This story was originally published Aug. 4.
Complete Genomics has signed two large-scale contracts worth $14 million that call for the delivery of 2,700 genomes over the next year, the company disclosed this week as part of its financial report for the second quarter of 2011.
Including those projects — the renewal of an existing project with the National Cancer Institute and a new contract with the Inova Translational Medicine Institute — the company has booked orders for 5,700 genomes, worth approximately $30 million, since the beginning of the year, CEO Cliff Reid said during a conference call with analysts.
During the second quarter, Complete Genomics recognized revenue for 950 genomes. While this was an increase over the 600 genomes it recorded in the first quarter of the year, corresponding revenues declined sequentially in line with price reductions for the company's sequencing service. The company reported total revenues of $5.9 million for the three months ended June 30 — a substantial increase over $1.1 million in the year-ago quarter, but a 13 percent drop from first-quarter revenues of $6.8 million.
The company's second-quarter revenues also missed analyst estimates of $7.7 million.
Complete Genomics shipped around 1,600 genomes in the first half of 2011 and anticipates delivering 2,400 in the second half of the year, bringing its total shipments to 4,000 genomes for 2011 — a five-fold improvement over the 800 genomes it shipped in 2010.
The company's backlog as of June 30, not including the two new contracts, is 2,200 genomes, worth $12 million. It now counts around 80 organizations in its customer base — an increase from just over 50 in the first quarter — and is seeing a reorder rate of around 50 percent, Reid said.
Complete Genomics posted a net loss of $16 million, or $.56 per share, for the quarter, compared to a net loss of $12.6 million, or $13.93 per share, for the second quarter of 2010.
The company spent $8 million on R&D during the quarter, up 63 percent from $4.9 million in the second quarter of 2010. Its SG&A spending more than doubled to $6.6 million from $3.1 million.
Complete finished the quarter with $126.4 million in cash, cash equivalents, and short-term investments.
Lower Prices, Delayed Samples
Complete Genomics currently charges $5,000 per genome for orders under 50 genomes and $4,000 per genome for orders greater than 50, though there are additional discounts for much larger orders.
This price reduction — from $10,000 per genome in the first quarter — resulted in a revenue falloff that surprised industry analysts, who had projected an average price of $8,100 per genome shipped as opposed to the average price of $6,175 that the company reported.
Reid acknowledged that while the quantity of genomes shipped during the second quarter increased by more than 50 percent over Q1, "the prices came down faster.". He added that in the first quarter the company "had some legacy transactions from 2010 that were over $10,000 a genome … but as we grow, we see the bulk of our work now is done in very large transactions that are in the $5,000 and below range," which reduced the average price per genome shipped.
Despite the "precipitous average price drop" the company saw between Q1 and Q2, "we think that effect will diminish over the remainder of this year into next year," he said.
He added that the price reductions are an essential part of the company's business model and were "instrumental" in landing the Inova contract.
The company also lowered its projected genome shipments for the third quarter to 600, while most analysts had forecast more than 1,000.
Reid said the drop in shipments is due to a slowdown in sample deliveries from one of its biggest customers, the Institute for Systems Biology.
"It's a contract of many hundreds of samples and we've seen under a hundred samples arrive from ISB since the beginning of the year," Reid said.
The delay was not related to funding issues, but rather the nature of the ISB project, in which ISB is serving as an "aggregator" of samples from several sites. "They're not sequencing samples they own and control themselves," Reid said. "Rather, they are pulling samples from a variety of different investigators working on a variety of different research projects."
He added that the samples will be coming in and chalked up the delay to "the normal ebb and flow of the research process." The company expects a "significant" number of samples over the next three months that will allow it to reach its goal of delivering more than 4,000 genomes to customers for the full year.
Reid noted that the plummeting price of its service is attracting many more projects "that were otherwise priced out of the market, and cited the Inova contract as "an extreme example of that."
Furthermore, in response to an analyst question regarding the impact of uncertain funding on academic customers, Reid noted that this scenario is actually "driving the research community to find the most economical way of getting their research done" — a trend that is pushing them toward sequencing services over instrument purchases.
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Nevertheless, he warned that prices will not continue to fall at the same pace that they have over the last year.
