W, Here's more on toolboxes:
A new kind of biotech emerges | 'Toolbox' companies try to build a future
Thomas Kupper
STAFF WRITER
16-Apr-1998 Thursday
PALO ALTO -- The headquarters of Incyte Pharmaceuticals is decorated with
slogans like "Biology is Information" and posters that advertise the
arrival of a new "Genomic Age."
Scientists sit at computers, not laboratory benches, and catalog thousands
of human and animal genes, gradually building a sort of Dewey Decimal
System of the chromosome.
It's a new kind of biotech company, one whose goal is to sell data or
services, not drugs. Pharmaceutical companies buy information from Incyte
at seven-figure prices and receive the product on CD-Roms.
"Incyte's not a drug company. We are an information-based biotechnology
company," said the Palo Alto company's chief scientific officer, Randal W.
Scott. "Our business is manufacturing information and mining information."
Niche research companies like Incyte, with no pretense of discovering or
selling their own drugs, are a growing presence in the biotech industry. In
San Diego, they include the drug-screening specialists Aurora Biosciences
and the gene-hunters Sequana Therapeutics, recently acquired by Arris
Pharmaceutical.
Just this week, San Diego-based Nanogen, which is developing a microchip to
rapidly identify molecules, raised $42.9 million in an initial public
offering that reflects the sector's popularity with Wall Street. It was the
first IPO for a San Diego biotech in nearly a year.
Significant companies are emerging in specialties like genomics, the study
of genes; combinatorial chemistry, the mass-production of potential drug
compounds; and high-throughput screening, a means to rapidly test those
compounds for disease-fighting potential.
Some call them "toolbox" companies or "robochemists," for the new
techniques they use to automate and accelerate the process of finding drug
candidates. Each performs an important step that gets scientists closer to
the discovery of a drug, though by themselves they don't yield anything of
value in the doctor's office or hospital room.
The sector became popular through a combination of financial and scientific
factors. Many investors have gotten tired of putting money into biotech
only to wait indefinitely for products -- and sometimes lose most of their
money when trials go bust.
Genomics and combinatorial chemistry created a new opportunity. As the
thinking went, these were areas where a company could sell services or
information to other drug companies and make money without ever producing a
product in the traditional sense.
At the same time, pharmaceutical companies in need of new drugs have grown
increasingly willing to pay for outside research, creating an opportunity
for biotechs that want to take on a piece of the drug-discovery process.
For the biotechs, the strategy is straightforward: By not tying their
fortunes to a single drug that might not work, toolboxes reduce the risk
most biotechs face. They make money by charging for services or collecting
relatively small royalties on projects they participate in.
"A lot of these companies were able to set themselves up as service
companies, so they were able to get rid of the risk of clinical trial
failures," biotech analyst Rachel Leheny of Hambrecht & Quist said.
Incyte and another Silicon Valley gene company, Affymetrix, have been among
the hottest biotechs with investors the past several years, with stock
valuations approaching or exceeding $1 billion. Incyte has done
particularly well, nearly doubling in value over the past year.
At Santa Clara-based Affymetrix, scientists have developed a new "DNA chip"
that lets scientists quickly read genetic information. It's a glass wafer a
bit larger than a square centimeter covered with tiny probes.
The chips, which Affymetrix sells in bulk to companies that pay as much as
$5 million a year, have uses in discovering genes and identifying
mutations. In the future, Affymetrix says, the chips could help in
diagnosing disease.
Incyte specializes in gathering genetic data and packaging it into
databases, each of which can be sold to several customers. Such data, which
explains the functioning of the cell, has the potential to save researchers
a lot of time.
"The reason we believe we can succeed as an information company is that
biology is basically an information system," Scott said.
The demand for these products stems partly from a global effort called the
Human Genome Project, which is attempting to map the entire genetic makeup
of the human being. That, in turn, could give scientists new ideas about
diseases and about potential treatments and cures.
Several toolbox companies have jumped into this search for genes, which can
be lucrative because pharmaceutical companies want access to genes and will
pay to get it. The largest of the gene-hunting firms is Maryland-based
Human Genome Sciences, but San Diego's Sequana lists asthma and diabetes
discoveries among its credits.
Once the genes are found, drug companies still need to get an idea of what
drugs might work on them. To do this, the combinatorial chemistry companies
produce huge libraries of potential drug compounds, which screening
companies then test by mixing them with the genes.
A screening company like San Diego's Aurora can generate leads that move
into clinical testing within a few years, thus allowing such companies to
charge relatively high royalties with a reasonable expectation that some
deals will pay off within a short period.
Aurora, whose stock jumped to a valuation above $200 million after the
company went public last year, is building a new "ultra high-throughput"
screening system that it says will be much faster than anything now in use.
Several pharmaceutical companies have bought copies of the system, and
Aurora will also keep one for itself.
Of course, success is not guaranteed for toolbox companies. In
combinatorial chemistry, so many companies have emerged -- including seven
that received venture capital funding last year -- that some worry
competition will drive prices down and prevent anyone from making a profit.
"I'm skeptical whether this is an area where you can really make a lot of
money," said Jim McCamant, editor of the Medical Technology Stock Letter.
One such company, Alanex Pharmaceuticals of San Diego, sold out to the
larger Agouron Pharmaceuticals last year, and another San Diego chemistry
company, CombiChem, has been trying to go public for months without
success.
One potential problem is the way some toolbox companies charge for their
products. Rather than simply charge a set price for a service, they include
a royalty, or a percentage of the revenue from any drug that results. This
means they have to wait years for the full payoff to arrive, and even then
it's small change compared to what the company that sells the drug gets.
The model didn't work for Sequana, which sold to the Bay Area biotech Arris
Pharmaceutical in part out of a belief that royalties on genomics deals
wouldn't be enough to sustain long-term profitability. The merged company,
now called Axys, is pursuing an integrated "gene-to-drug" strategy.
Before it was sold, Sequana was languishing with a market capitalization of
about $100 million, around the middle of San Diego's roughly 40 public
biotechs.
"In the 21-year history of the biotech industry, there has only been one
long-term model of success, which is bringing a therapeutic product to
market," conceded Kevin Kinsella, Sequana's former chief executive.
To be sure, most observers still believe the toolbox recipe will work -- in
certain cases. Companies like Incyte and Affymetrix with clear market
opportunities remain popular, and the sector is getting more publicity than
ever, including a recent Forbes magazine cover story titled "A hail of
silver bullets."
Leheny said presentations by toolboxes were among the most popular in San
Francisco earlier this year at Hambrecht & Quist's conference, a large
gathering for biotech investors.
The main factors that will determine which companies succeed appear to be
the difficulty for competitors to duplicate a company's strategy and the
prominence of a company's work in the overall process of developing a drug.
To avoid getting caught in an overcrowded market, the San Diego
combinatorial chemistry company Trega Biosciences has decided to supplement
its chemistry deals with work toward its own drugs in inflammation and
obesity. The stock has lagged, so the company sought a way to increase its
profit potential while keeping risk as low as possible.
"We have a model that can keep people engaged who are looking for the home
run without running the risk they'll lose all their money in the next 24
months," chief executive Robert S. Whitehead said.
Similarly, Sequana's sale to the Bay Area biotech Arris Pharmaceutical
creates a more integrated company with the potential to both launch
big-revenue drugs and continue breakthrough genetic research.
The result is no longer strictly a toolbox company, but something along the
lines of a traditional biotech. Success still depends ultimately on getting
drugs to market, but the company argues that the model increases the chance
of success. |
