NEW YORK, March 5 - When it comes to its online subscription services, Celera, the nascent pharma shop, might soon have to decide whether to fish or cut bait.
As the industry sees it, Celera can deal with its core subscription business in one of three ways: It can hold on to the unit, slated to become profitable this year; it can spin out the business or fold it into Applied Biosystems, to create a kind of one-stop genomic-tool-and-data shop; or it can sell the service outright.
Many insiders say the fate of Celera's online services is linked as much to the company's new pharma direction as it is to customers, cash, and clout. At the moment, most of Celera's resources are directed at its ongoing sequencing and informatics efforts.
But the company is on a self-professed fast-track downstream--as evidenced by recent moves that include the sale of its AgGen animal genomics and genotyping business to MetaMorphix, announced on Monday, and the departure in January of CSO and president Craig Venter. The company now is feverishly looking for someone to replace Venter.
A new CEO, pressed for time and charged with conjuring a drug-discovery strategy out of thin air, will have to carve out several hundred jobs to support the new direction. This will create nervous whispers among existing subscribers, who will demand to know the future of the database they've paid tens of thousands of dollars to use. If the new Celera head will be a pharma executive with little interest in genomics--a profile Tony White, CEO of Applera, is eager to flaunt--then what does Celera have in store for its core technology?
Get rid of it
"Celera will likely have to abandon its subscription service," said a well-regarded industry player. The company's nascent therapeutics corpus is "adrift" and "requires a refocusing of the effort and probable reapportionment of resources internally."
This official, who asked not to be named, said that by keeping the subscription service on board Celera risks distraction.
"Unless you've got the drug-discovery mindset embedded into your core process, you're going to be spinning your wheels," he said. From this perspective, Celera's business model [to evolve into a pharma firm while still holding onto the reigns of a genomic-database subscription service] was flawed from the outset."
Does Celera continue to sequence and perform large-scale bioinformatics as its downstream objectives come into focus? "I don't think they can afford to. They've got to start redirecting some of its resources. So I think there is some pain to come there."
A handful of analysts who cover Celera don't agree with that, arguing instead that the company should hold on to the business because it doesn't cost much to run but stands to make a profit this year.
"I just don't see the harm that [the subscription service] is doing," said Jonathan Aschoff, who covers Celera for Friedman, Billings, Ramsey in New York. "Of course they'll keep it."
As Wall Street sees it now, Celera's online division is set to earn between $120 million and $125 million this year--which would signal a profit, according to the company. But because what it costs to maintain the service is a closely guarded secret, it's not easy to determine the breadth of the profit. Experts think it likely costs between $110 million and $115 million to run the shop.
Even if subscriptions stumble--which doesn't appear in the cards for any time soon--Celera can still use the database for its own drug-discovery efforts. As it is, Celera licenses its data only after first sifting through and patenting the most interesting and potentially lucrative bits for itself.
Though Celera would not comment directly on the future of its prized service, a recent filing with the US Securities and Exchange Commission betrayed its weakness in the sector:
"While the Celera Genomics group continued to focus on drug discovery, it is also addressing increased market pressure in the online information business," the company wrote in the 10Q filing. "[Applera] remains committed to the online business, but heightened competition from publicly funded sequencing efforts is expected to limit commercial opportunities for the pure information business."
Applera "is responding to these pressures by pursuing value-added products and exploring organizational alternatives within [its] overall structure to best assure long term success for this business," it wrote.
A Celera insider put it this way: The company will never sell it. Besides, the online business has always had a lot of support from White.
Spinning and folding
"In the long run [the online subscription service] is probably not a business that belongs with drug development," said Christopher Raymond, who covers Celera for Prudential Securities. "It's a service business that requires an entirely different focus."
Yet although selling the division may put the company's research focus squarely on drug discovery, "the issue then becomes 'Well, there goes all that revenue," he said.
This may tarnish investor perception, said Raymond, who argues that the company might take a hit from investors who decide that spinning out "its only cash-burn mitigator" would be a bad move.
As it currently stands, Celera occupies a business platform for which traditional biotech investors have not developed an acute appreciation. "It's the kind of business that people see not necessarily as a high-growth or high-margin business," said Charles Duncan at Dresdner Kleinwort Wasserstein in New York.
"I think [the subscription service] presents more downside risk than it does upside potential," he said. "It's not strategic from the standpoint of facilitating drug discovery. It doesn't have any apparent or real strong [or] clear value in drug discovery and development. And right now, people want to focus on news of drugs."
A number of experts contend that Celera's online business, despite being only a few years old, is already a bit of an anachronism. "It's a business that may have been more strategic at another time, in that it differentiated the company," said Duncan. "Right now, though, it just distracts people....
"[Investors would ask] 'How's your subscription business doing?' 'Well, it's doing fine, but it has little to do with the business we're in now," he said. "And oh, by the way, it doesn't really facilitate the business we're evolving into.
"I think from this perspective it might make sense to try to move it off," Duncan reckoned. But then what if it fails to fetch a decent price? "That's not going to be seen as a good thing, either," he conceded. Investors threw approximately $1 billion to get the service running, the consensus seems to be. For what? A fire sale?
"You know," said Duncan, "having a sustainable cash-flowing business is not a bad thing. But I think the belief is that [the subscription service] can never be a substantial cash cow. The profitability is not huge, nor is it considered to be sustainably profitable. And certainly it is not considered to be growing profitability."
But the service can help fund drug discovery, which, when considering the $800 million price tag for bringing the average drug to market, needs all the cash it can get its hands on.
It can help pay for drug discovery in other ways, too, namely, as a bartering chip: Celera can license its database to an academic lab in exchange for the rights to develop a target that comes out of that lab.
It also may be an interesting addition to ABI because the companies share the same customer base and "because it may decrease the amplitude of some swings in that revenue stream, and it may also appeal more to that kind of investor base--the one that expects a different kind of market risk--compared with the traditional biotech base," said Duncan.
How might that fare from ABI's perspective? "It is not immediately apparent to me that owning Celera's database would make strategic sense for Applied Biosystems," said Scott Jones of A.G. Edwards & Sons. "It just doesn't make sense to me."