"We're beginning to see prices decline at a much slower rate," he said. "We think that by the end of 2012, the average price will be $3,000 or lower, but this actually represents a slower price decline over the next 18 months than what we've experienced over the previous 18 months."
In response to the company's lower-than-expected Q2 revenues and its conservative Q3 guidance, most analysts cut their full-year revenue estimates for the company.
Quintin Lai of Robert W. Baird reduced his 2011 revenue estimate by 33 percent to $25.4 million and cut his 2012 estimate by 36 percent to $53.8 million. He also lowered his price target for the company's shares to $15 from $20, but maintained an "Outperform" rating.
Jon Wood of Jefferies, meantime, lowered his 2011 revenue forecast to $24 million from $36 million, his 2012 forecast to $50 million from $80 million, and his price target to $16 from $20.
Reid said that the company does not plan on providing full-year revenue guidance but reiterated the company's goal of delivering 4,000 genomes in 2011. Based on the same average price per genome that the company reported in Q2, that would equate to $24.7 million in revenue for the full year.
Shares of the company plummeted more than 30 percent from a closing price of $11.25 on Aug. 3, the day it reported its earnings, to close at $7.71 the following day.
Reid said that the company now has 21 instruments in production — an increase from 16 instruments at the beginning of the year and a step toward its goal of having 24 machines running over the next few months.
Complete Genomics' current capacity is now 600 genomes per month. By comparison, it was able to sequence 400 genomes per month in March (IS 3/15/2011). Reid said the company is on track to reach its previously stated goal of ending the year with a capacity of between 800 and 1,200 genomes per month (IS 5/10/2011).
He added that the company also continues to "make progress" on its next-generation instrument, which will have an imaging density of 1 pixel as opposed to the current density of 2 pixels.
The firm expects to have the new machines in commercial production in the first half of 2012.
"We expect these next-generation sequencers will initially have throughput of approximately six genomes per day," Reid said during the call. He said previously that the company expects these systems to ultimately have a capacity of 10 genomes per instrument per day.
In response to an analyst question, Reid said the company has no plans to expand beyond whole-genome sequencing in order to deliver other types of data to customers. Rather, he believes that customers interested in combining RNA-seq or methylation data with whole-genome data will be willing to use Complete alongside other vendors.
Furthermore, while acknowledging that whole-genome sequencing will always be offered at "a premium" to exome sequencing, he said that the company is seeing increasing interest from researchers looking to move from a whole-exome approach to a whole-genome approach.
While it "makes sense" to do exome sequencing for Mendelian disease, Reid noted that researchers are interested in studying whole genomes for complex diseases because "it's clear that the regulatory regions of genomes are just as important as the simple coding regions."
As an example, he noted that the "entire spectrum of cancer is clearly moving in the direction of complete genomes."
Complete Genomics' new agreement with NCI is a follow-on order to a pilot study initiated last year, under which it sequenced 50 pediatric tumor/normal pairs for NCI's Therapeutically Applicable Research to Generate Effective Treatments, or TARGET, study (IS 9/7/2010).
The company did not disclose how many genomes it is sequencing under the renewed contract, but had previously said that it had a "pending" order with NCI for 1,128 genomes.
Like the pilot study, the new contract calls for Complete to sequence tumor/normal pairs and then validate somatic mutations of interest.
Reid said that bidding for the NCI contract was "hotly competitive," but the firm was able to win it "based on the quality of the data that we delivered under the pilot part of the project, and on the continued price reductions that we're achieving through technology improvements, and turnaround time, which continues to come down."
The contract with the Inova Translational Medicine Institute, meantime, is a longitudinal study that will sequence the genomes of 500 premature newborns and their parents, which would comprise around 1,500 genomes.
The Inova Translational Medicine Institute is part of the Inova Health System, a large hospital network based in Virginia.
Reid called the agreement a "landmark" transaction. "This is not a case of an NIH-funded organization doing basic research," he said. "This is a healthcare provider beginning to sequence their patients as part of a longitudinal study and we think that this is the first of what will be many such studies and contracts over the coming years."
Reid said the company believes the deal is the "first contract that has been signed with a healthcare provider to do complete human genome sequencing" and marks "the beginnings of the transition of complete human genome sequencing from being a basic research project to being an integral part of the healthcare system in the US and the world."
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