Fool Interview With the CEO of Human Genome Sciences
Part 2

March 6, 2000

David: Human Genome Sciences stock, HGSI on the Nasdaq, is presently trading at $206. The 52-week low is $14 3/8. So obviously, Dr. Haseltine, you're riding on a huge crest here with the growth of your company. How is HGSI going to make money? What is the business model?

Haseltine: I think in this whole business, the thing to look at is where is the money. For us at Human Genome Sciences, the money is in drugs. Drug sales, pharmaceutical sales, is a really wonderful business. It's a product that people need. It's a product you can protect with patents. It's really a government-sanctioned monopoly for a limited period of time on a very high-margin product. We seek to make money in a very traditional way by making and selling drugs, pharmaceutical products to meet unmet medical needs. Now, in addition to that, we support ourselves and in fact, we've virtually covered all our costs by providing new and powerful discovery tools to other pharmaceutical companies. We also stand to share in their profits very handsomely, I might say, if they should use our tools to create drugs. So there are really two sources of long-term profit for our company -- pharmaceutical sales of drugs we invent, manufacture, and sell ourselves, and very high royalties and revenue participation in products that we enable other large pharmaceutical companies... to discover. Our "business" is one that is well established and very profitable, i.e., the sale of pharmaceutical products.

David: OK, now there are a lot of others today who are patenting genes as they discover them. They range from private company competitors. Celera (NYSE: CRA) is certainly one that has a lot of headlines these days. There is Affymetrix (Nasdaq: AFFX), Incyte (Nasdaq: INCY). There are a lot of competitors in this field, and there is also the government, which is planning on making its information as it decodes the human genome free. How does Human Genome Sciences fit within that large stable of competitors?

Haseltine: We are definitely the king of the gene patent. We are in first for several reasons. We were the first genomic company. We started this whole revolution. We are the first to recognize that we could quickly isolate and characterize all human genes and we could use that knowledge to create medically useful discoveries. We discovered virtually all the human genes by mid-1995. Human genes are something you can only discover first. There is not an endless supply. What people are doing now, the Celeras of the world and other companies and the government, are rediscovering what we already found. We have very, very good evidence that as early as 1995 we had isolated and characterized in our laboratories and in our [Human Genome Sciences databases] 95% of all human genes.

David: So there are some 60,000 to 100,000 human genes? How many are there, because I hear that there are 60,000 to 80,000.

Haseltine: Anyone who tells you 60,000 is definitely wrong. We have isolated, characterized, and sequenced more than 120,000 different human genes. So the number is certainly greater than 120,000. Those people, who estimate lower, simply don't know. We have isolated and characterized them so we're in a very good position to know that there are more than 120,000 of them. Now the next thing we've done, and this distinguishes us from all other genome companies and projects, is we actually go out and make the product of the gene and determine what it does in living biological systems. We've also learned to robotize and automate those processes. So the first discovery that catapulted us to public recognition and into the marketplace was robotic and automated discovery of genes. But that was done for us by early 1995. Since then, for the last five years we've been asking and addressing the question that everybody asks -- what do you do when you have all the genes? What you do is you now robotize and automate the process of biology. What those genes do that's of medical use. We have now filed patents that describe over 7,500 human genes and their medical uses.

David: Let me ask you right there, doctor, when you say there are 120,000 genes and you have patents on 7,500, but you've decoded 95, 96, 97, 98, 99% of it, why is there that numerical disparity?

Haseltine: First thing, you can't just patent a discovery. You have to patent something that's useful. The patent, whether it's a machine or whatever it may be, patent law requires three criteria. Your invention must be new or novel, and that's met by the new sequence or new protein. It must be useful, and your patent must teach people how to use it, and it eventually has to be reduced to practice. It isn't enough to see a new sequence to patent it; you have to have some idea of what it does. The patent office is getting tighter and tighter on what it's going to take to get a patent. We realized that for a long time and we realize that in order to get a defensible patent, something you can use to protect a product, you had to do experiments.

What distinguishes Human Genome Sciences from the rest of the pack is that we have set up an automated system to make tens of thousands of proteins at once, to test them in live tissues, in living cells, test them in animals, and manufacture them for clinical use. So our patents have a great deal of information in them and there is nobody that's even close. If you take the kind of patents that we've filed, the rest of the world combined has published patents on less than 2,000 human genes. We're already up to 2,700 and we've filed more than 7,500 of those.

Tom: Dr. Haseltine, final question. If I'm an investor who's really looking at this industry for the first time, and I recognize that over the next 25 years -- and it may be fair to say the next century, not just the next 25 years and beyond -- that this is going to be critical to human life and is a radical revolutionary commercial development, but I don't know enough about it. How would you go about learning about these companies, thinking about them as an investor who may have a lot of experience in traditional industries like consumer brands or even consumer technology, but now is looking at an unknown in biotechnology and wants to learn more about it.

Haseltine: There are a couple of things I'd do. One, I'd read your website. I think you've put together a very interesting website and in my opinion, it's one of the best in the business. Second thing I would do is, everyone has friends in universities and science. I would seek out friends to help get some basic grounding in what's happening. Also talk to their friends or their physicians about what they think about how this new medical revolution is going to be. There is tremendous enthusiasm.

David: We feel it as well. It is an amazing time that we are living through and we thank you for taking some time to explain exactly what you've been doing with your business. We wish you the best of luck, and also wish you the best of luck on behalf of the millions of people who are going to benefit from biotechnology and the discoveries and solutions in the next century. Thank you very much, Dr. William Haseltine of Human Genome Sciences Inc.

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