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7-Business: Celera aims to crack the code of success

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TITLE:  Celera Aims to Crack The Code to Success
        Gene Firm's Transition to Drug Developer Has Yet to Receive Wall
        St.'s Approval
SOURCE: The Washington Post, USA, by Michael Barbaro
DATE:   Jan 21, 2003

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Celera Aims to Crack The Code to Success
Gene Firm's Transition to Drug Developer Has Yet to Receive Wall St.'s

On a bitter-cold morning in New York City last month, Tony L. White,
chief executive of Celera Genomics Corp.'s parent company, told investors
that its wrenching transformation from a business that sells genetic data
to one that develops drugs was "essentially complete." In what was
expected to be a one-two punch that day, Celera also announced the
appointment of a new head of development, pharmaceutical-industry
heavyweight James P. Yee.

Investors' response? The next day, the company's stock price fell 21
cents, or about 2 percent.

So it goes for Celera, the Rockville biotechnology company that helped
decipher the human genetic code. With Wall Street turning its back on
early-stage biotech companies and investor appetite for the sector
waning, the company's reinvention has so far landed with a thud.

The company ousted its founder and maverick biologist, J. Craig Venter,
last year and drafted Kathy P. Ordonez as president, hoping her
experience in the pharmaceutical industry would help her lead Celera to
biotechnology's next frontier: medicine tailored to a patient's genetic
makeup. But in the past 12 months, Celera's stock has plunged 58 percent.
By comparison, the 72 companies in the Nasdaq biotech index have, on
average, lost 37 percent of their stock value in the same period.
Celera's stock now trades at least $150 million below the value of its
net cash and securities, a sign of flagging confidence in the firm's
long-term prospects.

Despite its track record in the genetic-data business, Celera is untested
as a drug company, analysts say. Even if Celera succeeds, it will be
years before the firm can translate its genetic insights into commercial

"The simple explanation is that not that many people are giving them a
chance," said SG Cowen Securities Corp. analyst Eric T. Schmidt, whose
company has a banking relationship with Celera. He believes the company
is undervalued.

Celera, a unit of Norwalk, Conn.-based Applera Corp., is well known for
surprising its critics. The idea of personalized genetic medicine is not
new, but few companies have Celera's background dissecting DNA or its
access to costly decoding technology.

As she maps Celera's reorganization, Ordonez points to what she calls its
"tremendous competitive advantage," a database of the minute genetic
variations that scientists believe underlie disease. The company has
aggressively decoded these differences, chemical letters of the human
genetic code called single-nucleotide polymorphisms, or SNPs.

Dozens of biotechnology and pharmaceutical companies are studying SNPs to
determine how to make drugs work better in increasingly smaller subsets
of patients. But Winton G. Gibbons, an analyst at William, Blair & Co.
who owns stock in Celera, believes Celera's catalogue is the world's
largest , with 36,000 new SNPs uncovered so far.

"Celera's proven it has the intellectual capital. It doesn't have to go
out and build it or buy it," said Jill Kiersky, an analyst at Morningstar
Inc. "Its ability to translate that into marketable drugs is what has not
been proven."

The company has one more thing most of its competitors lack: money. As of
Oct. 24, the company reported $864 million in net cash (cash and
marketable securities, minus debt), one of the largest sums in the
sector. It also plans to turn a new genetic testing unit, Celera
Diagnostics, into a short-term revenue stream while it nudges along its
drug program.

Drug development is a tricky business, though, and more important for
Celera, an agonizingly drawn-out process. Commercializing a drug can take
up to 10 years per product. Celera is not expected to even begin human
tests, the first of many regulatory hurdles on a long road to federal
approval, for one of its four experimental compounds until the end of the

To increase its odds, Celera will increase spending on early-stage
product testing to 20 percent of its 2003 budget, up from 5 percent last
year. By 2005, that figure is expected to reach 40 percent.

Biotechnology analysts are warning investors that it's a risky plan.

"Celera's expansion into drug discovery is not an area where Celera has
established expertise," wrote Meirav Chovav, a biotechnology analyst at
UBS Warburg LLC. Celera "could find itself disadvantaged relative to
established gene-based drug-discovery companies."

