[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.
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