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April 18, 2000

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Subject:  Some CRA metrics
Author:  SamIAm99

Hi all. I haven't been around much during the recent drop. I figure, why hang around here and whine about "losses" or battle with the "this-baby-is-going-in-the-crapper" crowd. Plus, I have the added bonus of focusing on work that will get me out of grad school and getting a job that pays actual money: talk about a nice risk-reward appeal!:)

But I haven't stopped thinking about Celera and Biotechnology and Genomics. I think the recent volatility is a good lesson for investing in speculative stocks: a lack of traditional metrics for evaluation removes any upside cap (HYSQ at 139.5 is a beautiful example) or any downside support (pick a stock). However flawed tradition valuation models may be for companies like Celera, they at least provide a sort of stabilizing counterweight for the market. CRA's free-form price movements have been very frustrating for those trying to decide if it is a "good buy" right now.

I'm going to stick to my mantra that CRA cannot be valued by traditional methods. That is not saying that price doesn't matter: of course it does. But I'm very much a pragmatist and am not afraid to say: I cannot devise methods to place a near-term price target on Celera. So I'm not going to.

So what evaluation method do we use? I say, we identify a series of core business criteria/milestones and re-evaluate as Celera meets them or misses them. This is no different than what we do with the Sun's and Cisco's of the world. For established technology companies, we analyze earnings, revenues, cash flows, margins, market share, and M&A. For Celera, some of these are not appropriate and we can substitute anything that represents evidence of execution of their business model. Over the long term, their price will reflect their ability to manage their business.

Investment Criteria 1

Do you believe the business model? If yes, continue. If no, sell now (really). If you ask, "what is their business model?", go back and read the 10K and the myriad of posts on this board before investing. This point is crucial because all the metrics I offer are based on this premise. If you believe they are executing a faulty model, your evaluation will be way off.

Investment Criteria 2

Information generation. Celera's core strength is the ability to generate huge amounts of information in-house. Sequencing the human genome is phase 1 of this process. While not the only focus of their company, it is a core line of business for the relatively near term. We need to watch and evaluate the following achievements/milestones:

  • Assembly/annotation of the human genome
  • Sequencing/assembly/annotation of the mouse genome
  • Other genomes
  • Identification of SNPs and creation of a database
  • Proteomic database generation

    This is incomplete. We should hold them to a more specific list which perhaps other posters could help me with. Plus, adding timetables would help our evaluation as well.

    Investment Criteria 3

    Products. Dave has noted several times that this needs to be more than an academic endeavour. Money needs to be made with the information generated. Recently, Celera revealed their first products on their website: a portal for bioinformatic discovery. I expect this to be just the beginning. Here's what I'm looking at right now:

  • More portal/web-based information products. The "Discovery System" is nice, but I expect to see more in the future.
  • Added services/features to existing products. This will probably mirror their information achievements.
  • SNP products. Chips, databases, diagnostics, etc.
  • Proteome products.
  • Service products. They state that this is an important part of their model: I would like the service offering be better clarified and marketed.
  • Personalized medicine products. Way in the future, but still important.

    Obviously, many of their "new" products will simply be layered on their core "Discovery System" offering, which is fine. This is one to watch closely.

    Investment Criteria 4

    Customers. The best validation of the value of a companies product is customers paying cash for it. Right now, customers will take the form of database subscribers and service customers. Now that the first product is out, I want to see subscribers signing up. Despite being my "criteria #4", I consider this most important in the near term.

    Investment Criteria 5

    Partners. The value of their information product is based on their ability to add proprietary, bioinformatic value to the sequence data. They have a lot of internal skill, but Celera needs to make sure they are offering products worth paying for. One way to get at this is to make sure they are joining forces with top-notch partners.

    Investment Criteria 6

    Industry position. We need to make sure Celera executes on it's goal of becoming the definitive source of biological information. All of the previous for criteria get at this, but it's worth restating. In an information business, the leader (or top dog) wins and everyone else gets the scraps. If Celera is to create the value we hope, they absolutely have to win this battle. There will be no set moment when we'll say "eureka, they win!", but we need to watch it evolve.

    Personally, I think Celera is doing pretty well. I think they have #2 covered. With the introduction of the Discovery System, I think they are doing OK with #3 as well. Panther and Paracel are excellent examples of good partnerships/acquisitions (#5). Remember, watch PEB partners as well: they are important for Celera. They key is #4: customers. I want to see more very soon. It is also our main way of measuring their execution of #6: the most crucial metric of all.

    OK, so this is a rambling first draft. I'd like to hear your thoughts on what should be added/changed and where everyone thinks Celera is in terms of execution.


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