Iceland-based deCODE genetics (NASDAQ:DCGN) announced Tuesday that it has pinpointed a gene linked with obesity. That's exciting news for the company, which has partnered with drug powerhouse Merck (NYSE:MRK) to develop genomics-based drugs to combat fat. Investors were excited, too, running the stock up 10% yesterday on heavy volume.
It's not hard to imagine the potential market for such a fat fighter. After all, the Surgeon General says just about two-thirds, or 61%, of Americans are obese or at least overweight. It's becoming a health epidemic and plays a substantial role in health-care costs.
Through its agreement with Merck, deCODE will receive an undisclosed milestone payment hinged on this latest development. When the companies partnered a year ago, it was surmised that depending on what it could dig up, deCODE could receive up to $90 million in various payments (research funding, license fees, etc.) along the way, plus royalties on any successful drugs brought to market.
Despite the latest news, deCODE is still heavy on potential and light on revenues. While its net loss has improved -- it posted a net loss of $10.2 million for its second quarter, compared to $19.7 million the same quarter last year -- yesterday's announcement yields promise, not product.
Further, deCODE's revenues still rely on its partnerships, and those concentrations can be risky. For example, a separate partnership with Roche represented a whopping 42% of the company's consolidated revenues for the six months ended June 30.
Meanwhile, competition abounds -- although many existing fat-fighting drugs leave room for squeamishness. Roche's Xenical can apparently produce unwanted effects like incontinence, while Abbott Laboratories' (NYSE:ABT) Meridia has been plagued with reports of downright dangerous side effects.
British biotech Alizyme made headlines recently for Phase II trials of its own experimental drug, which showed a refreshing lack of side effects.
The promise of deCODE's discovery -- and its potential for a genetics-based way to fight obesity -- cannot be denied. Still, it will be a while before deCODE breaks the code of investment certainty.
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