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Despite Regulatory, Legal 'Uncertainties,' Celera Aims For Profitability in 2008

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Celera last week held to its goal of reaching profitability by 2008, all the while keeping a close watch on “uncertainties” on the horizon that may impact its more immediate financial performance.
 
Kathy Ordoñez, Celera President, cited several events that might impact Celera’s profitability in the coming months, including the pending clearance by the US Food and Drug Administration of its real-time HIV1 and hepatitis C viral load tests, and Innogenetics’ patent-infringement suit against Celera’s marketing partner Abbott.
 
Earlier this month, Health Canada approved Abbott’s m2000 real-time PCR diagnostics system and Celera’s HIV1 and HCV viral load tests for marketing in Canada. Celera and Abbott both believe the products will receive premarket approval in the US this quarter, but Ordoñez remained cautiously optimistic regarding the timeline for their launch.
 
“Our expectation is exactly in line with Abbott’s … and we believe all of the work has been done for that and are expecting [the FDA premarket approval] to occur very soon,” Ordoñez said during a conference call to discuss the company’s second-quarter earnings. However, she noted, even after the tests are approved, there are still many unknown factors that could affect their commercial success, such as “the adoption rate and how many large customers come on how quickly.”
 
Another unknown for Celera is the outcome of a lawsuit Innogentics filed against Abbott in September 2005 over the sale of its HCV genotyping products.
 
In January, the US District Court for the Western District of Wisconsin issued a permanent injunction against Abbott, but reversed an earlier jury decision that Abbott willfully infringed Innogenetics’ patent, denying Innogentics enhanced damages and attorney’s fees [see PGx Reporter 01-17-07].
 
However, on Jan. 19, the Court of Appeals for the Federal Circuit Court granted a temporary stay of the injunction while it makes a decision on Abbott’s request for an emergency stay to the permanent injunction.
 
In its second-quarter earnings statement, Celera noted that while “Innogenetics did not name Celera as a party in this lawsuit,” the company still “has an interest in these products and in the outcome of the litigation because the enjoined products are manufactured by Celera and sold through its alliance with Abbott.”
 
In addition, “Abbott has informed Celera that it will appeal the judgment as both Abbott and Celera believe that Innogenetics’ patent is invalid and that the alliance’s HCV genotyping [analyte-specific reagents] do not infringe Innogenetics’ patent,” Celera said.
 
Citing these pending events, Ordoñez acknowledged that Celera is facing “a lot of uncertainty.” She added that “with all of those factors, it is very difficult to exactly predict what will happen.”  
 
2007 Outlook Remains Positive, Q2 Revenues Increase
 
Despite acknowledging that its revenue could be negatively affected by the Innogenetics suit, Celera reiterated its prior guidance that total “end-user” revenue — which includes revenues from its alliance with Abbott as well as from unpartnered new genetic tests — will be between $105 million and $115 million for the 2007 fiscal year, which ends June 30, 2007.
 
The company anticipates total reported revenues — which include product sales, equalization payments, and license and collaborative revenue — to range from $43 million to $48 million for the fiscal year, up from the prior guidance of $40 million to $45 million. Of this, revenues from licensing and collaborations are anticipated to be $10 million to $15 million, up from the prior guidance of $8 million to $12 million.
 
Celera also expects R&D expenses for the year of between $50 million to $55 million, down from the prior guidance of $55 million to $65 million. Ordoñez noted that the company is “going through a major reconfiguration of [its] R&D effort,” that includes lower sample costs over previous years, more cost-effective genome scans, and the consolidation of two research groups.
 
As a result, the firm has lowered its guidance for net operating loss to between $18 million and $25 million from prior guidance of $28 million to $35 million.
 
The company appears to be controlling its expenses in an effort to move the business toward profitability and recover from a $5.3 million pre-tax charge last year for restructuring costs from the sale of its drug discovery business and the integration of Celera Diagnostics into Celera Genomics.
 
At the beginning of 2006, Celera acquired Applied Biosystems’ 50-percent stake in joint venture Celera Diagnostics, and announced it would focus on three areas in molecular diagnostics: existing genetic tests and their updates; a line of “new genetics” tests that involve proteomics or gene-expression signatures; and licensing and collaboration deals. Also as part of the restructuring, the company bowed out of the drug development business and partnered out its small-molecule programs in HDAC, factor VIIA, and cathepsin S to traditional drug makers [see PGx Reporter 06-28-06].
 
For the three months ended Dec. 31, 2006, its second fiscal quarter, Celera reported a net loss of $0.5 million, compared to a net loss of $17.3 million during the same period last year. Additionally, the company reduced its R&D expenses by 58 percent, from $28.7 million in the prior year quarter to $12.0 million.
 
SG&A expenses also decreased to $7.3 million from $8.8 million during the second quarter of 2006. “These expense reductions were primarily due to the decision to exit small-molecule drug discovery and development,” the company said in a statement.
 
Reported revenues for the second quarter increased 28 percent to $13.2 million from $10.3 million in the year-ago period.
 

“These trends in diagnostics … they’re just not on our radar screen other than just kind of looking at them, because they don’t really affect us very much. At least they haven’t so far.”

“Excluding the $2.5 million from the sale of a small-molecule drug discovery and development program, the increase [in reported revenues] was primarily due to higher diagnostic-related licensing, royalty, and product revenues, partially offset by a lower equalization payment,” Celera said.
 
Total end-user revenues increased 21.5 percent to $23.2 million from $19.1 million in the prior year quarter due to increased sales of HIV and HCV RealTime viral load assays used on the m2000 system, sales of analyte-specific reagents for thrombosis, and ASRs for cystic fibrosis.
 
Market Trends
 
According to Ordoñez, once the m2000 system is launched in the US, adoption for the company’s HIV test will be rapid, since Abbott’s product is more sophisticated than older methods of HIV testing.
 
“The US market, particularly as it pertains to HIV testing, is very, very anxious and excited about the potential for a real-time product,” Ordoñez said. Most HIV testing in the US is currently performed on older systems, she said, in which the detection step is separate from the amplification. These systems require “multiple dilutions to get the answer and have a lot of problems in terms of the workflow,” Ordoñez said.
 
“So the customers are watching this very closely, are talking to their friends in Europe, and so our expectation is that the adoption could be pretty rapid.”
 
In answer to questions about whether the entry of firms such as General Electric and Siemens into the healthcare space will have any impact on Celera’s operations, Tony White, CEO of Celera parent company Applera, quipped: “Are you talking about the rumor that Circuit City was going to buy Roche?”
 
GE Healthcare recently announced its plans to buy Abbott’s in vitro and point-of-care divisions for $8.13 billion in cash. The deal does not include Abbott’s molecular diagnostics unit. Neither GE nor Abbott would comment on whether the molecular diagnostics unit was for sale.
 
“We don't see much of this having anything to do with us, so we haven’t really paid much attention to it,” White said during the conference call. “Abbott specifically excluded their molecular diagnostics business, which is the part we partnered with. So we still have the same partner we have had.”
 
White noted that GE’s acquisition of the Abbott business appeared to be a “copycat deal” in the wake of Siemens’ recent acquisition of Bayer Diagnostics. “Siemens did Bayer, so GE needed to do something to keep up with the Joneses,” he said.
 
Still Celera, keeping its options open and its interests diverse, has reached out to GE and Siemens, White acknowledged. He noted, however, that no deals have come out of it. “We are always open to discussions. These trends in diagnostics … they’re just not on our radar screen other than just kind of looking at them, because they don’t really affect us very much,” he said. “At least they haven’t so far.”

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