Genomics and tools companies are not out of the woods yet. But we are encouraged by the tone of the pharmaceutical and academic industries.
In the shadow of a killer year in genomics, 2001 has brought about disappointing returns from early discovery and tool companies. The evidence is apparent in the recent underperformance of the Genome Technology Index versus the overall NASDAQ Biotech Index. Year-to-date, genomics stocks are down 48 percent compared to the 18.4 percent decline in the AMEX Biotech Index.
Powerhouse technology companies have seen slackening demand and the proximate causes of this weakness are several-fold. A hangover effect remains from last year’s frenzy over the ramifications of the sequenced human genome, and the IPO market boom resulted in an excess supply of new companies with faulty or undifferentiated business plans. Perhaps most important, 2001 brought a slowdown in capital spending at the pharmaceutical and biotechnology company level leading to disappointing pre-announcements from a number of companies.
The initial negative news from the weakening economy hit us this past March, with Applied Biosystems’ news of delays in customer orders based on the apparent economic downturn and negative foreign currency impact. With ABI gearing up for a launch of next-generation systems, we also saw push-back or ordering delays as customers assessed new product offerings and scrutinized their budgets.
In early July, Affymetrix lowered guidance due to weak sales to its pharmaceutical company customers for its GeneChip products. Slackening demand was primarily blamed upon the mergers and consolidation in the pharma industry, which was causing customers to hold back on instrument purchases and utilization due to structural reorganization and reprioritization of research groups and R&D expenditures.
Finally, we saw a change in purchasing psychology: less up-front technology access fees. Pharma could now afford to play hardball with the genomics and tools companies that needed as much revenue as possible.
This is one of the factors that brought about some major changes in business models. Companies such as Sequenom, Lexicon, Celera, and Deltagen started acquiring their own capabilities in order to be less dependent upon service and collaboration fees and to move forward proprietary programs as integrated drug discovery companies.
Meanwhile, other companies — namely Caliper — moved away from a collaborative technology development program and into more direct product sales of its systems and data point pricing demonstrating the challenges faced in entering deals.
Overall, many companies revised their near-term revenue forecasts downward, but we continue to believe the eventual market opportunity of direct-selling of validated technology and targets far exceeds a handful of potential so-called collaborations and licensing fees.
Genomics and tools companies are not out of the woods yet. But we are encouraged by the tone of the pharmaceutical industry and academia. Research is driving forth and companies are hungry to find the technology they need to drive their pipeline forward and get products into the clinic.
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.