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Callida Comes Along

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Nearly a year after the company was so cleverly conceived during a patent litigation settlement, Hyseq’s spinoff is on track to unleash sequencing by hybridization in a commercially available platform. Could rapid whole-genome sequencing be upon us?

by Adrienne Burke

It was an oh-so-Silicon-Valley dinner party. On a Thursday evening in February this year, 40 techie-types mingled in the street, European style, sipping wine and champagne outside Don Giovanni’s restaurant in Mountain View, Calif. In attendance were scientists from Affymetrix, Applied Biosystems, Intel, and the Lawrence Livermore National Laboratory. Amgen founder George Rathmann was there with his wife, as were other execs and supporters of Hyseq Pharmaceuticals and its spunky new spinoff, Callida Genomics.

The occasion was an anniversary — “15 years of sequencing by hybridization” — and a chance for an inventor to thank his loyal supporters. Over a Mediterranean meal, it was as if SBH had come full circle. Callida CSO Rade Drmanac first conceived of the high-speed DNA sequencing method on his lunch hour at a restaurant in Belgrade, Yugoslavia, as a 29-year-old PhD candidate. He won a $150,000 grant from the US Department of Energy to develop the technology in 1987, and has passionately and persistently pursued its development ever since.

Drmanac’s cohost and wife Snezana Drmanac has lived and breathed SBH alongside her husband and is now VP of R&D at Callida. “Fifteen years is a long time, and some of these people have been supporting us from the beginning,” she says, “all the time talking about the same technology again and again. It was so important for us to express how much that meant to us.”

Fifteen years can seem even longer when you have no product to show for it. Although SBH has been instrumental in identifying the rarely expressed genes that comprise Hyseq’s impressive proprietary database, the Drmanacs’ goal — to commercialize their technology and see it deployed for whole-genome sequencing — has yet to be realized.

That, they are thrilled to say, is about to change.

Three Failing Companies in One

Hyseq was founded in 1992 to develop and commercialize sequencing by hybridization. Instead, hamstrung by patent litigation with Affymetrix and a stagnant deal with Applied Biosystems, Hyseq changed course to pursue drug discovery. SBH languished.

Ted Love, who was brought in as COO in January 2001 by the company’s 74-year-old guardian angel and CEO George Rathmann, says that when he arrived at Hyseq “there was the belief that we were three separate companies, none of which were running very well.”

Love, 43, says Hyseq thought of itself as part Affymetrix, with a DNA sequencing and chip business, part Human Genome Sciences, with an effort to develop drugs from genes, and part Incyte, with a huge database of genes that it planned to sell. “The problem was,” Love says, “we’d never generated a dime in revenues by selling any of our genes, while Incyte was generating a couple hundred million dollars a year; we’d never put a product in clinic from our genes, and HGS obviously had a handful already in clinic; and we’d never made a chip or sold a chip, and Affy was making by this time a profitable business from their chips.”

Bad management and dumb deals, not weak technology, has widely been blamed for those failures. Says Snezana Drmanac, “All of the people I have ever worked with had the same feeling: they really adore the [sequencing by hybridization] technology … and [wanted] to have it on the market. It never disappointed us in terms of what we wanted to achieve and how we wanted to achieve it. It wasn’t the technology that kept us from going on the market. It was the business model and the types of relationships that we had.”

“We think this technology really has a place and should be marketed,” says Kim Trutane, an associate analyst at Medical Technology Stock Letter, which publishes biotech investment advice and follows Hyseq’s performance. “We were looking forward for years to them getting the chip out, but Hyseq had a deal with ABI and ABI was sitting on it.”

Love, who is now at Hyseq’s helm as CEO, concurs that the ABI deal “probably wasn’t a smart deal for us to sign.” Hyseq’s early management, he says, “signed a few bad deals, by the way. That wasn’t the only one.” Now he and Rathmann, who remains chairman, are trying to get the company “out of all the bad deals and advance the good deals,” Love says.

Indeed, the duo managed to renegotiate, or as Love puts it, “gain release from the strangle of,” the ABI contract, freeing the company to develop its sequencing technology independently.

And then, in a remarkable display of diplomacy and conflict resolution, they hashed out a settlement to the four-year-long patent battle with Affymetrix that not only secured Hyseq’s access to develop high-density SBH microarray chips, but induced Affy to finance the formation of a new company that would carry out that mission.

Explaining the philosophy with which they approached the Affymetrix settlement talks, Love echoes Rathmann: “We could continue to fight and ruin each other, or we could think about taking [their] IP on chip manufacturing and our IP on SBH technology and maybe we could make a chip that no one else in the world could make and do some things that will actually make a lot of money for us.”

Latin for Clever, Rhymes with Fajita

The settlement, reached in October 2001, created Callida, a company owned 90 percent by Hyseq and 10 percent by Affymetrix, entirely capitalized with $8 million from Affy, half of which is a loan that Hyseq must repay in the form of stock or cash.

Hyseq transferred all of its SBH intellectual property to Callida, and established a sub-subsidiary, N-Mer, to concentrate exclusively on developing a combined SBH-Affymetrix microarray product.

