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Genomania Meets the Bottom Line

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Science  16 Feb 2001:
Vol. 291, Issue 5507, pp. 1193-1203
DOI: 10.1126/science.291.5507.1193

When a drug company announces that it will start testing a new compound in humans, the news typically draws cursory notice from investors and stock analysts. After all, only a small fraction of candidate drugs ever make it to the pharmacy and on to a company's bottom line.

Last month, however, the financial savants took extra notice when Cambridge, Massachusetts-based Millennium Pharmaceuticals and European drug giant Bayer AG announced that they would soon put an anticancer drug into phase I clinical trials. What caught their eye was not the drug's potential profits, but the process the firms used to find it—and its speed. Aided by new technologies that enable researchers to rapidly screen thousands of genes and their protein products for potentially useful properties, the companies sped from gene identification to product testing in just 8 months, shaving at least 2 years off the typically long and costly drug-discovery process. “This is a major milestone for the pharmaceutical industry,” crowed Bayer executive Wolfgang Hartwig.


Such expansive claims are not unusual in the biotechnology industry, which for more than a decade has hyped the profitmaking potential of sequencing human genes, only to see many of those claims founder in a sea of red ink. But the Millennium-Bayer announcement may be one sign that for-profit genomics—a loosely defined collection of commercial ventures that range from selling technologies, tools, and information to developing new drugs—is beginning to live up to its advance notices. “It's a wake-up call anytime you can punch years out of product development,” says Mark Edwards of Recombinant Capital, a biotech consulting firm in Walnut Creek, California.

Still, many financial analysts remain wary of the growing genomics industry. Although a record number of self-proclaimed gene firms went public last year, and a few established firms saw their stock prices temporarily skyrocket in anticipation of the completion of the human genome, longtime observers note that most genomics companies have yet to turn a profit (see table). There are exceptions: Some genomics toolmaking companies and information brokers have impressive—and rising—earnings. But the industry is still too young to show that it can produce what Wall Street is really looking for: blockbuster drugs. Even some high-profile players, such as information broker Celera Genomics of Rockville, Maryland, are still struggling to figure out how they will ultimately make money (see sidebar on p. 1203).

Such uncertainty is typical of an emerging industry, analysts say. And just because many genomics companies are showing losses in annual reports doesn't mean they are in danger of closing up shop. Indeed, some companies—such as Celera—have banked so much money from stock offerings that they could survive for years at current spending rates. In addition, Bayer and bigger pharmaceutical companies with deep pockets are pumping billions of dollars a year into a wide range of genomics companies. These cash streams not only fuel research and product development but also give some companies “some ability to decide whether or not to show profits. Everything hinges on how much they choose to spend on R&D,” explains Alexander Hittle, a stock analyst with A.G. Edwards & Sons in St. Louis, Missouri.

Toolmakers to trailblazers

Although the hundreds of companies involved in genomics are often hard to pigeonhole, and they can reshape themselves in a single board meeting, they are often placed in one of three major categories. At one end of the spectrum are the toolmakers, which sell the machines, chemicals, chips, and computer codes that make it possible to sequence raw DNA, characterize gene expression, and search for meaningful patterns in the data. Among these are Affymetrix of Santa Clara, California, which makes gene chips that give researchers the ability to screen the activity of scores of genes at a time, sequencing machine-maker Applied Biosystems of Foster City, California, and bioinformatics software developer Informax of Rockville, Maryland. The toolmakers are among the first to show profits, in large part because—like the peddlers who sold shovels, food, and blankets to gold miners—they typically demand payment whether or not their customers ever strike it rich. Applied Biosystems, for instance, made a profit of $186 million last year, primarily on sales of sequencing machines and reagents. Affymetrix could be profitable within a year or so.

The second category is the service sector. Companies such as Incyte Genomics of Palo Alto, California, and Celera, for example, are making their names as gene discoverers and information brokers, selling up-to-date information on genes and their products to companies searching for drugs and diagnostic tests. Although Incyte may move into the black this year, profits in this sector are uncertain, because the demand for privately held information may shrink as public databases grow. Indeed, to hedge against that development, both companies are reformulating themselves, having applied for patents on genes that could involve them more directly in drug development and staking claims in the new field of proteomics (see below and sidebar, p. 1194).

