[On Thursday, Jan. 24, 2002, the Rule Breaker portfolio shorted 2500 shares of Sirius Satellite Radio (Nasdaq: SIRI). After the $8.00 commission and $0.26 SEC fee, we "received" $17,241.74. Our basis is $6.90 a share. Last week's column explained the decision.]
Last week, Applera Corp., the company whose three businesses are Celera Genomics (NYSE: CRA), Applied Biosystems (NYSE: ABI), and Celera Diagnostics, announced that Celera Genomics' President, J. Craig Venter, would step down but remain with the company as a scientific advisor. Applera CEO Tony White will act in his stead until a new top gun is found.
Possible reasons for Venter's departure range from the company's transition from bioinformatics to drug discovery and development, to personality conflicts between Venter and White, to Venter's preference for research to running a business. But the bottom line is clear: Whatever role Venter will play, his visionary leadership will no longer be at the top. Does that mean an end to Celera's business momentum, or does realizing value for shareholders require replacing the founding science brainiacs with MBAs?
We asked Motley Fool community members on the Celera, Biotechnology, Rule Breaker Strategies, and Rule Breaker Companies discussion boards to share their views about Venter's departure and Celera's business, especially in light of the Rule Breaker criteria. Did I mention that we have the best discussion boards and the best community in the known universe? Sign up for a charter membership before Feb. 14 and get the boards for $29.95 a year with a year free ($1.25 a month for two years -- a great value).
Bottom line: Is it time to reevaluate Celera Genomics' place in this portfolio?
Sustainable advantage: visionary leadership
LawrenceD believes that the management change makes sense. "People who invest in a technology sometimes become unreasonably wedded to the 'gee whiz' aspects of the technology, as opposed to examining the business fundamentals. The departure of the 'superstar scientist' makes it possible for Celera to undergo the necessary metamorphosis from a 'bleeding edge' biotech leader to a sound sustainable business. As an investor, I look upon this as a reason to retain my holdings in this company."
1946dodge strongly disagrees -- to say the least -- asserting that "the removal or forcing out of Craig Venter is a huge mistake." He stands firm behind the scientists running the business, because "whatever money you invest gets used mostly for research and development, which is the mainsprings by which progress happens. Progress does not happen when you have people wanting to make a quick buck breathing down your neck."
He praises Venter because he "drove his team to accomplish what everyone else thought was impossible, made his company stand out head and shoulders above all the rest. To do this in the face of tremendous doubt by all the experts and to keep his nerve, this man had to have tremendous courage, and above all, faith in science to make the world a better place."
"The original Rule Breaker buy report described Celera's business as follows:
'Celera's business involves decoding genomes, patenting its discoveries, and selling access to its databases, mainly to pharmaceutical and biotechnology companies that want to create cures using genetic engineering. Specifically, the company sells subscriptions to its genome information, will increasingly offer genomic information management and analysis software, and collects royalties and licensing fees resulting from its work.'
"Unfortunately, the subsequent success of the publicly funded genome project (which gives away its data for free) put a significant damper on this business plan. It is now clear that [Celera's] database business is likely to be only modestly profitable, at best. Suddenly, their avowed intention is to become a drug discovery and development company, something for which they are clearly not "top dog and first-mover."
"...Celera's $1 billion in the bank (thanks to the biotech bubble) does give them the time and resources to make this transition. But oodles and oodles of cash isn't exactly a sustainable advantage in my book. Time to take your money and run. Venter's exit is as good an excuse as anything."
cliff agrees that the business has changed and that its profitable future is farther out. "CRA is probably a day late and a dollar short when it comes to drug development.... but if there is a lot of patient money around, they might be able to pick up some diagnostics revenue in future years...like 10-15 years from now??" Athalon points out that the drug business burns cash, and $500 million per successful drug could cut through even Celera's cash pile. Athalon thinks that company might just "dwindle away."
But Manny00 differs. "To me, Celera is still in the same business they started with... they are still in the data-for-sale business, and now have added a new one: drugs. They could add several others as well, and probably will. The problem then becomes one of managing the arms. Maybe they dream of being the GE of biology; that works for me.
