Gene Therapy Stocks...CRA...Motley Fool buying $50k worth,,,and look at the crazy puppy fly,,,,but gene therapy is and will be HUGE.
PART I
Rule Breaker To Buy PE Celera Genomics Corp.
December 16, 1999
**This trade is being made under the regular portfolio policy, namely, once
The Fool announces an intention to trade, that trade will be made within the
next five trading days. For more detail, please read the New Trades section
of the Rule Breaker Portfolio.**
At some point in the next five market days, the Rule Breaker Portfolio is
BUYING approximately $50,000 (about 5.7% of the RB portfolio's current
value) of:
PE Celera Genomics Corp. (NYSE: CRA)
761 Main Avenue
Norwalk, CT 06859
Phone: (203) 762-1000
Fax: (203) 762-6000
celera.com
Closing Price (12/16/99): $76 3/16
Average daily volume: 276,000 shares
Daily dollar volume: $19.87 million
Market Cap: $1.86 billion
12 Month Sales: $10 million
Price-to-Sales ratio: 186
Celera Quote | Celera Snapshot | Celera Chart | Celera Financials | Celera
Estimates
One year ago, we added to the Rule Breaker Portfolio the first of what will be
many different investments in companies that use biotechnology. We said at
the time that we believed the two most significant Rule-Breaking industries
over the foreseeable future are the Internet and biotechnology. And we
called that investment, Amgen (Nasdaq: AMGN), a "biotech company," the
top dog and first-mover in the "biotech industry."
But truth be told, we now regret that phrasing, because biotechnology is not
an industry. It is a technology. There is no "biotechnology industry," per se --
just as there is no "Internet industry." There are many, many companies that
use biotechnology or the Internet in order to profit, providing products or
services that customers find attractive and valuable. But just try to identify a
single "top dog" Internet or biotechnology company. It's not really possible.
Again, these are technologies that different companies adopt in order to gain
a lead in one industry or another.
We are Rule Breaker investors, and we love biotechnology. We are amazed by
our species' increasing ability to understand, and in some critical and exciting
ways, reengineer the world in which we live. It puts us in mind again of one
of our ten favorite quotes from the Bard, holding as it does so much optimism
-- and so much applicability in our own age, a Renaissance of a new sort, but
every bit as exciting as what happened in Europe 400 years ago:
What a piece of work is a man! how noble in reason!
how infinite in faculty! in form and moving how
express and admirable! in action how like an angel!
in apprehension how like a god! the beauty of the
world! the paragon of animals!
This classic humanistic expression reminds us not only that we are a piece of
work, but that as pieces of work we can actually be reworked. Ask the
sufferers of cystic fibrosis who should, not before too long, have a treatment
that replaces the single faulty gene responsible for the condition with a
healthy gene. Bang-o. That's just one small example of what can be
accomplished through genetic engineering. Anyway, before we set down to
explaining what we have chosen to dub the next of our Rule Breakers, we
must define a few terms.
What does "biotechnology" mean? Good question. Here's what it means to us:
Biotechnology is the application of biology for human ends. This is a
broad-brush, encompassing definition obtained from the excellent primer
Improving Nature?: The Science and Ethics of Genetic Engineering by Michael
Reiss and Roger Straughan. It speaks of the use of our understanding of
genetics to rework the world in diverse ways that are deemed more satisfying
to us, as stewards. The various examples of biotechnology run the gamut
from the crossbreeding of plant and animal species by farmers to obtain living
beings that otherwise would not have existed (blue roses and bulldogs, for
example) to the stimulation of white-blood-cell growth in chemotherapy
patients (Neupogen, Amgen's billion-dollar bioengineered protein).
Looked at in this simple, rational conception, biotechnology is not something
cooked up in a test-tube by a mad scientist eager to create a man-eating
frog the size of an elephant. (OK, we should watch our backs, because
something like this may eventually be possible, of course.) No, biotechnology
is just a very powerful technology that -- like any other -- must be used
responsibly and constructively to beneficial ends.
All sorts of fascinating discussion and debate surrounds all of these ideas,
phrases, and words, which it is not within the purview of this report to
address. We do look forward in our daily Rule-Breaker scribblings to discussing
many thoughts and considerations of the issues at stake here, however. For
now, suffice it to say that we consider biotechnology (as we have defined it)
"the application of biology for human ends," and, that together with the
Internet and the emerging technology of wireless, biotech makes up one of
the three most interesting, world-shaping, outrageous, Rule-Breaking
technologies of our time. Period.
