Biodata company Gene Logic (NASDAQ:GLGC) announced today a collaboration with the Food and Drug Administration in which the Center for Drug Evaluation and Research (CDER) will use Gene Logic products to evaluate toxicogenomic standards. Shares jumped as much as 10%.

The agreement offers some validation of Gene Logic's five-year efforts in toxicogenomics, or assessing and analyzing the potential for drug toxicity in drug candidates. The company is a leader in an industry push toward pharmacogenomics, or using genomic data to help predict drug safety and efficacy. The company's website explains the -- MBA-speak alert! -- value proposition and is an excellent source for understanding Gene Logic's entire product line.

I've been watching Gene Logic since I met with management back in 2000. After going public in November 1997, Gene Logic raked in $200 million in a secondary offering in 2000. The stock zoomed to a closing high of $144.62 in March that same year before crashing along with the rest of biotech. It hasn't joined the rest of the pack's run-up since spring and closed yesterday at $4.82.

The company isn't GAAP profitable, nor does it generate free cash flow. One might be tempted to dismiss Gene Logic as just another drug-discovery platform company burning cash. You know, one of the bazillions that went public in the 1998-2000 biotech boom, trying to sell "solutions" (just once I'd like to see "we sell problems! not solutions!") to advance the drug-discovery process. Most of these are going, gone, or bought, because their customers were either biotech drug makers with less cash to spend or big pharmas that have consolidated and cut costs.

Not another biotech burnout
Yet there's a market for improvement in drug development. The drug makers say they spend $800 million and 10-15 years to develop one approved and marketed drug -- though this includes the costs of the many more failures. As a result, unless a drug is a blockbuster, the economics are against it. Evaluating ADMET (absorption, distribution, metabolism, excretion and toxicity) is a huge expense, and Gene Logic's products address all parts, especially toxicity. Streamlining the process reduces drug-development costs and increases the incentive to invest in drugs for smaller patient populations.

Gene Logic's special sauce is its Biorepository (I half expect to see "TM" after that!) collection of human and animal tissue and cell samples. The company tests this ever-growing (I didn't say metastasizing) cache of all sorts of tissue against marketed drugs, proposed drugs, and all sorts of other compounds.

So far, bioinformatics companies have flailed because the enormous cost of maintaining the databases exceeds revenues. That's one reason former data companies Celera (NYSE:CRA) and Incyte (NASDAQ:INCY) are now drug companies, having handed over or subordinated their data businesses, respectively. Can Gene Logic do better?

Benefits may flow from the company's $52 million (60% cash, 40% stock) purchase of privately held contract research organization TherImmune. TherImmune shows up as contract study revenue on the Q2 income statement, with a 20.3% gross margin. It apparently brought a net increase of around $1.3 million in operating expenses, making its operations slightly unprofitable.

And Gene Logic's bioinformation businesses, after declining from Q4 to Q1, climbed 2.9% sequentially and for the first time turned out a positive gross margin too (subtracting database production costs from revenues and dividing by revenues). It was only 7.8%, but a big change.

With its first real quarter of net cash from operations (Q4 2001 was an aberration), Gene Logic can rightly brag that expense controls, a promising acquisition, and the apparent ability to hold onto and renew database customers are the foundation for a realistic chance of moving towards positive cash flow from operations and -- just maybe -- free cash flow.

Gene Logic has $119 million in cash and equivalents ($3.81 a share) and a burn reduced to $1.7 million last quarter. As such, the entire business sells for $43 million or $1.38 a share at mid-day's $5.19 share price. There is risk here, but the risk vs. return may be attractive for the speculative part of your portfolio -- and will become more so if the company continues this performance trend in coming quarters.

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Writer and Senior Analyst Tom Jacobs regularly covers biotechnology and drugs for and writes the monthly investing column for the journal Nature Biotechnology. He owns no stocks mentioned in this Take. Find more of his columns in his archive.