The third category consists of the drug discoverers like Millennium and Human Genome Sciences (HGS) of Rockville, Maryland, both of which are helping other companies find drugs and diagnostics while trying to develop their own. HGS has focused on finding proteins that can be used as drugs, and Millennium has established itself as an ambitious technology pioneer, attempting to use concepts borrowed from the steel, computer, and other established industries to scale up and speed drug discovery. Under its 1998 deal with Bayer, for instance, Millennium promised to identify 225 new drug targets within 5 years, in exchange for up to $465 million in cash and the right to commercialize up to 90% of the discoveries. (Bayer, which has already received nearly 100 targets, decides which 10% it keeps.) Such alliances, believes Edwards of Recombinant Capital, are the future of commercial genomics, especially as companies try to tackle diseases that involve a dozen or more genes. But profits in this business aren't likely to materialize for years. Millennium, for instance, expects to spend nearly $400 million on research this year, report losses of $125 million, and remain in the red for at least another 4 or 5 years.

The proteomics generation

Toolmakers, information suppliers, and discovery companies are already looking beyond genomics to proteomics, the latest effort to demystify the functions of the proteins coded for by all those genes. Surveying genes is a good way of finding possible drug targets, the reasoning goes. But drug targets themselves are almost always proteins. And because proteins undergo significant changes after being built from their gene templates, researchers have recently set out to look for high-throughput methods to study them.

Many of these methods—two-dimensional gel electrophoresis, mass spectrometry, and protein binding studies—have been around for decades. But robotics and high-powered computers crunching massive amounts of data are making it possible to run these tests on a scale never seen before. “It's basically an old field being renewed because the technology has improved so much,” says Amos Bairoch, a proteomics expert at the Swiss Institute of Bioinformatics in Geneva.

Still, working with that technology remains more difficult than sequencing genes. Whereas gene sequencing basically requires a single technology, proteomics today consists of a collection of nearly two dozen different techniques for analyzing a protein's function, its amino acid makeup, its three-dimensional structure, and the other proteins to which it binds. One benefit for companies entering the field is that there's plenty of room. “There is enough to be done that people don't need to collide head on immediately,” says Bairoch.

View this table:

Some proteomics groups may compete on the same turf anyway. Among the highest profile proteomics entrants are genomics powerhouses Celera and Incyte, both of which have made major moves into the field in the past year. In March, Celera raised nearly $1 billion on the stock market and announced that it was committing a sizable fraction to building a new proteomics research facility. In December, Incyte used money from its own recent stock offering to buy Proteome Inc., an early start-up in the field, to bolster its own burgeoning effort. Meanwhile in Europe, the Swiss start-up Geneva Proteomics is preparing a stock offering to raise money to set up a similar proteomics factory.

This proteomics gold rush suits the toolmakers just fine. Suppliers of well-proven proteomics technologies such as mass spectrometry, which can be used to identify different proteins, are already seeing their business jump. Meanwhile, companies like Ciphergen Biosystems of Fremont, California, which supplies protein-identification chips, are hoping to cash in as well. Still, these so-called “tool-kit” companies could face trouble down the road, says Craig West, another biotech analyst with A.G. Edwards & Sons. “Tool-kit firms are going to experience consolidation” as the proteomics field settles on a couple of key technologies as de facto standards, says West. And ultimately, West argues, the real money will flow to those who use the technology to find new blockbuster drugs. “It just doesn't seem to us that having the next cool way to find something out is viable for a long-term business model,” he says.

What have you done for me lately?

Other analysts echo that sentiment in discussing the genome companies as a whole. Edwards, for instance, notes that as interesting as last month's Millennium-Bayer announcement was, the companies still have to show that they can move that speedily on a routine, sustained basis. Even then, some observers are skeptical that early agility will translate into substantially shorter drug development cycles, as major delays often occur during clinical trials and in the regulatory process. “We need a gene chip to speed up patients and the bureaucrats, not the science,” jokes one analyst.

Industry executives see other challenges. Some wonder who will train their next generation of employees, as many of the best and brightest academics and graduate students have been lured into the private sector by stock options and hefty salaries. Others fret about how to keep the talent they've hired—and sometimes made wealthy—happy. The challenge, one exec told analyst Hittle, “is to find ways of keeping the job interesting enough so that millionaires want to come to work every day.”

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