THE PAST: “Maryland Firm Marks Genetic Code Milestone” read the September 10, 1999 headline in The Washington Post . What caught my eye was a schematic drawing of a fruit fly. Had I mistakenly picked up the Health section of the paper instead of the Business section? No, the article was about a local company – Celera Genomics – that had just announced it had completed the physical process of reading, or “sequencing,” the fruit fly’s entire genetic code. As an investment advisor it was apparent that the Internet bubble would soon burst, and telecom and networking would probably not be far behind. Perhaps “genomics” would be a good place to invest some client money. Everybody was looking for the next hot investment arena in the raging bull market of the 1990’s. Maybe this was it?
Living in Montgomery County, Maryland provided an advantage as many of the emerging genomic companies developed in this area, eager for funding from nearby National Institutes of Health. On my way to work I passed a company called Gene Logic, a public company and the parking lot seemed full – always a good sign. By the fall of 1999 Gene Logic had signed up a number of partners, but the company was still losing money. Nonetheless, it seemed like a reasonable speculation at $6 a share and it was easy to buy in quantity. Within four months the stock topped $150. Up twenty-five fold! I was long gone, ecstatic when the stock topped $20, but the Genomic Gold Rush was in full swing.
Why the gold rush? Why then? Biotech stocks had been around since the early 80’s, creating a few winners like Genentech and Amgen. But for every winner there were dozens of losers. Companies with names and technologies long forgotten. Something new was happening. Stories about unlocking the book of life were beginning to make mainstream news. If Microsoft, holder of the code to DOS and Windows, was worth $400 billion, what should Celera with its code for the book of live be worth? Celera, valued at $385 million in June of 1999, could increase in value one hundred fold and still be valued less than Microsoft. Celera didn’t jump 100 times, but rising from $8 to $276, it provided some pretty sweet action for a few nimble traders.
Where was the money coming from? It came from individuals and institutional players on a huge roll and looking for more. In the fall of 1999, the Nasdaq Composite Index climbed above 3,400 for the first time, advancing over 140% in just over a year. Brokerage firms were running ads showing tow truck drivers who owned tropical islands. Priceline.com’s market capitalization was greater than American, United, and Northwest Airlines combined. If a discount ticket company could be worth $20 billion, what would you pay for a cure for cancer, heart disease, AIDS, Alzheimer's, or MS? As traders unwound their big Internet positions they were ready for a brave new frontier. Flush with cash, they found one: Genomics.
The investment banking firms were eager to accommodate. Genomic IPO’s and secondary offerings were popping up like mushrooms. Typical of the new issues (they totaled 68) was Caliper Technologies, a biochip maker, which went public at $16 in December 1999 and topped out at $195 in just four months. Sequenom, a maker of automated SNP assays, went public in January at $26 and jumped to $171 within 60 days. In total, financiers raised over $35 billion in biotech/genomic IPO’s and secondary offerings in 2000. This figure dwarfs the $5 billion raised on average in the preceding six years. It was a frenzy even by Wall Street’s new go-go mentality. But the frenzy was about ready to end.
While the genomics stocks skyrocketed in late 2000, it was already evident that the Internet/telecom/networking stocks were fading quickly. Now, after the five-, 10-, and 20-fold increases in genomic stocks, investors were getting itchy about their new-found friends. Was the music about to stop? Abruptly it did on March 14, 2000 at 9:00 a.m. CBS news reported they “had learned that President Clinton later today will unveil an agreement with Britain to ban patents on individual genes.”
Later the statement was modified, clarified, and massaged. It didn’t make any difference. The genie was already out of the bottle. Waves of panic selling instantly engulfed the market and continued for weeks to come. Caliper and Sequenom dropped over 85 percent in six weeks. Declines of 60 percent to 80 percent were commonplace, even among well- financed industry leaders such as Celera, Human Genome Sciences, Affymetrix, and Millennium Pharmaceuticals. In the summer the genomics stocks rallied briefly only to decline again, many to new lows, by late fall.
THE PRESENT: 2001 brought renewed investor interest in the industry. Many genomics companies are exceptionally well financed as they opportunistically raised capital in the white-hot heydays of early 2000. Celera has almost $1 billion in cash and both Human Genome Sciences and Millennium Pharmaceuticals have over $1.5 billion. The financial strength of the sector is validated by the recent M&A activity.
Vertex Pharmaceuticals is acquiring Aurora Biosciences for $592 million (a 44 percent premium), and pharmaceutical heavyweight Merck intends to acquire Rosetta Informatics for $620 million (an 82 percent premium). The scientific advances in the biotech industry, coupled with its financial strength, have resulted in alliances with the pharmaceutical industry never possible before. More deals are built on co-development – Vertex’s $815 million deal with Novartis and CuraGen’s $1 billion deal with Bayer – which provide the biotech industry with greater downstream profits, albeit with increased upfront risk.
Investors sense that the pace of development is quickening. Headlines from the recent American Society of Clinical Oncology highlighted a number of new therapies that specifically target cancer cells – such as Millennium’s Campath, Imclone’s IMC-225, and Novartis’s Gleevec. These drugs specifically target cancer cells, and avoid the pitfalls of traditional chemotherapy and radiation treatment that kills healthy cells. IMC-225 is a monoclonal antibody that blocks the epidermal growth factor receptor. Nearly two-thirds of all cancers have the receptor on their surface, and blocking the receptor prevents cancer cells from growing and dividing. Gleevec also works on EGF, but blocks an enzyme involved in a signaling pathway.
THE FUTURE: Investors are now seeing that the genomic leaders have exceptional intellectual property in the form of patents, licenses, and know-how, providing substantial barriers to entry. Most importantly, many new genomically derived drugs and therapeutics are making their way through clinical trials. As the pace of discovery quickens, drug development, especially monoclonal antibodies, will be augmented by the use of genomics technologies. Target selection and validation will continue to improve, and the increasing number of sequenced organisms will allow comparative genomics to elucidate functional understanding of the human genome.
Tomorrow’s headlines about life-changing medical breakthroughs may well reignite interest in this sector. We’re just beginning to explore this new genomics frontier. And we’re just getting out of the neighborhood.
Steve Newby is the portfolio manager for GeonomicsFund.com, a no-load mutual fund. Currently the fund is fully invested in a $25 million portfolio of 24 leading genomic companies. Regular contributor Ira Leiderman will return next month.
TrendSpotter is a weekly column that focuses on how trends in politics, patent law, and the US and European markets affect the genomics industry. The column appears every Friday. Next week Robert Goldberg, a senior fellow at the National Center for Policy Analysis, will offer his thoughts regarding genomics and Capitol Hill.
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