deCODE Genetics (NASDAQ:DCGN), a genomics company focused on cataloguing the genes responsible for common diseases, marked a change of direction last week, announcing that for the first time it was going to develop a pharmaceutical product.
The company is licensing a compound from Bayer AG (NYSE:BAY) that deCODE believes will help prevent heart attacks. Bayer had been testing the drug for another indication, but because of deCODE's genetic research, that company believes the drug will also reduce heart attacks.
The new approach by deCODE finally helps answer some of the questions surrounding its business model. With the collapse of such genomics-based stocks as Human Genome Sciences (NASDAQ:HGSI), the $64,000 question (depending on your portfolio size) has been: "How are these companies going to make money?" Selling their genetic knowledge generally has not provided enough revenue to cover costs, let alone generate positive earnings growth, and it is hard to envision it ever doing so.
The new deal between Bayer and deCODE is rather intriguing because it turns traditional drug discovery on its head. The usual paradigm has been to screen a boatload of molecules for disease-treating properties, then figure out what it did, send it through trials, and hopefully get one of those 100,000 molecules approved as a new drug.
deCODE has reversed the drug discovery process by first identifying the target through their genetic research and, instead of trying to design or screen its own compounds, the researchers hunted for a drug that already possessed the desired properties. Now, instead of going through the initial screening and phase I trial, they have a compound ready to leap into phase II, thanks to the development time and money Bayer has already forked into it. Of course, deCODE will have to pay Bayer milestone payments and royalties if the drug progresses successfully through trials, in a role reversal of the usual relationship between biotech and pharmaceutical companies.
deCODE's stock has been on a tear recently, rising from about $3 three months ago to over $8, fueled by a string of genetic discoveries and the resulting milestone payments from its research partners. With such a rapid rise, the company has an enterprise value of about $450 million. Like most biotech companies, it's losing money, albeit at a slower rate than last year, with the third-quarter loss shrinking to just over $1 million, but the burn rate will likely increase as the company begins its clinical trial.
Time will tell if deCODE can cipher the riddle of profitability.
David Nierengarten, Ph.D., works with a biotechnology venture capital fund. He often contributes to Fool.com and is an active member of the TMF Community as DavidMN. He does not own shares of any of the companies mentioned in this article. He appreciates your comments at [email protected] and on the Biotechnology discussion board.
