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Chinese BGI obtains advanced genome analysis technology in US takeover

Chinese BGI obtains advanced genome analysis technology in US takeover published on

At the end of December 2012, the Committee on Foreign Investment in the United States approved the takeover of one of the leading American human genome sequencing companies, Complete Genomics, by the American subsidiary of the Chinese corporation Beijing Genomics Institute. As of February 10th 2013, the transaction had already received approval from the Chinese National Development and Reform Commission. Still pending is only an approval regarding compliance with antitrust laws. Considering a relatively small share of CG and BGI in the American market, dominated by giants like Illumina, this approval is expected to be granted easily. The CFIUS decision, however, was criticized by some analysts as posing a threat to national security as well as to the competitiveness of American companies in the field of DNA sequencing.

Critics of the CFIUS decision accurately argue that by means of this takeover the Chinese company will gain access to technology that could be a breakthrough in the commercial application of human genome knowledge in clinical treatment. In July 2012, CG publicly announced details of the newly developed method of genome sequencing and analyzing named LFR (Long Fragments Read). LFR is expected to be a ten times more accurate solution (less than 600 possible errors for the complete human genome) and much cheaper than other methods offered currently by competitors. Using LFR, a WGS (Whole Genome Sequencing) retrieval with the haplotype map requires analyzing only 10-20 cells, less than 100 picograms of genetic material. If the method’s efficiency and competitiveness are proved in commercial mass sequencing, competitors evaluate this method positively. Even if, as a drawback, they point out the relatively long time required for full sequencing, it will be a significant step on the road to the application of genome sequencing and analysis data in commercial and widely available personalized medical treatment. The genome of an individual remains unchanged for a lifetime and its accurate sequencing and analysis can provide a basis for the doctor’s decision on the necessity of medical treatment and the selection of medications. Thus, its application could be perfectly tailored for an individual patient. It is possible that, in the not very distant future, modern clinics will apply medical treatment only after the patient has presented his or her analyzed genome or after an individual’s genome has been fully sequenced and analyzed on the spot. Human DNA sequencing, without analysis, is already offered by some American companies at prices below 1000 USD. The accurate and inexpensive genome analysis the LFR method is supposed to provide could be a starting point for a lucrative branch of the genetic industry, not only in the United States but also in increasingly affluent Asian societies, especially China. The business model CG has applied so far,  without significant success but based on the old technology, has relied on providing services directly to clinics and hospitals.

Considering the prospect benefits that could be achieved when using the LFR technology, it is not surprising that the Chinese company, one of the world leaders in genome sequencing, put their best efforts to take the full control of CG. It was no surprise that the American leader in genetic research and an equipment manufacturer, Illumina, was also interested in the takeover. To BGI’s bid, at a price of 3.15 USD per share, Illumina answered with 3.30 USD. Besides a takeover of cutting-edge technology, to Illumina, BGI’s successful acquisition of CG can also mean a dramatic decrease in the sales volume of DNA sequencers and sequencing systems. Currently, BGI is Illumina’s biggest customer. If BGI successfully implements CG’s technology in equipment manufactured in China, the Chinese company can become a serious competitor to the American giant. Illumina’s offer was rejected by the CG’s board of directors. The official reason for this decision was a high probability that the acquisition would be blocked as non-complying with antitrust laws. Although the key role in this decision was played by the fear that Illumina, as one of CG’s current competitors in the field of DNA sequencing and analysis technology, would close down CG after taking it over and gaining control over the LFR technology. Illumina’s concerns over national security, and its hiring lobbyists to block the takeover, have been questioned, as Illumina itself for years, without any concerns, had been selling DNA sequencers and sequencing systems to China. However, the argument, raised by American scientists such as Elaine R. Mardis, that after the takeover the Chinese company’s access to the genome database of American citizens could be used for obscure purposes are consistent with Illumina’s arguments. Illumina explains that selling sequencing equipment does not pose a threat to national security, but that selling genome sequencing and analysis technology does. Jay T. Flatley, Illumina’s CEO, compared the sale of sequencers and sequencing systems to the sale of Coca-Cola, and the release of the sequencing technology to giving out the production formula of Coke.

Another argument raised against this transaction is the negative impact it could have on the market position and commercial gains of American companies from the genetics sector. Obtaining the LFR technology could, in the long term, give BGI a market advantage over its American competitors. The questions is how was ever possible that a company like CG, with its long presence in the market and significant scientific success, was put on sale. One of the reasons is the economic crisis. The decrease in order volume had a serious impact on the company’s financial results. Partially CG itself is to be blamed, as it was unable to transform scientific achievements into market success and capitalize on them. Delays in order processing and high prices, which, in spite of the implementation of advanced technology, were still higher than those offered by competitors, caused serious problems for the company’s cash-flow. In the field of DNA sequencing, CG’s main competitor was none other than BGI. The Chinese company, thanks to scale effects and advanced equipment provided by Illumina, could beat any prices offered by smaller companies like CG and indeed it has. The discounts CG offered to its customers were no match for BGI’s offer. As some insiders suggest, prices offered by BGI were below the cost, which aimed to eliminate competitors such as CG. Another serious blow for the American company were the funding cuts made by the National Institutes of Health. These and other factors caused the company’s financial situation to worsen, which resulted in a share value drop. The share price of 9 USD during IPO and 17 USD at the peak time plummeted to around 2 USD. In 2012, CG’s CEO Clifford A. Reid and other members of the board of directors faced a difficult decision. At the end of the third quarter of 2012, the company’s assets in cash and long term investments were valued at around 34.7mln USD, including a 6mln USD bridge payment from BGI’s American subsidiary. Delays in order processing clouded the prospects for getting enough funds in a short time and could not have been balanced even with the acquisition of such a valuable customer as Mayo Clinic. The price war with BGI gave no margin for revenue increase either. Faced with a choice between the domestic competitor, which would possibly close down the company after taking over its technology, and the previous competitor from China, which agreed to leave the company’s headquarter in the US and guaranteed orders for CG as its “sequencing factory”, CG’s board of directors had little room for maneuver.

CFIUS did not consider CG’s takeover by the Chinese company (indirectly, through its American subsidiary) as a threat to national security. Interesting, however, is that nobody, not even CG’s board of directors, raised the issue of a government bail-out or of providing government subsidies to the company. The advanced technology, the customer database, and access to the genome database of the US citizens, which, regarding rapid progress in genomic research, will be growing, will fall into the hands of the Chinese company. BGI, subject to decisions of the Chinese government, has to meet all legal obligations imposed by Chinese law, as well as requirements imposed on Chinese companies by government policies. What is interesting, CFIUS had a different approach towards the protection of US citizens genome when compared to the battle that SEC fights against Chinese companies listed on the American stock exchange and their auditors accused of fraudulent accountancy as well as against Chinese administration, whose position means protecting the fraudsters and even providing funding for companies delisted from the NYSE. As for the BGI’s takeover of CG, the best matching summary is the following quotation: “You keep what you kill”.