Which brings us to that other term we wanted to define: "Celera."
What does "Celera" mean, Latin students? Well, our schooling did not include
Latin, but our dictionaries retain their etymologies. Inquire about "celerity" of
Mr. Webster and you will find the Latin root "celera." Two thousand years
ago, that very word -- "celera" -- came off the tongues of Roman
philosophers, centurions, and emperors and it meant SPEED. And that is
exactly the idea of the word today, in reference to the company we'll be
buying. Celera is all about SPEED, about using computers to SPEED up our
human understanding of our own genetic code, to SPEED our way toward new
genetic destinies, and for this company to SPEED its way past the competing
Human Genome Project.
Those who are buying Celera, are buying SPEED.
Let's talk about that. Let's understand it. To do so, we adopt the framework
that we use for all Rule Breaker reports. We examine Celera in light of the six
Rule-Breaking attributes spelled out in our book, Rule Breakers, Rule Makers.
To summarize:
Top dog and first-mover in an important, emerging industry.
Sustainable advantage, gained through business momentum, patents, visionary
leadership, or incompetent competitors.
Smart management and good backing.
Excellent past price appreciation, measured by a relative strength of 90 or
greater.
The greater the consumer brand, the better.
A recent constituent of the financial media has recently called the company
"grossly overvalued."
Top dog and first-mover in an important, emerging industry.
The important, emerging industry in question is human genetic information.
We are presently living in the B.U.G. era, which is one way to view the calendar of
human history. B.U.G. years are the years "Before Understanding Genetics" -- human
genetics, that is -- which has been one consistent historical era since our planet was
formed 4.5 billion years ago. The entire history of Planet Earth has been purely
"buggy."
But two key developments have propelled us to the climax of the B.U.G. era. The first
is Gregor Mendel's discovery of genetics, which began in the 1850s in Moravia as he
crossed varieties of the garden pea in his small monastery garden. The eventual results
of this first key development are evident today, where after many further advances and
efforts, we are now able to manufacture human proteins and clone animals. The
second development is the huge gains in computing power achieved over the past 30
years. It is symbolized perhaps by the laptops upon which this report was created. A
little Pentium laptop holds many times the computing power of machines that just one
generation ago looked like huge vacuum cleaners and occupied whole rooms. (And
you ain't seen nothin' yet -- referring to advances in computing power, that is, not this
report.)
Either of these developments on its own provides outstanding rewards in efficiency,
productivity, understanding, and the profits netted by those who dreamed them up. But
put both of them together -- genetic studies with computing power -- and you arrive at
the inevitable result: a total understanding of the genetic map. The same four
nitrogenous bases that run through human DNA -- adenine, cytosine, guanine, and
thymine -- run through plants, animals, and all living things. We are working toward a
total genetic map -- a total understanding of where every gene sits in every creature,
and what each one means.
While we are still a long way away from a total genetic map of everything, we are
getting increasingly close to a genetic map of one particular species that has always
held our imagination and interest: our own. We presently appear to be less than two
years away from having mapped human DNA, the human "genome." ("Genome"
simply means the total genetic material of a species.)
The plan initially was that this would be a government-sponsored project, called the
Human Genome Project, which is a fascinating and worthy effort on the part of many
scientists and the government to map the genome. However, recently senior executives
at scientific-instrument company, PE Corporation, realized that with enough
computational power and the right people onboard, they could complete a full map of
the human genome before the federally funded Human Genome Project's year 2005
goal. When PE Corp embarked on its new project, it had one man in mind to lead it.
That man (more on him later) had developed a super-fast gene sequencing technique,
called a "shotgun technique." PE Corp wanted the inventor of the shotgun technique to
lead its new company. The inventor is Craig Venter. The new company is Celera.
So, to cut to the chase on this, the first attribute of the Rule Breaker: Celera is the top
dog and first-mover of the important, emerging industry of bioinformatics.
(Required reading: Run your mouse -- don't walk it -- to this message board post,
post #4885 from the Rule Breaker Strategies board.)
OK. Ready?
