Stock Talk TMF Interview With Gene Logic
President & CEO Mark Gessler

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With Tom Jacobs (TMF Tom9)
November 30, 2000

[Today's story on bioinformatics company deCODE genetics' (Nasdaq: DCGN) move into pharmacogenomics ties in with this interview.]

One exciting area of biotech today is mining the human genome for functional genetic information. The Fool's Tom Jacobs (TMF Tom9) recently spoke with Mark Gessler, President and CEO of Gaithersburg, Maryland-based Gene Logic (Nasdaq: GLGC), a bioinformatics company producing gene expression information from its growing repository of normal and diseased human tissue. Here is an edited transcript of their conversation.

Tom9: Mark, GeneLogic's goal is to be world's leading source of gene expression information. What does that mean, so that my Aunt Harriet can understand it? My Aunt Harriet, by the way does not own a computer, so I'm safe, but she's very smart.

Gessler: How genes are being used. For most of your readers, the important distinction being made is between underlying gene sequence information, provided by companies like Celera (NYSE: CRA) and Incyte (Nasdaq: ICNY) as raw data. That's like a phone book -- I'm sure Aunt Harriet still has a phone book -- and in my community we have addresses for 60,000 people, but in reality we don't know what those people do based on that information.

What I would say is that what we now have with the genome, with the human genome and the baseline blueprint of life being unraveled here, we have really the baseline "phone numbers" if you will that says we've identified a gene and the 3 billion base pairs and we say that maybe there are 60,000, maybe there are 100,000 of these genes out there, and really the next step is saying what are these genes actually doing in the body, in diseases and under normal circumstances.

Information's going to be the absolute backbone of the pharmaceutical and biotech industries.
What our clients are able to do is understand more about how the pathways are being used in the disease, and this kind of information helps them to determine which genes should be focused on in their [product] development pipeline.

Tom9: Great. Now why is this a smart goal from a business standpoint -- for what you're offering to do for those folks?

Gessler: The reason it's a smart objective is that information's going to be the absolute backbone of the pharmaceutical and biotech industries. While we see more and more new technologies come out and they have implications in terms of more experiments being run, the absolute backbone is the information and how you manage it, how you're comparing it. So, we want to be one of the leading players in the information business, providing genomic information to our clients via database products, more specifically the GeneExpress database suite.

One of the things that sets your database apart is the vast array of tissue samples and sampling capability that you have.

Gessler: Absolutely. We're one of the first companies, if not the first company, to sit at this confluence of this massive amount of genetic information with large-scale amounts of clinical information. All the samples coming through, sourced from hospitals, from patients undergoing operations, for research into various forms of tissue, all that tissue and all the clinical data about that patient -- without information about that patient specifically such as identity -- goes into our database. I want to be able to look at a specific stage of cancer, specific age ranges, specific cancer, to be able to refine down the search to a very specific type of tissue. This is absolutely important in understanding what genes are doing what at a particular point in time.

Our clients may have [interest in] 100 genes or 1,000 genes, but they are interested in tracking across all the diseased genes we have in our database, and all the normal ones. We're about 10% through to our objective to have about 30,000 human tissues in the database over the next several years here, so they would have the ability to scan through our database over 100,000 genes or 100 genes that they have that they are particularly interested in and look at those genes and figure out exactly what is going in each stage of disease under all the circumstances that are important to human life and human health.

Tom9: I can understand why this is really important to drug makers in terms of narrowing�their searches for drug candidates and so on. They have access to your data through subscriptions?

Gessler: Yes, it's a three-year subscription model where they pay an annual fee for the entire database that would range, if you are a large-scale pharma company, between $2 and $6 million, and if you are a biotech company, it's slightly less: a $2 to $4 million range.

We charge the customers on annual basis, which gives us an underlying kind of an annuity, in terms of the business going forward. The customers I sign up this year are going to be with me for certainly a couple more years. That gives us the opportunity to really ramp up the revenue in the years ahead. We're building up a better and better annuity base each successive year.

Tom9: So a customer gets a subscription to the GeneExpress Database Suite -- it has three components?

Right, three primary components. First, something we call BioExpress, which is the compilation of normal and diseased human tissues. These are the tissues that I mentioned that we're pulling together literally from the operating room and bringing through our process and then ends up in our database.

The second part is something called ToxExpress, where we're actually treating rats and we're treating human tissues in vitro, and we're comparing the patterns that we see of gene expression for compounds that are known to be toxic. Many companies want to understand what is going on with their compounds in terms of toxicity at a very early time point, and what we're trying to do is unearth the patterns of gene expression that might be indicative of a compound that may not fare well in clinical development.