Celera began life in 1998 as a company that would compile and sell
genetic information, a far cry from actually producing drugs itself.
Elaborate maps of DNA, many bearing Venter's signature, still line the
hallways at Celera's headquarters. A secondary stock offering in 2000
brought the company nearly $1 billion, one of the biggest such takes in
the biotech sector.

(Celera was given to shareholders as a tracking stock by its parent
company. It trades separately on the New York Stock Exchange under the
stock symbol CRA.)

Venter was ousted in part because his vision was at odds with those of
Applera's top managers, who wanted Celera to turn its patented genetic
information into drugs. Last April, White appointed Ordonez, already head
of Celera Diagnostics, with the charge to re-create the company.

In Ordonez, White found a soft-spoken executive with a low profile -- in
many ways, Venter's foil. For nine years, she was chief executive of
Roche Molecular Systems Inc., a division of the Swiss pharmaceutical
giant F. Hoffmann-La Roche Ltd. Many consider her a seminal figure in the
diagnostics business and, White is fond of saying, one who can "turn
science into money."

In short order, Ordonez sold Celera's genetic-database business and laid
off 132 workers -- roughly 16 percent of the company's staff -- tied to
the enterprise.

Because of its cash hoard, Celera earned a second chance. By the time a
company decides to abandon a business model, stock value has typically
plunged and battered investors are unlikely to stick around, said Barry
Nalebuff, a professor at the Yale School of Management. But the biotech
stock bubble from 1999 to 2000 changed the rules. Even after Wall Street
had soured on many struggling biotechs, huge cash reserves remained,
allowing companies to circumvent investors.

At least two of the country's leading biotechnology companies have
restructured themselves from gene hunters to drug developers: Millennium
Pharmaceuticals Inc. of Cambridge, Mass., and Human Genome Sciences Inc.
of Rockville. Both emerged with strong drug pipelines, but their stock
values have also fallen sharply in the past two years.

Ordonez, 51, said Celera needs time to execute its drug-making strategy.
In the 10 months she has been on the job, she has stitched together a
team of industry heavyweights.

She hired Yee, a vice president of clinical and preclinical research at
Roche Bioscience, as head of development. Robert F.G. Booth, a senior
vice president at Roche Bioscience, became chief scientific officer.
David S. Block, a former DuPont Pharmaceuticals Co. executive, was
appointed chief operating officer three months before Ordonez arrived. By
2004, company executives say, Celera will hire up to 40 people for in-
house drug testing.

Analysts stake the company's immediate future on Celera Diagnostics, a
joint venture with sister corporation, Applied Biosystems Inc. of Foster
City, Calif. By studying the differences between normal and diseased
tissue, Celera plans to develop a series of diagnostic tools for doctors
and researchers.

Such tests require less money and time than drug candidates do to reach
the market, and they could turn Celera Diagnostics into a cash cow. Last
month the Food and Drug Administration approved its first product, a
gene-based AIDS test. Ordonez predicts the two-year-old unit will be
profitable in 2005.

The testing fits nicely into Celera's central mission of drug
development. Gene-based diagnostic tools can be used to screen patients
enrolled in human tests for Celera's experimental compounds. And the
genetic insights gained through their development will be passed on to
Celera scientists hunting for new drugs.

Celera is putting its greatest emphasis on oral drugs for asthma, blood
clotting and osteoporosis. Booth, the chief scientific officer, wants to
push most of these drugs through the early stages of human testing and
into advanced trials without seeking help from a major drug company. Such
a strategy might eventually mean bigger gains for Celera's shareholders,
if the drugs are proven to work.

"Celera is in a very fortunate situation because it has the cash to keep
testing," Booth said. The company expects to spend about $135 million on
research and development this year, he added.

Nevertheless, it will be years before Celera's drug candidates are
eligible for Food and Drug Administration approval. That may explain why
a company with so much cash on hand, a trove of genetic data and a strong
management team is finding it so hard to attract new investors. It's just
too early for anyone to tell if Celera can execute its business plan,
analysts say.

Schmidt, the analyst at SG Cowen Securities Corp., said: "This is a
company that Wall Street is just not watching very closely right now."