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William Blair Downgrades Complete Genomics

NEW YORK (GenomeWeb News) – Citing pricing pressures in the whole-genome sequencing space and Complete Genomics' rising operating expenses, investment bank William Blair today downgraded the Mountain View, Calif.-based firm's stock to Market Perform.

In a research note, analyst Amanda Murphy said that she believes Complete Genomics offers a differentiated model for outsourced whole-genome sequencing "that facilitates a lower cost model." The firm also has a building backlog of whole genomes — about 5,700 genomes as of the end of the first quarter — indicating its model is gaining acceptance.

She noted, though, two obstacles that the company faces as it seeks to build out its business. The first is a difficult pricing environment. Starting a year ago when Illumina cut its prices for whole-genome sequencing, the average sales price on a per-genome basis has fallen "more rapidly than we had modeled," Murphy said. While prices have stabilized in the past year, pricing pressure remains, and she expects the average sales price per genome to be $3,700 in 2012 and $3,000 in 2013.

Larger orders are currently priced at less than $3,000 per genome, she estimated, and added that Complete Genomics is pursuing "R&D-like" projects and shipping genome orders at no cost, "which has complicated pricing dynamics."

She further noted that the firm has received some large orders and that the translational market is a potentially large opportunity for Complete Genomics, but the company has had only limited success in turning the orders into actual sales. She is modeling almost 7,000 genomes shipped this year and 11,000 in 2013.

"With the lack of large orders signed to date we have become less confident in the acceleration of genomes we have modeled in the outer years and currently model revenues that are more than $10 million below consensus in 2013," Murphy said.

Additionally, the company's operating costs are growing faster than had been expected due to investments in operational infrastructure, including new sequencers, and upgrades to existing platforms and other workflow components. The uptick in spending has resulted in an increase in Complete Genomics' gross profit breakeven target to a range of between $10 million and $12 million from an earlier target of $8 million, and an increase in operating profit breakeven target to between $35 million to $40 million from an earlier figure of $25 million.

At the estimated genome shipment and average sales price run-rate, Murphy is modeling gross profit breakeven to occur in mid-2013.

In the past week, Complete Genomics' stock has jumped 82 percent to $3 as of the close of the market last Friday.

"With continued uncertainty around timing of sample receipt from customers and customer acceptance of delivered genomes, combined with a lack of conversion of large genome orders in the pipeline to backlog, we believe the stock adequately reflects the company's profile," Murphy said.

In early morning trading on the Nasdaq today, Complete Genomics' shares were down 3 percent at $2.92.

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