Celera Genomics Group, which gained international fame by sequencing the human genome, acknowledged yesterday what its critics had claimed all along: Selling the genome doesn't pay.
At least not well enough to make the Rockville company profitable in the long run. Not when a government-backed project is posting much of the same information on the Internet for free.
Celera said yesterday that it intends to quit marketing databases of information about genomes, genes and proteins to drug companies and academic researchers. Instead, Celera will hand responsibility for distributing the genomic information to its sister company - scientific tools maker Applied Biosystems Group of Foster City, Calif. - in exchange for royalties. Celera will jump with both feet into the business of discovering drugs and diagnostics, tests to detect medical conditions and diseases.
Also yesterday, Celera announced that former Roche Molecular Systems Chief Executive Officer Kathy Ordonez, who heads Celera's diagnostics unit, will become Celera's president. She replaces J. Craig Venter, who resigned in January.
"Our friends in the public sector have been more successful than we thought they were going to be," said Tony White, chief executive officer of Celera, Applied Biosystems and parent company Applera Corp. of Norwalk, Conn., in a conference call with investors. "We decided to get ahead of that curve and not wait for this thing to deteriorate on us."
The decision, which Celera has been signaling for more than a year, amounted to a repudiation of the strategy upon which the company was founded. Celera had planned to make money by offering genomic information online through subscriptions. But White said yesterday that it had become apparent that drug companies weren't going to renew subscriptions at the multimillion-dollar annual fees that initial five-year subscriptions had commanded.
"It was never a real product," said John McCamant, editor of the Medical Technology Stock Letter, based in Berkeley, Calif. He attributed much of the frenzy over Celera, which drove its shares to a high of $138.50 in June 2000, to the same high technology investors who were buying Internet stocks that later went bust.
"High-tech investors didn't understand biotech," he said. "They bought the concept that you could own the genome."
Yesterday, Celera's shares lost $1.47, or nearly 8 percent, to close at $17.90, a 52-week low, on the New York Stock Exchange.
Venter, a brash scientist White hired to run Celera, had pioneered a method that used computers to assemble - in order - all the DNA needed to create and run a human body. His claim that he would finish the sequencing years ahead of a timetable announced by the government-funded Human Genome Project ignited a widely publicized race between the two. Scientists from both projects ended up sharing the acclaim for sequencing the genome, announced at a White House news conference in June 2000.
Critics of old strategy
Even before the announcement, critics scoffed at Celera's strategy. Roy Whitfield, chairman of Celera competitor Incyte Genomics Inc., called the sequencing "a commercial nonevent."
Nevertheless, Celera initially sold subscriptions to academic researchers for $1,000 to $15,000 per lab per year and to drug companies for $5 million to $15 million per company per year. Celera had 19 commercial subscribers - those paying the higher fees - and 180 academic and institutional subscribers at the beginning of this year. It reported $35 million in total company revenue for the second fiscal quarter ended Dec. 31 but lost $18.9 million, excluding a nonrecurring charge related to its acquisition of Axys Pharmaceuticals Inc., a South San Francisco drug discoverer.
Even for established drug companies, discovering biotech drugs is a business fraught with risk. Although a single blockbuster drug can return hundreds of millions a year to a pharmaceutical company, finding and testing such a drug can take decades. Most are never approved for sale.
"The jury is out," Dresdner Kleinwort Wasserstein analyst Charles Duncan said yesterday of Celera's new strategy, noting he continues to recommend investors "hold" the shares. But "this is a good first step."
Duncan and McCamant said Celera will have to show it can use its specialized, high-speed computers to search through genes and proteins to find those that are useful in medicines and diagnostics. The work will be done in part at Celera's recently completed protein-analyzing factory in Rockville.
McCamant said the company probably has 12 to 18 months to announce significant finds before investors become even more disillusioned.
Friedman Billings Ramsey analyst Jonathan Aschoff already is unimpressed. Yesterday, he downgraded Celera's shares, saying he expects them to "underperform" the market.
The genomic-information subscriptions Applied sells may be packaged and sold as a "bundle" with tools such as chemical kits needed to do scientific experiments. Celera will continue to get cash from its existing customers, amounting to about $62.5 million over the next four years in earnings before interest, taxes, depreciation and amortization. It also will get royalties in the low- to mid-single-digit range beginning July 1 on sales of any bundles of Applied products that incorporate genomic information.
Celera employees will continue to support the online information business from Rockville.
But, Aschoff said in a report yesterday, "the drug discovery business is likely a decade from its first commercial product, and [Celera] has just lost its full entitlement to a business unit that was on the brink of profitability."