Rule Breaker Portfolio Celera's Pipeline

Celera currently focuses on creating maps of the genome and tools for using the data. Its future revenues, however, may be composed largely of royalties from drugs discovered using those maps and tools. That's what Human Genome Sciences does with most of its therapeutic protein discoveries. It's risky, since the model isn't proven yet, but it provides Celera with ever-expanding possibilities.

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By David Langford (Wotdabny)
December 27, 2000

[Note: Today's Rule Breaker article was written by guest columnist David Langford, who helped write content for The Motley Fool's recent biotechnology seminar and is a frequent contributor to the discussion boards under the name Wotdabny.]

As Celera (NYSE: CRA) submits the human genome for publication, it truly crosses the starting line of the new era of drug discovery. Ninety-five percent of drug discovery today is still trial and error, slowly grinding along with technology that hasn't caught up to 1990. Dozens of binders of information are taken on each patient who braves clinical trials. The average clinical trial generates enough paperwork to fill a semi-truck and takes six months to edit the errors. Armies of scientists, oceans of time, and billions of dollars are spent -- $20 billion on clinical trials alone in 1999 -- yet few noteworthy bona fide cures have been discovered. What was the last disease to actually be defeated, polio? Cancer, heart disease, and the common cold are among traditional medicine's arch-enemies, and perhaps always will be.

I'm sure old-era drug discovery compares favorably with some industries. Mining gold is terribly costly, and often millions are sunk into empty holes. Celera's breakthroughs are kind of like having increasingly accurate maps and increasingly useful tools for finding and mining that gold -- you can learn all about them right here at The Fool.

Celera will do drugs
Although Celera currently focuses sharply on creating these maps and tools, that doesn't mean the company will exclude itself from the profitable and ultimate goal of all biotechnology: new drugs. Yesterday's column included biotech guru George Rathmann's belief that President and Chief Scientific Officer J. Craig Venter is too smart not to. Celera's future profitability isn't bioinformatics, but something Celera's expertise in bioinformatics makes possible. This often-overlooked core of Celera's business model is the topic of today's Rule Breaker column: Celera's agreements with pharmaceutical companies will give Celera a drug pipeline paid for and developed entirely by other companies.

It's the royalties, baby
Genomics and proteomics promise a vastly larger, richer field for drug discovery than the world has ever known before, a field that won't become fully explored for a hundred years. During which time some speculate that the cure to most if not all human ailments will be found -- and Celera could very well be the single largest contributor, by far, if, as some believe, Celera's data is better than anyone else's. This is what we in the Rule Breaker call expanding possibilities. Drug companies will gladly pay for the data and do the risky drug development themselves, saving Celera years of expensive development and risk of failure. Partners of Rule Breaker holding Human Genome Sciences (Nasdaq: HGSI) are doing it right now (as detailed in the TMF Guide to Biotech Investing), with HGS' therapeutic proteins.

Celera will supply the data that makes their manufacture possible, for a percentage of sales. Celera's business model, however, could be augmented at some point, like Human Genome Sciences' is, by its own drug discovery efforts -- it's hard to say which direction would turn out better. Let's take a quick look at the differences between HGS and Celera.

A light business model
HGS' core is its in-house drug pipeline. But if we factor in all the drugs other companies are developing and will pay HGS a royalty (probably 7-10% of sales) for, we find that HGS' total pipeline is three times the size of the drugs it is developing by itself. Put another way, two-thirds of HGS' pipeline exists entirely because other companies are developing drugs for them. For Celera that'll be three-thirds instead of two, and it uses the royalty money not to fund costly and risky clinical trials, but to feed the gene and protein discovery machine, which generates more data, more deals, and more drugs Celera will own a piece of.

When do these discoveries start taking place? According to Dr. Venter, significant discoveries will come down the pike over the next 12 months, and within two years "we plan to have a pretty big slew of them." Although new drugs won't hit the market for a dozen years at the inside, investors know a growing pipeline when they see one, and Celera may have the cash to stay on top and go the distance.

So which is the better business model: Spend most of your money on drug discovery in-house, and let the bulk of your pipeline be developed by others, or spend all of your money on gene and protein discovery in-house, and let your entire pipeline be developed by others? It's hard to say -- no one's ever been in HGS' or Celera's position before, although HGS is perceived as being safer because it seems closer to traditional drug discovery (as we discussed recently). Once their virtual pipelines are glimpsed, however, the two companies don't seem so far apart, and while HGS is ahead for now, Celera's moving much faster than anyone. I invest in both.

Rule Breaker Celera: Win big or lose?
Celera is only two years old. Ten years from now, Celera could have deeper and better understood data than all other biotechs combined. But more importantly, dozens of companies might be developing so many drugs based on Celera's data that Celera's effective pipeline will be greater than any biotech's pipeline has ever been. Celera could break the old pharmaceutical rules and change drug discovery forever. It could also fail utterly, losing to other bioinformatics companies such as Incyte Genomics (Nasdaq: INCY), Gene Logic (Nasdaq: GLGC), or Rosetta Inpharmatics (Nasdaq: RSTA).  

It's a risky investment, and despite some debate about whether Celera can really cash in, I believe that not many companies have Celera's phenomenal potential. Will it succeed? Only time will tell.

Rule Breaker Portfolio


12/27/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
AMGNAMGEN INC(2.06)(3.04%)65.69
AMZNAMAZON.COM(0.06)(0.37%)16.88
AOLAMERICA ONLINE(2.75)(7.14%)35.75
CRAAPPLERA CORP - CELERA GENOMICS(0.44)(1.27%)34.00
EBAYEBAY INC0.561.62%35.25
HGSIHUMAN GENOME SCIENCES3.695.38%72.19
SBUXSTARBUCKS CORP(0.75)(1.67%)44.25

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(8/5/1994)
Annualized
Rule Breaker(2.98%)(2.07%)(9.63%)(51.37%)690.38%38.14%
S&P 5001.04%1.76%1.06%(9.55%)189.90%18.10%
S&P 500 (DA)0.99%1.68%1.01%(9.14%)204.16%18.99%
NASDAQ1.84%0.89%(2.25%)(37.60%)252.60%21.77%

Trade Date # Shares Ticker Cost/Share Price Total % Ret *
8/5/944020AOL0.4535.754363.01%
9/9/972640AMZN3.1816.88559.07%
12/16/981160AMGN21.4465.69206.32%
7/2/98470SBUX27.9544.2558.29%
9/22/00560HGSI80.0572.19(9.83%)
12/17/991260CRA39.7634.00(14.48%)
2/26/99600EBAY50.2635.25(29.87%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain *
8/5/944020AOL$1,816.44$143,715.00$214,491.00
9/9/972640AMZN$8,408.40$44,550.00$61,965.70
12/16/981160AMGN$24,875.50$76,197.50$51,322.00
7/2/98470SBUX$13,138.62$20,797.50$7,658.88
9/22/00560HGSI$44,830.50$40,425.00($4,405.50)
12/17/991260CRA$50,093.00$42,840.00($7,253.00)
2/26/99600EBAY$30,158.00$21,150.00($9,008.00)
 
Cash: 
Total: 
$5,375.09
$395,050.09
 

* Our long term totals include both our realized and unrealized gains. For instance, we have sold portions of AOL and Amazon in the past, and those realized gains are included in our total returns for these stocks.



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.