Celera's business involves decoding genomes, patenting its discoveries, and selling
access to its databases, mainly to pharmaceutical and biotechnology companies that
want to create cures using genetic engineering. Specifically, the company sells
subscriptions to its genome information, will increasingly offer genomic information
management and analysis software, and collects royalties and licensing fees resulting
from its work.
At its root, then, you can see that Celera is at least as much of an information
technology company as it is a biotech company. The information that Celera is on
track to discover could be the cornerstone for most future drug research and
development. The opportunity to identify and replace one or more genes to cure a
disease (not just for the afflicted but for all his or her future offspring) should in most
cases be far more effective than hoping to discover a cure or balm from chemicals or
organic substances drawn from nature. Realizing this, Celera's mission is to become
the definitive source of genomic and related medical and agricultural information.
Will drug companies partner with Celera and pay money to use its information?
Amgen, Novartis, Pharmacia & Upjohn, Rhone-Poulenc Rorer, RhoBio and Pfizer
have already signed agreements with Celera, agreements totaling more than $100
million in value. And this makes sense, doesn't it? Think about it in the terms used by
Tom Headrick, from our Fool community. Tom asks: "How much does it cost to bring
a drug to market using today's current methods? How much of that cost will be eroded
by having this genetic/biological material available in the database as a springboard
launching a new drug or therapy for drug companies?" He closes by pointing out,
"That's why they are [working with Celera]."
In the "informatic" part of "bioinformatics," Celera has used the help of its parent
company, formerly Perkin-Elmer, now called PE Corporation, to obtain a leadership
position. PE Corp supplied Celera with the vital technology and the initial funding
needed to generate results. Now, success is already arriving. In record time, Celera
completed the sequencing phase of the fruit fly this year, thereby showing its
sequencing technology to be the quickest in history. Check this out and see if it makes
your spine tingle. From Celera, on September 9, 1999:
"Celera Genomics announced today that it has finished the sequencing phase in
deciphering the genome of Drosophila melanogaster, the fruit fly. Over 1.8 billion
base pairs -- letters of genetic code -- were sequenced in completing the sequencing
phase. Celera began to sequence the genome of Drosophila and deliver data to its
subscribers in May 1999. By comparison, the first genome of a free living organism,
Haemophilus influenzae, consisting of 2 million letters of genetic code took one year
to complete, and other early genomes not using Celera's whole genome shotgun
strategy took over a decade to complete.
"Celera now turns all its sequencing resources towards the sequencing phase of the
human genome."
Like a battleship swinging its giant guns around to point squarely at you, Celera kicked
the fruit fly's sequencing information out with mind-blowing speed and then
immediately turned all of its sequencing resources (and you're going to see that's a
HECK of a lot of resources) to the human genome.
The following sections of this report will demonstrate, piece by piece, that Celera is the
top dog in this important, emerging industry. We'll see how Celera has three times
more computational power than its nearest competitor, and how it has 15 times the
data management capacity. Celera also employs world-leading scientists and
technologists who are capable of handling the SPEED of its computers, and the
output. (We want to point out that even if the company fails in business, it will have
accelerated the work of others and presumably helped our species a great deal. So,
whatever happens, we'll get that satisfaction from this investment.) Celera is so speedy
that, although it took over 10 years for other companies to map less than 10% of the
human genome, this year Celera has reportedly mapped nearly one-third of it already.
It is top dog.
Is the company the "first-mover"?
Celera wasn't the first to consider mapping parts of the human genetic makeup.
Incyte Pharmaceuticals (Nasdaq: INCY), Human Genome Sciences, and Gene
Logic (Nasdaq: GLGC) moved in this direction before Celera existed, much like
dozens of book sellers existed online before Amazon.com (Nasdaq: AMZN).
However, Celera is the first mover in attempting to create a highly detailed map of the
human genome (all of it), and it is the first to use Venter's shotgun approach and 300
gene sequencers (more on that later) to do the job. It appears that the shotgun
approach is working, and working quickly, so being the first mover to use this
approach may be what matters most. Using this approach, Celera already leads the
human genome "race."
And this race is not crowded. Celera's "competitors," except one, focus on mapping
parts of the human genome, not the entire enchilada. The government's Human
Genome Sciences (HGSI) is the only big competitor aiming to complete a map of the
human genome, but because it has been using a traditional physical mapping technique
(more on that later) it has moved slowly compared to Celera. Also, its ambitions were
lower until Celera announced its intentions. As soon as Celera was born, HGSI
increased its intentions regarding its mapping of the genome.
