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We're bursting with pride over Celera Genomics' (NYSE: CRA) publication of the human genome sequence, but we wish that at least a few months could pass without the Egos in Chief of Celera and another of our holdings, Human Genome Sciences (Nasdaq: HGSI), blowing their trumpets -- in each other's ears.
The latest spats concern Celera's and the International Human Genome Sequencing Consortium's publications of the human genome sequencing papers in Science and Nature, respectively. Granted, this is a very big deal for the scientists, particularly the two whose names come first in the list of authors: Celera President and Chief Scientific Officer J. Craig Venter and the Consortium's and Whitehead Institute's head, Eric Lander. Add in Nobel Prize potential, and ego bursts are de rigueur.
HGS's CEO William Haseltine, it seems, is always available to chime in. But guys, please:
Haseltine: "Genome sequencing is probably the worst way I know to find genes." (Pay no attention to that Venter behind the curtain.)
Venter: "The genome sequence will be a 'truth serum for the field.'" (Anything anyone else has done is trash.)
Haseltine: "They have to say something about a worthless database." (My proteins are better.)
Oh, but there's more.
Eric Lander said Celera's paper failed to prove that the Celera technique is worthwhile. Venter finds it unfortunate that his rivals have "got their panties in a gather." And, "Eric Lander is obviously bothered by Celera's success. He's playing with half-truths and innuendos. I'm getting so I really don't care what his opinion is."
Management must be, er, confident to break rules
No doubt about it, you must have an ego to break the rules. The world is usually arrayed against you, committed to maintaining the status quo. Your army must be stronger, your leaders more visionary, tougher. Your company is not going to create value through an important, emerging industry unless it has an enormous arsenal. It's usually not enough to have the best product. You have to fight.
The Rule Breaker company leader must persuade the best minds to join, venture capitalists to fund, and investors to invest when the company goes public. Then, that leader must deliver, day in and day out. As David Gardner advised Dr. Haseltine in November, "Show, don't tell." Ditto Dr. Venter.
When we look beyond public displays of those egos, we see that Venter and Celera must deliver four revenue streams:
- subscriptions to the Celera Discovery System (CDS)
- milestone payments for drugs in development discovered from the CDS
- royalties from those drugs when approved by the FDA and marketed
- revenues from drugs it discovers, develops, and markets (probably with partners)
The Wall Street Journal yesterday reported that Celera uses a tiered pricing system for access to the Celera Discovery System, charging up to $15 million per year for the big drug makers such as Pfizer (NYSE: PFE) and American Home Products (NYSE: AHP), with rates varying according to rights to receive milestone payments for drug candidates and royalty rates for approved and marketed drugs. What's curious is that there is no bottom figure. (I wasn't able to confirm this in calls to the company; they're understandably busy with the genome publication news.) Celera charges academic researchers $10,000 a year. Roy Whitfield, CEO of Incyte Genomics (Nasdaq: INCY), said in our interview yesterday (look for it soon!) that Incyte charges customers from $2 million a year (for the smallest biotechs) to $15 million a year for its database, with free access to some academic researchers in exchange for royalty rights.
Incyte made about $200 million last year, primarily from subscriptions to its databases and associated services sold to 19 of the top 20 drug makers. Celera says it's on track to earn $80 million to $100 million for its own database services for its fiscal year ending June 2001. A major indicator of Celera's future success will be whether it can charge higher prices than Incyte.
Milestone payments: to start within two years
Milestone payments are fat checks -- from a few million up -- that Celera and Incyte will receive when drug makers take their drug candidates (discovered through the vendor's database) past certain milestones in the drug development and approval process. Typically, the payments grow larger as the drug clears further hurdles and its future success appears more likely. Millennium Pharmaceuticals (Nasdaq: MLNM) and Bayer recently announced that they went in 18 months from discovering a gene target for drugs to having a drug candidate ready to apply for FDA approval for human trials. With big drug maker customers mining its database, Celera could see its first payments within two years. If they don't appear, investors can rightly wonder if Celera's services are really as good as the promotion.
Royalties: eight years
It can take 10-15 years from target discovery to lead drug candidate, through human trials, FDA action, and marketing, but let's say eight because of the advances the Millennium-Bayer performance promises for the brave new biotech world. Celera can't expect royalties from drugs -- whether from its customers' discoveries or from licensing its own finds -- for at least eight years, probably longer. And remember that for each drug success, the road is littered with failures.
Wild-eyed guess? In the best case, we might expect Celera to hit $200 million in revenues in a year or two, and then start to add steadily larger milestone payments, with royalties not for 8 or 10 years from now. For long-term high returns, I'll hazard that it's really 10 years from now when Celera truly becomes interesting, but we will probably know in a few years whether Venter and Celera have provided the "truth serum" for the industry or not.
The Egos in Chief will keep sparring, but we'll keep our eyes on the bottom lines.
When faced with trouble, Tom Jacobs sends in the clones. He owns shares of Celera Genomics and Human Genome Sciences. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.