Rade and Snezana Drmanac and their associates are overjoyed to be making headway toward the launch of a commercially viable sequencing platform, and to finally be able to work with Affymetrix. Says Snezana, “I think we were looking at each other and wanted to work together for such a long time.”

Rathmann, who does double duty as Callida’s CEO, says, “If we’re able to keep the relationship the way it’s going, we’ll have to our advantage the ability to make the very best chips you can possibly make, because we’ll be using Affy technology to do it.”

The optimism of Rathmann and the Drmanacs is infectious. But it’s not unanimous.

An Affymetrix spokeswoman isn’t quite so effusive. Asked via e-mail whether Affy’s relationship with Callida can be seen as a vote of confidence in the SBH technology, she writes, “We are pleased to be working with Hyseq to see the potential of combining the two technologies for new applications.” And while Rathmann and others at Callida maintain that the settlement has been a win-win that boosted Affy’s stock price and will give the chipmaker entrée into the sequencing market, the Affy spokeswoman refers to Callida as “a customer of ours that has bought a system.”

Rathmann and Love acknowledge that not everyone thought Callida was the best possible outcome of the Affy settlement. Some believed Affy had clearly violated patents on certain of Hyseq’s probes and that Hyseq “should have kept fighting to get a few hundred million dollars out of them,” Rathmann recalls. Others thought that Hyseq’s biopharmaceutical business should have been spun out of the SBH technology business instead of the other way around.

Even Love at first advocated a more straightforward solution: “I envisioned just selling them Callida — take all that intellectual property and just integrate it into Affy and do the best you can with it.” In the end, he says, “the way we did it is … definitely the best thing to have done for the chip company and it will work out fine.”

Endless Ideas

It’s true that the mission of the new Callida is not much different from the original Hyseq, but certain things have changed. Not quite a year into its life, Callida is systematically exploring the potential for commercializing its technology on a variety of platforms. It struck a deal to license its non-universal probe patent rights to Agilent, is making headway on two universal-array prototypes to be unveiled for testing later this year, and has, Drmanac says, “interactions” with a few companies, including a nanotech feasibility study with Intel’s nascent biochip group. (Other collaborations had yet to be made public at GT press time.)

Callida is also demonstrating that it learned a lesson from Hyseq about business strategy. At Hyseq, most of the 25-person team that now comprises the Callida staff worked on production and development of high-throughput screening technology using SBH. “We had great progress, but we were not focused or oriented toward the market,” says Snezana Drmanac.

Now, Joe Kosmoski, director of technology and product development, says Callida is product-driven. “We’ve changed our focus and how we explore science. It’s always with the customer and the need for a market in mind, and that’s very different from the original Hyseq,” he says. “We still have a huge R&D effort, but no R&D is done just strictly out of the interest of science or knowledge.”

All indications in the research lab are good. Kosmoski, a self-described baby-faced 36-year-old biochemical engineer, says it’s his job to filter the pie-in-the-sky ideas from the viable ones before studies ensue. And while the team generates an endless stream of product ideas, every new SBH application he tests “has success to some level, almost to the point that it exceeds our expectations,” he says.

Hyseq is banking on that. Love predicts that Callida will ultimately make a public offering and that Hyseq will monetize its 90 percent interest to reap “hopefully more than the $4 million or $10 milllion that we borrowed.” (If certain business and technical milestones are achieved, Affy could put up another $12 million, again half of that in the form of a loan to Hyseq.)

Three Probed Approaches, Two Prototypes

For the immediate future, Callida is concentrating on three distinct approaches to packaging SBH, all for genome sequencing.

In a nutshell, the SBH method uses an algorithm to mathematically determine all of the possible four-base sequences for an oligonucleotide of a certain length. Next, all of those oligos are synthesized and bound to a microarray substrate, and a genomic sample that has been cut into smaller pieces and labeled is hybridized to the array. Oligos that hybridize with the genomic DNA light up, indicating that the sequences are present. A second algorithm is used to tie these short sequences, which overlap, together into a longer one.

Because Callida’s IP includes the rights to universal probe technology, the company can incorporate all possible combinations of probes in an array. Explains Kosmoski, “Unlike Affy or other people who make a probe for a particular sequence, we have a probe for every sequence.”

Those probes can, in theory, be put on any substrate — glass slide, plastic plate, microparticle, microfluidics, or nanotechnology. Callida is exploring each of those platforms and promises two different glass-slide-based prototypes in the near future.

One is an ultra-high-density microarray that combines Affy’s N-Mer chip with Callida’s probes and bioinformatics. Affy creates, according to Callida’s specifications, arrays of probes to which labeled samples then hybridize.

The 500,000-probe chips would be capable of reading any given sequence, but marketed for tackling large targets of more than 10kb: “Because you have to invest in advance in a large number of probes, those chips are going to be efficient only for long sequencing or for large targets,” explains Snezana Drmanac. The N-Mer chip might be used for reading HIV, bacterial, or mitochondrial genomes, or for sequencing large mixed populations of genes 10kb or greater in length.

By year-end, according to Rade Drmanac, Callida will finish feasibility studies and get ready to begin product development. To Callida’s advantage are Affy’s manufacturing infrastructure and its customer base: existing Affy GeneChip users already own the instruments necessary for hybridizing and reading N-Mer chips.

