Yesterday's column played a dirge for most biotech drug discovery platform companies. Some may provide excellent investor returns, but the potential market may just not be big enough to interest Rule Breaking investors -- unless a drug discovery platform company itself plans to develop the drugs it discovers.   

Of course, this is all wide-eyed conjecture. And you may have perfectly valid reasons for thinking otherwise. But we are on the trail of Rule Breaking investments, where we accept very great risk in exchange for the possibility of fantastic returns.

Speaking of sky-high returns, let's revisit bioinformatics and ask whether it offers them, with unfailing 20-20 hindsight. 

Has Celera changed in a year?
About a year ago, the RB Portfolio purchased Celera Genomics (NYSE: CRA) and said it was a Rule Breaker in bioinformatics -- though the Team admitted that it might not have been the first mover. A year later, the company is farther along in its business, having:

  • raised another $1 billion in cash

  • made a number of acquisitions and alliances, including those to increase its capability in:
    • SNP information (single nucleotide polymorphism -- individual difference of just one genetic base)
    • proteomics (deciphering all the proteins that genes code for)
    • gene expression software

  • sequenced or planned to sequence the human and other genomes -- including extremeophiles, reported by Jeff Fischer Friday. (A good glossary might help!) 

Celera's business hasn't changed. Its mission, clearly stated on its website, is still to be "the definitive source of genomic and related medical and agricultural information." The company is, as they say, executing

Does bioinformatics present Rule Breaker returns?
Bioinformatics, according to Celera's website, is: "The collection, organization, and analysis of large amounts of biological data, using networks of computers and databases." Formerly focused on sequencing and now more on managing, integrating, and mining immense databases, bioinformatics is moving the entire field of molecular biology from lab experiments to a new world where work will be on the PC.   

But just who is going to buy all this bioinformation, and how much will they pay?   

Test case: Gene Logic
To answer that question, let's look at another bioinformatics company. The RB Team noted last year that Gene Logic (Nasdaq: GLGC) and Incyte Genomics (Nasdaq: INCY), among others, were arguably first movers ahead of Celera. Specifically, Gene Logic is the first mover in developing databases of gene expression, and toxicological and pharmacological effects on normal and diseased tissue. (We discussed these databases and the company when we interviewed President and CEO Mark Gessler for a recent Stock Talk.)

A Motley of Fools (the proper collective noun, along with a "Jester of Fools") visited Gene Logic recently. We spent the day with scary-smart, dedicated scientists and computer folks, including a fascinating presentation and Q&A with Gessler, a sparks-flying scientific-cum-business whiz. His company aims to be a leader in gene expression -- the task to determine what genes actually do in a given normal or diseased tissue, and how they respond to proposed or on-the-market drugs.

It's the tissues!
Gene Logic secures tissue samples from a painstakingly developed network of hospitals and pathologists. The diseased and normal tissues come from people in all stages of life, with myriad medical conditions. The company uses Affymetrix's (Nasdaq: AFFX) GeneChip arrays to test the samples for various genetic sequences (Gene Logic is Affymetrix's largest customer). As we viewed the whole process from GeneChips to Agilent Technology (NYSE: A) scanners, software analysis and amazing pictures on computer monitors, it felt very "The Motley Fool goes sci-fi."

The company's goal is to have a library of 30,000 tissues representing major patient populations and diseases, tested and analyzed in great detail for the ways genes express -- turn on and turn off -- in those tissues. The company is 10% of the way to its goal to produce this gold mine of information for drug companies, other biotechs, and researchers.

The market for gene expression databases
Through our discussions, repeated in more detail in the interview, Gessler projected a ballpark figure of 50 or 60 biotech and pharmaceutical company database customers and $100 million in revenues in several years. He pointed out a potential universe of 500-1,000 customers, and possible revenue streams from gene intellectual property (patents). Gessler also said that Gene Logic was exploring beefing up its databases with SNP and protein information.    

This company sees a fantastic increase in just a few years from about $25 million in revenues to $100 million -- a fourfold increase that should bring investor returns. Not bad at all. But long-term, we're back to where we were yesterday: a bioinformation market of 12 or so big drug makers, 300 biotechs -- many if not most of whom will consolidate over the next five to ten years -- and researchers at academic institutions. And Gene Logic has many competitors, even if it does have a head start on gene expression data in normal and diseased tissues.   

Was Celera a good choice?
In the absence of lucrative drug-making deals (one reason we emphasize drug makers in The Motley Fool  Guide to Biotech Investing) or large-scale consumer applications, it takes plenty of faith to imagine a Rule Breaking future for any bioinformatics company, let alone Celera. And I say that as a Celera shareholder. I just don't see Rule Breakerdom from database subscriptions, royalties on genes and drug targets, or integrated software systems (discussed in Friday's news). Respectable profits someday and possibly excellent investment returns, but the potential to become a Rule Maker with $1 billion in revenues? An America Online (NYSE: AOL)?   

Time will tell. And Fools will, too: If you read just one discussion board thread this week, make it this fascinating one that addresses the real size of the potential market for drug discovery and, by extension, bioinformation.

Interested in pursuing future Rule Breakers together with the portfolio managers and thousands of fellow Fools? Join us in the Quest for RuleBreakers 2001! It starts January 16, after you've finished digesting your holiday meals and feel ready to get back to work. Together with participants, we'll discuss the way we approach stock selection and use those ideas to compile a list of potential Rule Breakers. It should be a ball.

If you'd like a broader scope of investment ideas, we've got something for you, too. Check out the The Motley Fool's Industry Focus 2001, which covers 17 industries, from biotech to home furnishings retailers.

Foolin' around,
Tom Jacobs, TMF Tom9 when ridin' into discussion-board town on a four-legged, single-nucleotide polymorphism