So, in the ways that count most, Celera is first mover. As Fool Kevin DeWalt pointed
out in his post (CRA board #76), Dr. Venter and Celera have:
1.Sequenced the first entire genome of a living organism (in 1995).
2.Most aggressively pursued building the technological platform to sequence
DNA.
3.Committed to becoming the first private [meaning non-government, because it's
obviously public] organization to sequence the human genome.
Celera was the first company outside the government to announce that it would try to
map the human genome, and it is the first company to attempt to do so at such great
length.
The whole of this report will show how Celera is leading, but where is it going? Once
the company owns scads of genome information, what will it do with it?
Celera wants to be the leading provider of genome information and offer multiple
services related to the information. Can Celera profitably be a genome information
provider? The company's growing list of clients and partners has some people
predicting that Celera could be profitable in 2002 or 2003. This prediction is a Crap
shoot, but it is not nearly as random as Craps, nor is it beyond logic's reach.
Let's move to #2.
Sustainable advantage, gained through business momentum, patents,
visionary leadership, or incompetent competitors.
The best Rule Breakers possess key advantages: Amazon's giant customer base,
AOL's worldwide brand name, Starbucks' omnipresence.
Celera has a monstrous technological advantage over all competitors; it also is one of
the most respected bodies of management in the scientific world; and it has shown the
greatest speed in mapping a genome. The company's only head-on competition is the
Human Genome Project, but at the rate Celera is moving, it could reach its goal by
2001, well before the competition. By computational power, Celera is three times
larger than any other gene-sequencing lab in the world, and Celera is on course to
house the second-most powerful computational facility on the planet. Celera should be
able to sequence 30 billion base pairs of DNA annually, and it will have 10 to 20 times
more capacity for sequence information than its largest competitor.
Several companies have undertaken genomic research and isolated gene sequences
from the human genome. These companies, including Millennium Pharmaceuticals
(Nasdaq: MLNM), Myriad Genetics (Nasdaq: MYGN), Genset (Nasdaq:
GENXY), and others, are commercializing their findings, meaning they're selling them
to biopharmaceutical and healthcare concerns. However impressive these companies
are, though (and they are), they are not sequencing the human genome. Because
they're not, the output of these competitors may actually prove to be complementary
to Celera's ambitions, rather than combative. Focused genetic information created by
these companies could serve to complement Celera's genome information.
Whether or not this proves accurate, we still see any genetic-based companies as
potential competitors. But there is only one large competitor in the minds of many. If
the government's Human Genome Project provides a free map of the human genome
to the public, as it plans to, then Celera, in trying to sell its information, will compete
directly with the federal government and its free data. Many people see this possibility
as a significant strike against Celera. Perhaps it will be.
Then again, consider Linux software. Linux is freeware (like genome data might be),
but there is tremendous value being created by Rule Breakers, such as Red Hat
Software (Nasdaq: RHAT), that offer Linux-related services and value-added Linux
products. In similar fashion, Celera will likely offer the most detailed genome
information, and it will offer it with an unmatched level of expertise. Celera will be paid
to help clients actually make use of complex genome data. Creating a business this
way, Celera can, and will, give genome data away for free, too, thereby lessening our
fear that the Human Genome Project can harm it. (Celera charges for the right to
preview the fruit fly genome, but soon the company will distribute the information freely
and charge for services related to it.)
So, Celera has the best technology and management (as we'll see in a moment) and
this gives it numerous advantages over competition, but is the competition inept? Not
by any means. Although we can't say that Celera has inept competition, given Celera's
gene-sequencing lab (the most advanced in the world), and provided its jump on the
competition (already!), we can say that Celera and its technology is making the
competition look much less imposing.
However, Celera can't succeed on rooms filled with cool technology alone. The
company spends over $65,000 a month on its electric bill. It needs cash. Luckily, it
has cash. While the competition is typically strapped for greenbacks, Celera recently
had over $200 million in cash and it will be paid over $75 million by its sister
company, PE Biosystems (NYSE: PEB), over the next three years. This should be
enough money to fund Celera's operations beyond 2001, and by the end of that year
Celera plans to have the human genome mapped and several more paying business
partners feeding the company coffers.
