Genomics may be a cinderella story. companies based on workhorse gene sequencing and identification tools blossomed overnight to become the belles of the stock market, only to quickly disappear into near investment obscurity. Today, as the search to discover and develop genomics-based therapeutics grows, each of these companies is gussying up and putting its best foot forward in hopes of being rediscovered as a winning drug company.

In "Biotech 2002," his most recent industry report, investment banker G. Steven Burrill notes that while the technology platform business model first appeared to make sense with its focus on delivering products to speed drug discovery, it soon became clear that most new technologies address only a portion of the drug discovery continuum.

"As essential as genomics and its ancillary technologies are to the life sciences, few of these firms were able to convince investors of their ability to generate and sustain profits using their existing business models," Burrill writes. So instead of offering tools and services, genomics firms believe they can create long-term business value by transitioning into drug R&D, a business model proven by existing biopharmaceutical producers.

Most genomics firms have begun the difficult transformation through a variety of changes. These can include new managers with drug-industry experience; in-licensing of product candidates; acquisitions to gain technology and infrastructure, including drug R&D, clinical capabilities, and manufacturing; partnerships and alliances; and a decreased emphasis on sequencing services and database sales.

Genomics companies have recognized "they can't thrive solely by licensing their particular technology and expertise for drug development by others," says consulting firm Ernst & Young in its 2002 biotech industry report. "To maximize the value of their technologies, many of them are venturing into the more risky and more expensive business of developing, and in some cases marketing, their own drugs."

Companies fitting this bill include such notable names in gene sequencing and gene function as Celera Genomics, Human Genome Sciences, Incyte Genomics, Hyseq, Lexicon Genetics, and Millennium Pharmaceuticals. Others--such as Deltagen, Curagen, Exelixis, Sequenom, deCode Genetics, and Myriad Genetics--are using genomics-related technologies to identify drug targets and then move into drug discovery alone and with partners.

Not only do these companies have similar trajectories, but they also share comparable histories. Most were created in the early to mid-1990s when efforts to sequence the human genome were taking off. As the first draft of the genome was nearing completion in January 2000, they saw their stock prices increase manyfold. Buoyed by this bubble, the biotech industry overall raised a record $32 billion through stock offerings that year.

However, the surge in share prices only lasted for a few months, and multi-billion-dollar market capitalizations for small, unprofitable genomics companies vanished as quickly as they appeared. By early 2001, when the genome was published, share prices were down 70%, and they fell another 50% the following year.

Today, stock prices for many genomics firms are near or even below 1999 levels as the companies have yet to convince investors that they'll succeed in developing products. In contrast, stocks of successful biopharmaceutical producers or those simply with promising drugs in their pipelines have been trading at higher prices, despite a market downturn.

Like small biotech start-ups, genomics companies have no track record and no experience in bringing drugs through clinical trials. Yet unlike start-ups, many have substantial intellectual property portfolios created from gene sequencing and expertise in understanding gene function. They also can afford the technology, development, production, and human resources they'll need.

This is because most took advantage of their briefly soaring stock prices to cash in and now have several hundred million, if not a billion or more, dollars in the bank. These cash reserves give them unusual independence, flexibility, and the luxury of being able to support internal efforts for some time. They can often choose between developing products with major pharmaceutical companies or going it alone and creating their own integrated operations.

In fact, according to Ernst & Young, the biggest driver of biotech consolidation has been the aggressive merger and acquisition behavior of these companies. One of the best examples is nine-year-old Millennium Pharmaceuticals.

ON THE STRENGTH of its early ability to produce gene targets, Millennium set up some of the biotech industry's most lucrative alliances with big pharma partners. More than 20 deals between 1995 and 2001 gave it more than $2 billion in funding, while it raised another $830 million in stock sales.

Millennium notes that over time it's been able to shift the deals from straight licensing to more collaborative ventures. Recent relationships with Aventis and Abbott Laboratories--in which the companies share costs, risks, and potential profits--let Millennium maintain significant ownership and decision-making rights from discovery through commercialization.

Although most small biotech companies aren't in the position to share either costs or risks, Millennium has been doing both while at the same time building its business by acquiring key capabilities. By April of this year, with its $2 billion purchase of Cor Therapeutics, the company had become a fully integrated biopharmaceutical producer with two acquired products on the market and another 10 in clinical trials.

The company expects to reach $300 million in revenues this year, although it is still a few years away from being profitable. Spending on R&D and clinical development has increased substantially. And it has been facing the same challenges and potential setbacks of any drug developer, with two of its drug candidates recently disappointing in clinical trials.

Millennium's stock trades at only about $9 per share--it still has to prove it can develop and market its own products. It has moved only one genomically derived drug candidate from its own labs into clinical trials, with help from its partner Abbott. The drug, in Phase I trials, is an enzyme-inhibiting compound involved in regulating metabolism and targeting obesity.

Genomics drugs should represent a new class of therapeutics directed toward genetic causes of disease, and, as such, expectations surrounding them have been extremely high. For example, a widely publicized belief is that genomics can lead to personalized drugs based on an individual's genetics. Company executives have mixed views on this potential, with one calling the idea "deeply flawed," another suggesting it's overpromoted, and a third seeing real possibility.

They do agree, however, that genomics should help design appropriate treatments, using existing or new drugs, for specific patient populations or disease states. A frequently cited example is Genentech's drug Herceptin. While it is not considered a genomics drug per se, since it didn't arise directly from gene sequencing, the monoclonal antibody targets only specific breast cancers in which the HER2 gene is overexpressed.

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Copyright © 2002 American Chemical Society