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As Celera s CDS Revenues Shrink, Applera Cuts Royalties, Extends Distribution Pact

In 2002, Applera assumed that the data held by its Celera Genomics group would produce cash flows of $200 million to $300 million over 10 years and established a royalty plan that would allow its Applied Biosystems group to exclusively market the data until 2012.

Last week, Applera, responding to a rapidly diminishing market for Celera's CDS data, restructured its marketing and distribution agreement between its two operating groups, extending the pact by five years to 2017, and lowering the royalty rate by 1 percent that ABI must pay for exclusive rights to the Celera Discovery System and other genomic information.

The new pact sustains the top line for Celera as it pursues a non-data based business strategy, an analyst said.

"It keeps Celera's revenue line from going to zero," said Adam Chazan, an analyst with Pacific Growth Equities of San Francisco. "It shouldn't have any material effects, it's all inner-company stuff and nothing too concerning from an investor standpoint."

In an SEC filing, Applera said it would modify the agreement that goes into effect in 2006 because its "experience with the development and commercialization of products covered by the agreement" had "varied from the original assumptions on which the terms and conditions of the agreement were established."

During the exuberant days of the Human Genome Project, Celera reached a market capitalization of $14 billion as its share price soared to a height of nearly $300 — largely on the perceived value of the human genome sequence information in its database. Today, the company has changed its strategic approach from commercializing its data to becoming a drug-discovery firm. It has a market cap of $894 million and annual net losses of approximately $717 million as of June 30, 2004, the most recent full-year data available.

In 2002, Celera said it anticipated a cash flow of $200 million to $300 million over 10 years from commercializing the data resource, which included revenues from existing CDS subscriptions and royalties from ABI's marketing efforts when it announced the original deal. In line with the agreement, Celera has not sought any new customers for its Celera Discovery System and related information products and services since June 30, 2002, and has been letting subscriptions to the database expire without renewal.

Celera reported net revenues of $89 million for its 2001 fiscal year, followed by net revenues of $121 million in 2002, and $88 million for FY '03 and $60 million for FY '04.

Revenues in FY '03 fell, the company said at the time, primarily due to its decision not to pursue additional sequencing service business. The company reported revenue of $74.5 million in FY '03, 85 percent of its total revenues, from its online/information business. In 2003, the company said it projected a "fairly substantial falloff [in CDS revenues] in 2005," and "no revenue in 2006" from its data business.

In FY '04, the company said its revenues fell, again, primarily due to the continued expiration of online/information business customer agreements.

Celera said last month that it expects its FY 2005 revenues to be in the range of $25 million to $30 million.

Previously, the marketing plan called for a progressive increase in ABI royalty payments, reaching a ceiling of 5 percent through the end of FY 2008, and then to decline each succeeding year through the end of the original deal. The agreement covered the use of CDS data in developing reagents — such as probes and primers — used in ABI products such as TaqMan assays, the SNPlex Genotyping System, the Variant SEQr Resequencing Systems, the Expression Array System, and TaqMan low density arrays, the company said.

Applera said the royalty rate for FY 2005, which ends June 30, 2005, was expected to be 3 percent.

In the 2004 annual report, Celera Genomics said that it believes that in order for Applied Biosystems' sales of these products to meet original expectations, Applied Biosystems will have to continue devoting a significant amount of its resources to researching, developing, marketing, and distributing them.

ABI has just finished a one-year restructuring effort (see BCW 2/03/2005) and it is unclear how much the company will put into supporting the CDS product and its derivatives, although the data is seen as an attractive value-add by some customers (see BCW 1/27/2005).

Celera's income from the pact had been guaranteed, up to $62.5 million, for the first four years of the deal, and that will continue. The following has been a part of SEC filings in the past and is included in the newest filing:

"Applied Biosystems has agreed to reimburse Celera Genomics for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts below a total of $62.5 million during the four fiscal years ending with the 2006 fiscal year, if the shortfall is due to the actions of Applied Biosystems including changes in marketing strategy for the Celera Discovery System."

Applera representatives did not return requests for comment before publication deadline.

— Mo Krochmal ([email protected]) and
Bernadette Toner ([email protected])

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