Recent days and weeks have brought more good deals for development-stage bioinformatics companies. Gene Logic has been announcing three-year subscription deals, worth $1.5 million to $5 million a year, at a breathless rate. Incyte's got bragging rights too, and Celera just bagged what had looked like a competitor -- France's Genset. The open question is whether these companies can (and need to) develop their own drugs to hit the big time.
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Biotech deals announced in the last few days highlight the hottest debate in the biotech world: If and how bioinformatics companies -- the likes of Gene Logic (Nasdaq: GLGC), Incyte Genomics (Nasdaq: INCY), and Celera Genomics (NYSE: CRA) -- can sustain long-term business success. Can they sell their information alone, obtain future milestone payments and royalties on drugs or diagnostics produced from their data, or must they become drug development companies themselves? You, too, can weigh in on this debate yourself, by joining one of many smokin' threads on the Celera discussion board about the subscription, royalties and/or drug development dilemma for companies rich with genomic and proteomic information. Gene Logic's quick pen Incyte and Celera duke it out An interesting sidelight is that Incyte's press releases trumpet "the leading genomics information company." Take that, Celera, whose "mission is to become the definitive source of genomic and related medical information." I just love a good fight, don't you? Terms not disclosed Gene Logic and Incyte are two pure bioinformation companies whose businesses are pretty clearly pointed in the non-drug development direction -- and are executing their business plans well. They may survive in their current form, unlike the slew of drug discovery platform companies -- companies whose sole business plan is to provide some neat way for big drug makers like Rule Maker portfolio holdings Pfizer (NYSE: PFE) or Schering-Plough (NYSE: SGP), or American Home Products (NYSE: AHP) to develop drugs -- that I've argued will consolidate or fail. Looking at Celera and bioinformatics, there are those such as Compugen's (Nasdaq: CGEN) Chairman and CFO, Martin Gerstel, who opined in an interview with the Fool that bioinformatics' future is not computing power, but specialized molecular biology software. Contrast that with Celera's President and Chief Scientific Officer Craig Venter's comments that computing capability limitations are holding his industry back!). That could mean more pressure for Celera to earn more than respectable returns by turning to drugs, which offer the potential for dramatic returns as demonstrated by Amgen (Nasdaq: AMGN) and its $65 billion market cap based on sales of two blockbusters. David Langford has argued that Celera need only get on the milestone and royalty gravy train to benefit -- as Incyte plans to -- from others' development of drugs from its data. Could Celera develop its own drugs? Amgen's first CEO, George Rathmann, told The New York Times recently that he thinks Celera' Venter is too smart not to join in. (You can find our article on Rathmann and other recent Foolish biotech content on our InDepth: Biotechnology page.) Celera investors -- like me -- will be watching closely. You can also sharpen your biotechnology investing skills by purchasing The Motley Fool's Guide to Biotech Investing, or The Motley Fool's Industry Focus 2001, which analyzes the biomaterials and genomics tools industries.
The deals have come fast and furiously. Gene Logic yesterday signed Sumitomo Pharmaceuticals to subscription deals for two parts of its comprehensive GeneExpress Suite database, following a spate of agreements in the last month with IDEC Pharmaceuticals (Nasdaq: IDPH), Procter & Gamble (NYSE: PG), Boehringer Ingelheim, Biogen (Nasdaq: BGEN), and Organon. Most of these are for access to the company's complete GeneExpress Suite, which the company says are three-year deals with $1.5 million to $5 million a year in fees. The Biogen pact is for customized services.
Incyte's just announced agreements with measurement and testing giant Agilent Technologies (NYSE: A) and materials powerhouse Corning (Nasdaq: GLW), which will license Incyte's data and gene patents to build and improve biochips, devices to test and analyze DNA. Yesterday, Celera signed France's Genset (Nasdaq: GENXY) as a customer for its databases, software and supercomputing power to enhance the drug discovery and development process, while today the Max Planck Society for Advancement of Science in Germany, the Karolinska Institutet in Sweden, and the University of Tokyo in Japan, became Celera customers. Celera's announced many academic customers in recent months, and it typically charges them less than it does commercial companies.
Not surprisingly, the companies don't disclose the exact financial terms, though Gene Logic has been refreshingly straightforward about the range of subscription fees ($1.5 to $3 million) and revenue targets ($100 million a year a few years out.). Because the Gene Logic and Celera press releases are silent, we can assume that the deals do not include -- as Incyte's do -- provisions for milestone payments and royalties payments for products developed from the data provides. Inquiring investors want to know whether customers are willing to grant either substantial subscription fees or meaningful milestone payments and royalties, but not both.
But could Celera go whole hog and develop drugs itself? With over $1 billion in cash and short-term equivalents (per 10-Q for the quarter ending Sept. 30), Celera is probably the only one of the bioinformatics bunch that could undertake drug development without selling too much equity or rights to big drug makers in exchange for drug development funding. Remember that drug making requires bottomless pockets: As a rule of thumb, it takes 10 years and $500 million to develop and bring to market a successful drug.
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