He will look for any future signs of trouble, though. "I would be greatly concerned if we hear that the other scientific giants, who made Celera the force it is today, also leave the company. That will indicate to me that the problems of management are beyond just dueling egos. Other troubling signs would be: stagnant or declining revenue growth from subscriptions, the emergence of another company that threatens their cutting-edge lead, and a series of questionable business decisions, mergers, partnerships, etc.
"Overall, I think it's too early to assess the impact of Venter's leaving. But I see no reason to sell...yet." neuronnorth agrees that the young company's businesses are very promising.
Not everyone thinks that drug making is a pot of gold, though. Ferretz sees strong business value in bioinformatics, and markrbower reminds us "that at the height of the genome-hype there were several detractors who said that the plan of making a sustainable profit off genomic databases was unsound. With the most recent quarterly reports, we have all learned that selling biological information CAN be sustainably profitable. Venter's vision was indeed correct."
A final caveat from koch: He isn't so sure that we can even really understand what "the business" is as long as Celera Diagnostics -- owned 50-50 by Applied Biosystems and Celera Genomics -- is non-public and off the books.
For Caesium, "Management...is the most important thing to convince me to invest in a company, [and] good management [does] not sacrifice CEOs so publicly. They find a way to resolve the problem, even if it means replacing them, but they do so in ways far superior to what happened to CRA... The way Venter departed with no successor in place and no clear path in the short term is clearly not comforting.... CRA was Venter's baby and yet he found his dealings with Tony White so acrimonious he abandoned it with no parent. It may be the smartest move for CRA bringing in a new CEO with drug discovery experience, but there are better ways to handle an orderly succession."
This, and his view of the changed business, were enough for Caesium to sell his shares on Friday.
amimotley doesn't believe that Venter's necessarily the "good management." "[M]ost take the view that Venter was 'forced out.' Perhaps this was the case, but perhaps not. It is also equally possible, that like a spoiled child, he 'took his ball and glove and went home' when he didn't agree with the board of directors... I blame Venter as much for this situation as anyone else. He resigned, got on his boat, and left for the Caribbean when he didn't get his way, instead of respecting the majority vote of the board and seeking a compromise or smooth transition that would not shock the investment community. To me, that Venter is mostly to blame is clear by the suddenness and unplanned nature of the move. Tony White, as a savvy businessman, would 'never' have precipitated such a hasty move. He would have had a succession plan in place first, even if the eventual goal was Venter's removal. No, Venter stormed off, and to hell with the shareholders."
WCMinor takes that tough love farther. He compares Venter's departure to legendary Johnson & Johnson (NYSE: JNJ) CEO Ralph Larsen's impending retirement. "Ralph and Craig can both look back on some outstanding personal achievements, but in only one case do those achievements include leaving behind a lot of happy shareholders. I believe if there is a reason to hold JNJ it did not go away with Ralph Larsen's departure, and if you have lost money in CRA, you are not about to start making it now that Venter has left."
And y4u thinks that maybe the manner of Venter's departure has a silver lining: "Concerning the method of Dr. Venter's adieu? The company did get immediate world-wide advertising for a position. Without having to sneak around quietly asking people and starting rumors. Another brilliant move. Let's see what happens."
Forget the business: what about 10x/5y?
davefeatherstone certainly has opinions about the White-Venter relationship and turned them into side-splitting humor (He even spanked me once in a post -- that's as far as I go!). But he thinks that the 10x/5y stock criterion -- one that we had not introduced at the time we bought Celera -- is the key reason to jettison the stock:
"What makes Celera special as a drug company is that it has no candidates in the clinical pipeline, no proven expertise at drug development, and (as far as we know) no proprietary protection for any particular approach or drug class. Even if Celera had a dozen candidates entering clinical trials (which it does not), it would be a stretch to assume payoff in 5 (or even 10) years. The 10x/5y rule kills, unequivocally, CRA as a Rule Breaker in my opinion. At least with Venter, we had hope for another blast of profitable hype."
There you have it -- both sides of the main issues. Join in on your choice of the four boards where this conversation continues, Celera, Biotechnology, Rule Breaker Strategies, and Rule Breaker Companies.
Have a most Foolish day!
Tom Jacobs (TMF Tom9) will be watching the State of the Union tonight, so don't call. He owns shares of Celera Genomics. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.