Good afternoon, Fools, and happy Tuesday! Our pockets are bulging today, flush with our quarterly deposit of $25,000 -- that's January's $12,500 a wee bit delayed, and $12,500 for April. Because we stay fully invested, we will invest this luscious pile o' green in S&P 500 Depositary Receipts, or SPDRs (AMEX: SPY), within the next five business days, and then in stocks as soon as we find the right place to put it.
After market close on Friday, Applera Corp. and its two publicly traded units, Applied Biosystems (NYSE: ABI) and our very own holding Celera Genomics (NYSE: CRA), announced a conference call for the following Monday (yesterday) to discuss a new business arrangement between the two companies. We listened to the call with interest, while Applera CEO Tony White and CFO Dennis Winger, Applied Biosystems' President Mike Hunkapiller, and just-named Celera Genomics and current Celera Diagnostics' President Kathy Ordonez explained the new marketing and distribution agreement for Celera Genomics' bioinformatics database with Applied Biosystems.
It's a biggie.
Slow death of Celera's bioinformatics
Over the last three months since former President J. Craig Venter's departure, White reviewed Celera Genomics' business and determined that the investment required to maintain and expand Celera's bioinformatics business -- its flagship Celera Discovery System (CDS) -- would not yield a satisfactory return. Sure, White could jigger resources to juice up CDS, garner new subscribers, and keep current ones, but it wouldn't produce enough profit. Fair enough. Boards of Directors pay the Tony Whites of the world to make exactly these crucial capital allocation decisions, and they are not happy when those decisions are wrong.
White ruled out a sale to a third party, and Applied Biosystems' Knowledge Business was born. In this business line, Applied Biosystems will become the exclusive CDS distributor and incorporate CDS into a portal system combined with Applied Biosystems' existing business in tools -- instruments, reagents, and software. Celera's sibling wants to offer the life sciences researcher an expanded e-commerce platform, the best one-stop shop for large-scale biology research.
It's a natural fit for one of the top guns in life science research tools. With CDS's information on single nucleotide polymorphisms -- minute differences in genetic sequences in 40-50 individuals -- Applied Biosystems believes it will be uniquely positioned to sell assays on demand. Applied Biosystems will offer the researcher the data to design experiments, the custom-made tools to conduct them, and the data to evaluate the results.
Terms of the agreement
If Celera's EBITDA from committed subscription contracts for 2003-2006 falls below $62.5 million and this is due to Applied Biosystems changes in the CDS product, Applied Biosystems will reimburse Celera for the difference provided that Celera fulfills its responsibility to service existing CDS subscribers. Applied Biosystems pays its sibling a low- to mid-single-digit royalty on new Knowledge Business revenues obtained after July 1, 2002; presumably Applied Biosystems is going to attract new customers and convert existing Celera subscribers to new value-added products.
Applera estimates the cash flow to Celera over the 10-year term of the agreement to be $200 million to $300 million. For comparison, Celera's current trailing-12-months revenues are $113 million. One analyst raised the natural question whether this could be considered an arm's-length transaction. White said what you would expect: The company did some modeling. What could he say?
Management believes that the move benefits both Applied Biosystems and Celera, because the latter's management can concentrate exclusively on building its drug discovery and development business. I don't buy it, but it doesn't matter. Celera, with or without CDS, is not the business we bought, and it's nothing special now.
Oh, Celera, we hardly knew ye
With this move, any resemblance of Celera Genomics to the company we invested in two-and-a-half years ago is gone. Read our buy report for Celera and try to remember the world in December 1999. Bioinformatics was new and exciting, powered by Venter's shotgun approach to high-throughput sequencing of the human genome. Celera wasn't the first to try to build a bioinformatics business -- Incyte Genomics (Nasdaq: INCY) and Gene Logic (Nasdaq: GLGC) could each claim first-mover status -- but Celera was indisputably top dog with gusto at the time. We wrote recently about the exciting run-up in Celera's stock price, and, in light of that and other experiences, we've asked participants on the Rule Breaker Strategies discussion board to contribute thoughts on the RB Port's sell strategy. Please join in.
