TCS Daily

Genome Investing: Where To Satisfy A Genetic Itch

By James K. Glassman - February 26, 2001 12:00 AM

Now that scientist Craig Venter of Celera Genomics has sequenced the human genome, clearing the way for greater study of our genes and potential new treatments, there's a big question for tech investors. How do we profit from what seems to be a biotech revolution-in-the-making?

First of all, it's important not to confuse scientific progress with business success. Venter deserves enormous credit and probably a Nobel Prize. While a government scientist in the late 1980s, he began to develop a radical technique for quickly mapping our genes. Many of his colleagues in government scoffed at his methods, so he left the National Institutes of Health and started a non-profit research center, The Institute for Genomic Research in 1992.

In 1998, he teamed up with Perkin-Elmer (now Applera Corp.) to create Celera, turbo-charging the effort to describe all of human DNA. Venter's private venture forced the government's more expensive Human Genome Project to speed up, and in the end Venter produced a higher-quality map of the roughly 35,000 genes that make up a human being.

Venter expanded the bounds of science, delivered a wealth of knowledge for the study and treatment of human disease, and showed that private efforts, even for ambitious projects in basic science, surpass the work of government agencies. Has he made a giant contribution to bio-medical science? Absolutely.

Still, whether you should invest your 401k money in Celera (CRA) is a very different question. One reason that this issue (a tracking stock for the part of Applera that includes Celera Genomics) has fallen close to 80 percent from its high is that many investors have looked beyond the science to focus on the business.

Celera may gain lucrative royalty payments if other companies commercialize some of its discoveries, but right now Celera gets most of its meager revenues from selling subscriptions to its gene database. Big companies like Amgen and Pfizer each pay between $5 million and $15 million per year to subscribe, and non-profit research institutions pay considerably less. Selling access to a library for seven figures is nice, but there are not that many potential customers.

I don't want to knock Celera - they have a lot of smart people and may discover great new avenues to growth. But my guess is that it will continue to be the people who actually create new medicines, not the people who own research libraries, who will profit most in the Genome Era.

So, you might say, why shouldn't I just invest in the companies that subscribe to Celera's database? Well, there are some great companies in that group, but one thing Celera's work has revealed is how little we know about many of these genes. For example, we used to think that there were close to 100,000 genes in a human being, and now we've learned that the actual number is less than half that. Scientists are now turning their attention to the actions of proteins directed by our genes. The sequencing of the genome is really just the beginning for a lot of research programs.

Right now, I'm intrigued by companies that are already developing specific products based on our knowledge of genetics. Mark Augustine, a senior biotech analyst at US Bancorp Piper Jaffray, likes a number of these product-focused companies. Alexion (ALXN) is developing several products related to the immune system, including laboratory pigs genetically engineered to yield tissue suitable for human transplant, i.e. cells that won't be rejected by the human immune system. Aviron (AVIR) is using new knowledge of genetics to develop better vaccines. Xoma (XOMA) has a number of products intended to fight deadly infections.

I should warn you that these are very small firms with high levels of risk. They may offer large potential rewards, but should represent only a small portion of a diversified portfolio. Among the larger biotechs with established earnings, Augustine likes Medimmune (MEDI) and Genzyme (GENZ). Good stocks to consider as you look to profit from biotechnology.


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