CAPScall of the Week: Complete Genomics


For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Complete Genomics (NAS: GNOM) .

What Complete Genomics does
Complete Genomics is a life sciences company developing DNA sequencing technology to quickly and cost-effectively analyze DNA data. The main buzz surrounding Complete Genomics is its announcement that it has developed new genome sequencing technology, known as Long Fragment Read, which is significantly more accurate than what's currently available on the market and requires less DNA for analysis. Genome sequencers are vital to researchers as they allow for quicker turnaround times in studies. Also, as genome sequencing costs fall, research studies become cheaper and more feasible to run.

In Complete Genomics' latest quarter, the company noted revenue of $3.9 million, down from $6.8 million in the previous year, while expenses ballooned due to DNA sequencing technology development.

Whom it competes against
As you can imagine, competition among life sciences companies is fierce. Illumina (NAS: ILMN) is currently suing Complete Genomics for allegedly infringing on a single method of sequencing a polynucleotide template. This lawsuit was filed at the same time that Roche was attempting its hostile takeover of Illumina (which Illumina successfully fended off).

Also, Life Technologies' (NAS: LIFE) new Benchtop Ion Proton Sequencer is capable of sequencing the human genome in just one day, for the tidy sum of just $1,000. This significant reduction in time and cost could be a game-changer that puts its technology out of the reach of its competitors. Big pharmaceutical companies are starting to take notice of Life's superior technology, such as when GlaxoSmithKline (NYS: GSK) and Life Technologies partnered up in 2011 to develop a companion test for a cancer drug. But did I mention the lawsuits? Pacific Biosciences (NAS: PACB) won a lawsuit last year against Life Technologies regarding the technology surrounding single-molecule sequencing.

In short, Complete Genomics competes as much against its competitors' lawyers as it does against their innovation.

The call
After reviewing Complete Genomics' prospects, I've decided to make a CAPScall of underperform on the company.

In spite of Complete Genomics' new LFR technology, I'm concerned the company is quickly running out of cash. Complete ended its latest quarter with just $63.1 million in cash ($40.2 million net cash), and an increasing cash burn rate ($36 million in 2008, $54 million in 2009, $71 million in 2010, and $78 million over the last 12 months) that shows no sign of letting up. That leaves Complete with few options other than to sell itself on the cheap, sell the rights to its new technology to raise cash, or dilute the daylights out of its current shareholders. There's also no guarantee, even if it does issue a dilutive share offering, that its technology will be widely accepted or effectively be able to compete against Illumina and Life Technologies, which have much larger partners and deeper pockets. With the company cutting 55 of its 255 jobs and delaying its expansion, I think that's all the incentive I need to rate this stock as underperform.

You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Illumina and Pacific Biosciences of California. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has transparency written in its DNA.

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