When an analyst asked Applera CEO White what had changed in three years since Celera was born, he was straightforward. Applera thought they could build a sustainable bioinformatics business based on sequencing the human genome and leveraging the intellectual property (IP) from patenting various gene sequences, but Celera found it couldn't compete effectively with the government and International Human Genome Sequencing Consortium's free offerings. By moving the business to Applied Biosystems, White believes they can deploy CDS in an integrated platform and gain a sustainable competitive advantage.
I'll confess I'm not a White fan, because I've never listened to him on a conference call without wincing. His glib responses to analysts might be deserved, but not when they ask questions to which shareholders deserve answers. I suppose being White is like being Defense Secretary Rumsfeld's generals, fending off obnoxious armchair legions second-guessing you on battlefield decisions. Performance would excuse your attitude then, except....
If we could roll back the clock, we might see now that White has always been the power, the puppeteer, and not visionary J. Craig Venter with his great science skills and limited business acumen. Knowing what we know today about White's control, we might question whether management would satisfy components of our strategy's criteria. But that was then, and this is now.
We already own the leaders
Celera today is a company striving to exploit its bioinformatics IP in the drug business. We've known this for a while, but only now has the company cut the cord to the main source of revenue and sailed off into uncharted seas ("There be monsters!"). It retains $940 million in cash as of December 31, 2001, and that could certainly buy a lot of clinical trials. But Celera ain't no top dog and first mover in the race to turn genomic and proteomic data into improved drugs: That title belongs to Millennium Pharmaceuticals (Nasdaq: MLNM) and Human Genome Sciences (Nasdaq: HGSI). They have been building fully integrated drug companies for years, and without question they are simply farther ahead. Celera today isn't the top dog and first mover in anything.
Given the time frame for striking partnerships, developing drugs, and turning profits, it seems highly unlikely (never say impossible) that the company will achieve 10x/5y returns, let alone 10x/10y or less. Celera will have revenue from Applied Biosystems and it does own 50% of Celera Diagnostics, but we are persuaded by Human Genome Sciences' CEO William Haseltine that diagnostics has not been nor will be a very lucrative business. Celera may have a future as a profitable operation of Applera Corp., but is no longer a Rule Breaker and offers us no foreseeable possibility of outstanding returns to compensate for its significant risk.
Oh, Celera, the Tribe -- most prominently and persuasively our Fool Community in a recent column -- has spoken. It's time for you to go. In compliance with our Foolish portfolio trading policy, we will be selling our entire Celera Genomics holding within the next five business days and investing the proceeds in SPDRs until we have a better place for the money.
News from the fuel cell world
Fascinating news for investors who follow hydrogen fuel cells: Coleman Powermate has apparently received Transportation Department approval for the world's first fully available commercial fuel cell system. Guess who manufactures the metal hydride fuel canisters for them? Chevron Texaco Ovonic Hydrogen Systems, which just happens to be 50%-owned by Energy Conversion Devices (Nasdaq: ENER), lovingly featured in the December 2001 issue of The Motley Fool Select. The stock is up 31% since the issue hit the Net on December 20.
Have a Foolish week! Updated portfolio returns below, including the S&P 500 with dividends added (DA) benchmark.
Tom Jacobs' (TMF Tom9) greatest business success was running the store at his summer camp. At press time, he owned shares of Millennium Pharmaceuticals and Energy Conversion Devices. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy. Tom reserves the right to be wrong, stupid, or foolish (small "f"). And often is.
Rule Breaker Portfolio Returns as of April 22, 2002 Market Close:
RB S&P S&P 500 Port 500 DA* Nasdaq Week 3.86%** 0.50% -- 0.28% Month -1.04%** -3.45% -- -4.70% Year -13.01%** -3.51% -- -9.83% CAGR*** since 8/4/94 25.55% 12.11% 14.06% 12.26%
*Dividends added.**Please keep in mind that these figures will be distorted for the RB Port once a quarter when we deposit $12,500 in new cash. See next note!
**Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits. Total return wouldn't be meaningful, because we started adding cash to the portfolio in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, cash added shows up as returns.