clearly a company with a single focus," Sullivan said.


Cornell agreed that pure-plays may have a leg up in the stock market. "I think that most investors want Curagen to unlock the value of 454 and spin it out," he said.


This may be something for other next-generation companies to keep in mind as they bring their instruments to market. According to Sullivan, however, they better get there quickly.


"Customers of the life sciences industry seem to most often consolidate around a couple of companies per technology," said Sullivan, pointing to Affymetrix domination of the high-density array market and ABI's leadership in the DNA-sequencing sector. "Now that the entry of 454's system has started the ball rolling on industry-wide evaluation of next-generation DNA sequencing technologies, other companies with next-generation sequencing technologies need to get them in commercial form and in front of scientists in the near term. Otherwise, they may find themselves trying to convince scientists to switch from technologies they just switched to, which is never easy. 


"I think that not long from now, thought leaders in DNA sequencing will be evaluating new technologies against not only Applied Biosystems, but against companies like 454 and Solexa as well," Sullivan said.


Kate O'Rourke covers the next-generation genome-sequencing market for GenomeWeb News. E-mail her at [email protected].

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