The third and final component of the database is something we call PharmExpress, which is very similar to ToxExpress except we're testing top-selling drugs across all the important disease areas such as oncology, cardiovascular disease, CNS [central nervous system], in treating animals and then taking the tissues from those animals and doing the same sort of scan for gene expression that we're doing in the case of ToxExpress -- so that we're able to unearth, for the first time perhaps, what pathways are being modulated and what the downstream effects of these drugs are, not only in the target organs, but in non-target organs, which is important in designing new therapies in these diseased areas.

Tom9: Is anybody else collecting tissues with the same goal?

Gessler: I can say that there are certainly other companies that want to get into this game and want to begin to collect tissues. Now, I'll take this one step further, because there's certainly a lot of talk out there about SNPs. These are single nucleotide polymorphisms. These are base sequence changes or differences. The differences between you and me are modest...

Tom9: We're talking one letter differences in the A's, C's, G's, and T's of DNA.

Gessler: ...and they may have important implications to what a gene does in humans,�maybe because you are more likely to get a disease or you may be more likely to react favorably if you're treated with a drug. There's a lot of talk about SNPs, where you can gather up a lot of samples from thousands of patients simply through cheek swaps or blood draws to do that. It's important not get confused.

If you're doing sequence analysis, you don't need a huge number of samples to understand the human genetic code. If you're on the other end and you're looking for single based changes [SNPs], or differences between human beings, you can gather that up in the thousands, by simply doing cheek swabs or blood draws, or even other forms of material, but those are the two most common ways.

But when you sit in the middle, when you're trying to do a detailed survey of precisely what's going on with how genes are being used for disease, you need 10 or 15 samples from each of these important disease areas or disease stages. Think about a cancer -- seven or eight major cancers -- we have [samples] for each pathological stage of that cancer, with all the detailed clinical information behind them. That enables us to start to say which genes are consistently being used and which ones are not, and how does that change as we move from each stage [of disease]. That kind of information is absolutely vital, dependent on having high quality samples on the front end with detailed clinical information.

Ten years in biotech might as well be 3,000.

Tom9: Turning to the numbers. You're expecting $24 million to $25 million in revenues by the end of year?

Gessler: That's correct.

Tom9: When is estimated profitability?

Gessler: Probably two or three years away from that. We have a strong current cash position of about $230 million and are certainly well able to finance going forward. Obviously the model we're in is to build the database information set up as rapidly as we possibly can, extending our first-mover advantage. We want to pull ourselves well far away from any other competitor in this space. And for the customers, they understand that we are the game in town. Nobody, in my view, is even close to coming up with the kinds of levels of information at the quality and quantity we're able to provide.

: You rely on the Affymetrix (Nasdaq: AFFX) GeneChips with 60,000 genes or gene sequences to test your tissue samples. Is there a point at which advances come along that mean you might have to redo your test with new equipment or information?

Gessler: We certainly save material from the samples... because there are going to be technologies in the future that we're going to want to take the same material and run it against. One of the key areas if probably proteomics in the future... We still think that's a couple of years away, but we're setting up the database to be able to run large scale proteomic data sets, and there are other things as well, such as the SNP information off of our underlying samples. There are a variety of ways we can use the samples and we're setting up to execute on that.

Long term, how high is the ceiling for Gene Logic? Spin out where you see your company in 10 years.

Gessler: Ten years in biotech might as well be 3,000. I want to be careful to tell you what I can see. A couple of years ahead of us, we're talking significant revenues, approaching $100 million if not more. There are certainly 300 companies that can pay at the very top end of our pricing and that have the absolute requirement for our information utility to be hooked up in house. And certainly all the biotech companies that are out there. Literally 1,000, probably 500 at least, that could immediately use what we're providing in a cost-effective manner, they have no capability to generate it internally themselves, or it wouldn't make any sense.

Certainly pharma and biotech is the first place we're going to start, also the diagnostic companies are ripe for us to have customer relationships with as well... Over the next couple of years I'd be very pleased if we had 50 or 60 biotech and pharma customers that are hooked up to our database... We've started executing on a more aggressive strategy underlying the gene intellectual property and we're looking at ways to leverage that part of our patent portfolio as well.

Your Turn:
What do you think about Gene Logic and its future? Chime in on the Gene Logic discussion board!