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A Tale of Two Data Businesses: Incyte, Gene Logic Evolve Strategies for Growth

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Despite declining database revenues, companies peddling biological information remain bullish about their chances for success in the coming year.

Incyte last week reported a 62 percent year-over-year drop in second-quarter revenues, which come primarily from its information business — down to $11.0 million in Q2 2003 from $29.1 million in Q2 2002. Nevertheless, it predicted annual revenues of $50 million to $60 million overall and said it expects to be operating on a cash-flow-neutral or cash-flow-positive basis by the end of the year.

Similarly, Gene Logic reported a quarterly revenue fall-off of seven percent for its information business — down to $13.1 million from $14.1 million in Q2 2002 — but also predicts a pick-up in sales for the second half of the year. The company expects its total revenues, including fees for CRO services from its newly acquired TherImmune subsidiary, to reach $80 million to $84 million for the year.

The two firms have embarked upon radically divergent strategies — and messaging tactics — to meet their revenue goals. In Incyte’s view, the key is to pare down its information business to a bare-bones operation that is clearly independent of its drug discovery activities. “There is some synergy [between the information business and drug discovery], but they are very distinct businesses in terms of how they operate and what they need to have supporting them,” said Pamela Murphy, VP of investor relations and corporate communications for Incyte.

Gene Logic, on the other hand, is taking the opposite tack — busily integrating two firms into one in hopes of delivering a set of capabilities that is greater than the sum of its parts. “We don’t want to give customers the perception that there are two different companies and two different product lines here,” said Phil Rohrer, Gene Logic CFO, during a conference call to discuss the company’s second-quarter earnings. The TherImmune acquisition, which closed in April, “was built around the unique juxtaposition of two different technologies that will allow us to go out into the marketplace in a way that no one else has ever done,” Rohrer said.

From BioKnowledge to Biocuration

Incyte announced plans last week to halt its in-house sequencing operations and consolidate its three information products — LifeSeq Foundation, ZooSeq, and the BioKnowledge Library — into a single “biocuration” product that will be available in 2004. Lee Bendekgey, executive vice president and general manager of information products for Incyte, defined “biocuration” as “the synthesis, quality control, and organization of all public and Incyte-proprietary genomic and proteomics information, as well as the published literature.”

The new product will be modeled after the BioKnowledge Library, a manually curated resource of protein information gleaned from the scientific literature. Although the company will stop adding genomic sequence data to the new resource, it will continue to “compile, categorize, and catalogue information that exists in the public domain as well as in Incyte’s databases,” Murphy said.

Eliminating the costs of sequencing will enable Incyte to offer the biocuration product at a lower price than its current products. Curators at the company’s Beverly, Mass., office (the original headquarters of Proteome) and its Palo Alto headquarters will contribute to the new product. The information business currently employs around 70 staffers, but it’s unlikely that all of them will be with the company by the time it launches the new product. “With the reduced costs we expect to realize as a function of becoming a smaller organization when we launch our new product, we believe the information products unit will be profitable in 2004,” Bendegkey said.

The streamlining will follow on the heels of the restructuring of Incyte’s drug discovery operations, which it wrapped up during the second quarter. In a move that saved $10 million, the company eliminated 52 positions at its San Diego drug discovery laboratory and target validation wet lab in Palo Alto, and consolidated all discovery activities to a single site in Wilmington, Del., bringing its total drug discovery staff to 130.

For the remainder of 2003, Bendegkey cited a stable LifeSeq customer base, strong renewal rates for the BioKnowledge Library, and “some IP deals in the pipeline” as factors in the company’s revenue target of $50 million to $60 million. Incyte has posted $23.5 million in revenues for the year to date.

Incyte incurred R&D expenses of $30 million for the second quarter of 2003, compared to $38 million for the year-ago period. Its net loss widened to $27 million for the quarter, compared to $17.5 million for the year-ago period, and it had $22 million in cash and cash equivalents as of June 30, 2003.

Predicting Growth via Predictive Toxicology

Gene Logic is also in the process of evolving its information business, but rather than scaling back, it plans to expand its offering to embrace the capabilities of TherImmune.

The company has embarked upon what CEO Mark Gessler described as “a new capabilities roadshow” for its large pharma customers to highlight the combined firm’s resources for pharmacogenomics and toxicogenomics. Gessler noted that “a number of genomic project discussions are now underway” as a result of the roadshow.

A well-defined commercial offering that combines Gene Logic’s and TherImmune’s strengths, however, is not expected until at least the second half of the year, said Robert Burrows, director of corporate communications for the company. “There’s a tremendous opportunity for cross-pollination” between the two companies, Burrows said, but added that there is “an execution risk” that has forced Gene Logic to proceed cautiously.

The integrated offering would build upon the predictive toxicology capabilities that Gene Logic already offers in its ToxExpress database, Burrows said, adding genomics expertise and informatics capabilities to TherImmune’s cell-based screening, non-human testing, and toxicology services.

The company is also planning to start a toxicogenomics screening service to help clients predict and eliminate failures much earlier in the pre-clinical stage, Gessler said. “Substantial discussions are now underway with a number of our customers about specifically implementing this into their pipeline as a key element of their go/no-go decision making process,” Gessler said. In addition, he said, Gene Logic plans to offer expression-based analysis in the area of clinical development “to do patient stratification to improve the approval rates for new drugs.”

Gessler offered a preview of an in vivo hepatotoxicity predictive toxicology screen that the company is implementing with several customers prior to pre-clinical development. According to Gessler, the program could reduce the cost per drug from $339 million to $282 million — a 17 percent savings.

But Gene Logic doesn’t expect a short-term revenue boost from this combined offering. Its guidance of $80 million to $84 million in annual revenues is based solely on sales from its existing information products and services — which have brought in $25.8 million for the year to date — and CRO revenue, which so far totals $13 million for the year. To make up the nearly $40 million difference to meet its revenue target, Gene Logic plans to increase its large pharma and larger biotech customer base.

The seven-percent decline in revenues compared to the second quarter of 2002 “is primarily due to the loss during the first half of several small biotech clients, which has largely been due to capital constraints they have encountered,” said Gessler (see table). However, he noted, the company saw a “more than double-digit revenue increase” in its top pharma client base in the second quarter.

While predicting that the biotech “washout” is nearing an end, Gessler remained cautious about increased sales to the sector. “We’re going to believe that the pharma business will continue to improve for us, but whether we can make up difference of the loss of the biotech business that we had previously remains to be seen,” he said.

Gene Logic posted net losses for the quarter of $4 million, compared with $4.4 million in the year-ago period, and R&D expenses of $463,000 compared to $637,000 in Q2 2002.

As of June 30, the company had $71 million in cash and cash equivalents.

— BT

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