After mapping the human gene sequence, Celera will begin to map the genomes of the
next species up the ladder, the rat. (OK, bad joke there, but it's true that the rat is
next.) The rat is to be followed by the mouse and agricultural species, including rice
and maize. Interest in information on these species will span several industries all
around the globe. (How to make stronger corn will interest Iowa. How to make rats
shrink will interest the city of New York.) All told, Celera will strive to build itself as
the predominant genome information portal in the world, offering details and analysis
on genome data for anything from salmon, to beets, to perhaps Grizzly Bear.
You can only imagine the revenue potentials of offering such a massive amount of
varied and powerful (almost frighteningly so) information. (Industry estimates are all in
the billions.) Clearly, the human genome promises to be the most helpful to humans for
its ability to help scientists cure disease, but at the same time, we will be able to make
food much more tasty in years ahead, and that ain't a bad benefit either. Food
companies will pay for this advantage. This is all a roundabout way of saying that there
isn't obvious competition on the horizon that stands to get in Celera's way as it begins
to "map" the entire living world. Nobody has the computational power, the
management, and the speed that Celera is showing.
Then there are patents. Some Fools have been concerned that Celera may not be at
the forefront in obtaining patents. Competitors have literally filed for tens of thousands
of patents while Celera, at recent count, had filed for about 7,000 gene patents. Other
Fools wonder if Celera will be able to patent the human genome, or other gene
sequences, at all. After all, who really owns this information? A God somewhere on
high? Maybe. So, who will be allowed to own the information down here on Earth?
That question could be decided by the courts, and some people believe the court will
not allow anyone to own the information. We think differently. In healthcare so far,
we've seen that discovering companies are given the right to patent scientific
information that they unravel. Genes don't appear to be any different.
While we do believe that the discovering company will own the patent to the human
genome, we don't believe that a patent on the information will be vitally important
anyway. Celera will be selling smart information, not mere strands of letters the likes of
which anyone could theoretically copy. The company will sell its expertise -- an
expertise aided by its having the most precise genome information organized in the
most useful form, and from employing many of the smartest scientists in the world.
Patents or not, Celera stands to possess more genetic information than any other
company, and, presumably having discovered it, it will have inherent rights in how to
organize, manage, analyze, utilize, and distribute it. Celera plans to patent 300 specific
genes of the human genome as well as the process of using them, and we don't see
anybody stopping this. (For excellent thoughts regarding patent issues further, see this
post by Fool ElricSeven.)
Next is momentum.
When it comes to business momentum, Celera -- Mr. SPEED -- has it. Recently up
and running, the company already completed the sequencing phase of the fruit fly
genome by sequencing more than 1.8 billion base pairs by September. Celera did
more sequencing in nine months than other companies have completed in a decade.
Assembly of the genome should be done before 2000. Celera's sequencing of the fruit
fly in under a year serves as "proof in the pudding," so to speak, that the company is
able to quickly construct genomic DNA in its new lab.
The fruit fly genome is much larger than any other genome sequenced in all of history,
so to complete it so quickly is revolutionary. (Right now Celera is gunning through the
human genome.) Thus, Celera has more "momentum" -- more SPEED -- than any
other company that we've ever bought. Human Genome Sciences and Incyte required
several years to sequence less than 10% of the human genome. Celera is hoping to do
the whole shebang in under 27 months, and is already well on its way.
So, other than visionary management, which we address next, criteria number two is
now complete. Celera has a sustainable advantage due to technology and its brain
trust. It has seemingly unsurpassable business momentum due to the same and its
speed. It does have competition, namely from the government, and large questions
remain regarding how much money Celera can earn from its information if the
government provides similar information for free. We're betting on Celera's proprietary
expertise and detailed knowledge to sell, though, and we believe that we're already
seeing this happen via the partnerships Celera is signing with firms like Pfizer. We're
also betting that Celera's genome data quality will top that of its competition, largely
due to the same two advantages already mentioned, technology and management. As
for patents: intellectual property abounds at Celera, and with it patents will, too. The
company has been filing for patents steadily, and it will continue at a regular and likely
increased pace. This baby has several moats built around its business, and the
sustainable advantages of a true Rule Breaker. |
