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A New Year of Genomics Opportunity

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by Michael King

 

The ongoing sequencing of the human genome was a positive for the genomics group in 2000 — enough to drive tens of IPOs. But the subsequent lack of immediate results in drug development soured the taste of many investors in 2001 and left fortunes waning at the infant companies.

Further, when equipment companies started missing their marks, an end to the genomics instrument bubble seemed imminent. As a result, the genomics sector has underperformed the BTK, S&P 500, Nasdaq Composite, and Pharma Index over the last 18 months, down 18.5 percent since the beginning of 2000 and a whopping 55 percent year-to-date.

With the introduction of new, more advanced technologies, including high-throughput protein crystallography and whole-genome expression analysis, we believe the drug development process will become more streamlined and productive. We expect the genomics revolution to begin to bear fruit in the next three to five years with its first product approvals.

We believe 2002 will be a major year of validation for genomics as several of the early discovery companies file investigational new drug applications with the USFDA and put their discoveries into clinic. We believe major advances by these later-stage discovery companies will bring focus and excitement back to the genomics sector which should, in turn, reverberate through the technology platform and informatics names.

As pharmaceutical companies focus their genotyping efforts, we will look for GTI companies Illumina, Lynx, Orchid, Sequenom, and others to reap the benefits via genotyping collaborations or service agreements. In the area of gene expression analysis, our recent investigation into the utilization of microarrays in the large pharma community, including companies such as Aventis, Eli Lilly, and GlaxoSmith- Kline, has increased our confidence that microarrays will continue to be in high demand, with Affymetrix maintaining the leading market share. In fact, many pharmas saw between a two- and four-fold increase in array use in 2001 alone and believe these rates may go up again in 2002.

Additionally — though difficult to predict from an investment standpoint — we expect to see a large surge in bioinformatics sales as more pharmaceutical and biotech companies seek out leading data-mining, integration, and management software to analyze increasing amounts of genetic and proteomic information.

Most recently, the drive for strong informatics and the clear sign of continued consolidation in the struggling genomics industry was exemplified by Exelixis’ acquisition of Genomica. Overall, we believe some of the winners will be Lion Bioscience’s SRS system for integration and organization and Compugen’s proprietary Leads 2.0 gene discovery software for mining the public genomic databases and linking the public genome to expressed proteins.

It remains unclear how many of the early genomics names will survive the turmoil of the economy, climate of the capital markets, and potential acquisitions. But we expect several GTI companies to begin to license specific candidate genes to collaborative partners and co-develop preclinical compounds developing further value. Overall, with a number of drivers ranging from novel innovations and collaborations to mergers and acquisitions, we believe the sector will rebound in 2002.

 

Michael G. King, Jr., is a managing director and senior biotechnology analyst focusing on the genomics sector for Robertson Stephens.

Robertson Stephens research analyst Edward Tenthoff and research associate Ellen Lubman also contribute to Genomoney.

Robertson Stephens, which has not independently verified the information contained in this article, maintains a market in the shares of Affymetrix, Compugen, Lion Bioscience, Orchid BioSciences, and Sequenom, and has been a managing or comanaging underwriter or has privately placed securities for these companies within the past three years.

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