New Industry’s Genes Hold Long-Term Promis
No wonder so much of the “new economy” seems like a fad. A few months ago everybody raved about the mapping of the human genetic code, or genome. Surely, the public thought, medical miracles would quickly follow. Companies engaged in genome research saw their stock prices bid to the skies.
Yet today the genome is forgotten like a child’s toy. The stocks of companies such as Incyte Genomics, Human Genome Sciences, Celera Genomics Group and Affymetrix are at fractions of their highs.
But we should not confuse the dust storm with the stability of the land beneath it. Genomics companies are working diligently and with good capital behind them to create new medical and pharmacological science and a new industry along with it.
Indeed, the development of the genomics business is an object lesson for investors: Know what you’re buying. Fair to say most investors in genomics
stocks last winter had only a sketchy idea of what companies were doing in the new field.
“What genomics is leading to is the industrialization of medical research,” says Roy Whitfield, chief executive of Incyte Genomics, a Palo Alto company that has created databases of genetic information that it shares with pharmaceutical and biotech company clients for annual fees ranging from $3 million to $15 million.
The client companies, and university laboratories and small firms on a different fee schedule, gain knowledge of how specific genes work to produce proteins in the body and how they interact with viruses, bacteria and medicines.
Incyte, a 7-year-old company, will take in roughly $195 million in revenue from such business this year. But it will lose money because it’s investing $180 million annually in research and development of new databases devoted to information on proteins and on variations in the genetic codes--called single nucleatide polymorphisms, or SNPs--that, say, make one person allergic to penicillin and another not allergic.
The promise of such knowledge systems is that they will lead to personalized medicine--gene-based drugs that treat each person specifically.
Creating such knowledge databases is complex and expensive. Analyst Meirav Chovav of Salomon Smith Barney estimates that Incyte will be investing heavily through 2002 but will begin to turn a profit after that.
And genome finance is simple compared with the science involved. A misconception about the genome is that it is like a wartime code--break the code and understand everything. But knowledge of the human body’s 100,000 genes is only the first step.
“The next step is to understand the interactions of genes and the essential proteins and to understand how pathogens [viruses and bacteria] form and interact,” says Caltech professor John Baldeschwieler.
Scientists at Caltech in the 1980s developed the gene-sequencing computer systems and instruments that enabled the genome to be deciphered in the first place. Today companies such as PE Biosystems--the parent firm of Celera Genomics--are selling such sequencing equipment to biotechnology companies.
Other firms are engaged in producing gene-based drugs or diagnostic tools. Affymetrix of Santa Clara, Calif., for example, makes “chips” containing genetic information that can be used in diagnosis and treatment of disease.
The emerging genomics industry, providing fast access to gene data, will accelerate drug discoveries in the larger pharmaceutical business. One company, Human Genome Sciences, of Rockville, Md., is already producing gene-based drugs in partnership with pharmaceutical giant SmithKline Beecham.
Incyte is following a different path, providing its databases to a broad range of leading drug, biotech and info-tech companies, including Hoffman-LaRoche, Pfizer, Bristol-Myers Squibb, Amgen and Genentech, as well as Motorola and IBM for new developments in bio-information.
“The top pharmaceutical companies annually spend more than $8 billion on discovery research. We think Incyte can capture 5% to 7% of that spending,” says analyst Kevin Tang of Deutsche Bank Alex. Brown Securities, throwing out figures that would double or triple Incyte’s revenue in coming years.
But genomics is not a “dot-com” business of overnight riches. It demands a lot of investment and intellectual firepower. “We have 90 PhDs in biochemistry just confirming our analysis of gene systems,” says Whitfield, 46, who graduated in mathematics from England’s Oxford University and has an MBA from Stanford.
Business acumen and luck helped him last February, when enthusiasm for genome companies was at its height. Incyte raised $200 million in convertible debt financing.
And as it did so, Janus Life Sciences fund, part of the Denver-based mutual fund family, made a $400-million equity investment in Incyte stock.
Janus bought at the equivalent of $105 a share, and so sits now with a substantial paper loss in Incyte--which closed Friday at $30 a share. But Janus typically invests for the long term and the field of genomics has enormous promise in the long term.
And the short-term outlook isn’t bad: If the huge research investments of Incyte and other genome companies were treated as capital investments for accounting purposes, the companies would be profitable today.
But beyond the fate of any single company, the genomics and biotech industries are models of new economic and technological development. In the past, when less capital was available, scientific advances came out of government laboratories or facilities of large companies such as Bell Labs at AT&T; or the research labs of Merck and IBM.
Today we support advanced research with stock market investments of pension and mutual funds and other institutions that typically devote just a small percentage of their enormous capital to risky ventures.
It’s a volatile system, and there are failures. But there are also successes. And that’s why the new economy is no fad.
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James Flanigan can be reached at jim.flanigan@latimes.com.
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Industry in Embryo
Mapping the human genetic code, or genome, was only the first step in a long process of developing new medical science and a new industry. Pioneering companies already are working in specific ways to develop the genetic industry, even as their stock prices fluctuate wildly. Listed are some leaders in the new field.
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Fri. 12-mo. 12-mo. Company/ticker/ stock 52-wk. 52-wk. revenue* type of business price high low (millions) Affymetrix $57.00 $163.50 $36.31 $142.9 AFFX; genetic diagnostic chips Celera Genomics Grp. 66.31 276 15.19 42.6 CRA; gene databases Gene Logic 21.38 152.50 5.31 21.4 GLGC; gene-identifying software Human Genome Sci. 81.50 116.38 17.84 21.5 HGSI; gene-based drugs Incyte Genomics 30.00 144.53 8.59 168.2 INCY; genetic databases
Company/ticker/ earnings* type of business (millions) Affymetrix -$0.39 AFFX; genetic diagnostic chips Celera Genomics Grp. -1.65 CRA; gene databases Gene Logic -0.97 GLGC; gene-identifying software Human Genome Sci. -0.57 HGSI; gene-based drugs Incyte Genomics -0.56 INCY; genetic databases
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*Through June 30
Sources: Company reports, Times analysis, Bloomberg News