Combo Chips and Solution Arrays

Callida’s HyChip for whole-genome sequencing is also coming along, with a prototype expected in the next five months. Known as the “combinatorial approach,” the HyChip holds two libraries of every probe — one attached to the chip or microparticle or labeled with a nanoparticle, and the other in a library in which each probe is identifiable by fluorescent tag or something comparable.

As opposed to an Affy chip, which would require one million probes to read one million 10-mer sequences, the HyChip could read one million with only two sets of 1,024 5-mers. The current version of the universal HyChip holds an array of 5-mer probes, which result in over 1 million possible 10-mer combinations. Every base is read multiple times by 10 overlapping 10-mer probes per strand, enabling the chip to analyze any possible set of SNPs or completely sequence any nucleic acid.

According to Snezana Drmanac, the technology performs sequencing functions with greater than 99.9 percent accuracy and achieves read lengths that far exceed currently available sequencing methods. Gel sequencing, for instance, delivers reads of 700 bases, max. Drmanac says her research protoype achieved three times that, and that “on our marketing product we plan to have even longer reads because we will have higher spotting density. We’ll use 6-mers instead of 5-mers, and that’s going to increase the read length too.”

On cost, Callida expects to be comparable per base to the current fastest technologies. But, Drmanac says, “speed is the catch.” While gel-based sequencing requires editing and human interaction for base calling, the 99.9 percent accurate reads achieved using the HyChip were done completely with automatic base calling — a significant time saver.

According to CSO Drmanac, the technology is designed to read up to 6kb-long sequence and it can be used for resequencing on any gene. And again, because the forthcoming version sits on a standard glass slide format, any commercially available reader can read it.

Solution arrays are a third SBH application that Callida has tested using microparticle technology. Snezana Drmanac explains: “You have microparticles that can be visualized with microscopes or laser readers, each with a specific signal that you would be able to recognize when mixed together in solution.”

For instance, the Luminex platform, which Callida explored, provides 100 different beads that give off signals when scanned with array laser scanners. Callida created a set probes that attach to the Luminex beads. “We were very successful in showing proof-of-concept feasibility for both genotyping and sequencing,” says Kosmoski. But Callida deemed the platform too small to develop a marketable product. “Luminex’s multiplexing capacity is 100 unique individuals and we need at least 1,000,” Kosmoski says. “One day if they or some other microparticle company can provide us with more than 1,000 flavors, we’ll pursue that further.”

Fully aware that gel sequencing has a hold on the market, Callida is determined that any products it launches will exceed what’s available “in [terms of] what it can do for the user, cost, and read length,” says Kosmoski. “We want to dream above the gel.”

A Genome in Every Bassinet

While Callida’s early commercial introductions will address the market’s sequencing and genoptying needs, Drmanac envisions half his company’s revenues eventually coming from diagnostic tools. DNA diagnostics is already a $1 billion market, he notes, and most kits only give a yes or no answer. The future of diagnostics is in resequencing genes and genomes to get complete answers, he says, and he predicts that it will someday be a $10 billion market. By capturing just 10 percent of that market, Callida could reap hundreds of millions in revenues, Drmanac says.

For years, Drmanac has dreamt of a method that would enable doctors to sequence the genome of every newborn. With 4 million babies born every year in the US alone, Drmanac calculates that, at $1,000 per test, it could be a multi-billion-dollar-a-year constant market.

But he and his team realized early on that to achieve that goal they would have to figure out how to sequence one molecule at a time, thereby eliminating PCR. “Even if we were to do the smallest, simplest PCR … we’d need about a liter of blood,” says Kosmoski. “That makes whole-genome sequencing impossible for an individual.”

In a feasibility study funded by Intel, Callida is now examining a fourth application of sequencing by hybridization — a nanotechnology approach that could be the key to speedy and cheap whole-human-genome sequencing.

With Intel, Kosmoski says, “We’re trying to create an identification tag on the molecular-size scale. If we could take one of our SBH probes and put [a tag] on to it, that would allow us to identify that one single probe, and that would give us single molecule sequencing.”

Andy Berlin, who joined Intel two years ago to “accelerate the convergence of silicon and biology and medicine,” met Rade Drmanac during dinner at an industry conference in Ohio, and, Berlin says, “discovered we were thinking about the same things.” With offices just five miles apart in Silicon Valley, the two continued the conversation and soon began working together. And in February, Berlin was among the other SBH supporters at Don Giovanni’s toasting the technology’s pending success.

“We believe it might be a way to make sequencing fast and affordable. We’re going to find out,” he says.

Noting that other emerging companies such as US Genomics and Solexa also have their sights set on speedier genome sequencing methods, Drmanac says, “I have no doubt that whole-genome sequencing will be developed and routine and anybody who can afford to have their genome sequenced will.” He is quick to add that Callida has “a couple of technologies that will be among the first to reach that.”

“In theory, we could become greater than a pharma,” Kosmoski proclaims. “But that’s untested. That’s just Rade’s enthusiasm rubbing off on me!”

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