At The Fringe Of The Gene Race
Editor’s note: This month’s article discusses some companies trading at very low price levels and on very light volume. Trading in such stocks can be very risky. Also, the author holds no positions in any of these stocks.
As companies like Human Genome Sciences and Incyte Pharmaceuticals (see “Profiting In The Biotechnology Sector: It’s All In The Genes)” race toward discovering new genes, they have spawned the birth of what I call specialized “fringe” companies.
Many of these biotech companies have developed highly specialized products and technology necessary to store, analyze, and decipher the wealth of genetic information being uncovered daily. They exist on the fringe of the race to identify the human genome and offer expertise for doing the grunt laboratory work in gene discovery. Their products allow larger companies in the heat of the gene race, like Human Genome Sciences, to work more efficiently and more accurately.
In addition to laboratory expertise, many of these fringe companies also are developing “bioinformatic” computer software systems that will allow larger gene-seeking companies to sift through the enormous amount of biological data and identify genes linked to disease that are ripe for pharmaceutical exploitation.
I liken many of these fringe companies to the Cisco Systems and Lucents of the world. Obviously, they are not as large (or even profitable) as these two powerhouses, but they function in a similar fashion, providing the nuts and bolts of the genomic research industry. Just as Cisco provides the skeletal circuitry for the Internet, many of these small, fringe biotech firms provide the backbone DNA expertise for the gene-seeking industry.
These companies are not as sexy as the Human Genome Sciences of the gene world, but they are just as important. Many of these companies are small, involve inherent investor risk, have no near-term profitability–but they do have enormous growth potential as the genomic research arena expands. Here are some of the leaders in the field.
Affymetrix [AFFX>AFFX]
- www.affymetrix.com
- 408-731-5000
Affymetrix is a Santa Clara, Calif.-based biotech company founded in 1991. It develops chip technology used to analyze and process genetic information and has a DNA probe apparatus in its stable called the GeneChip system that allows other companies to find relevant genes linked to disease states. The company generates revenue by licensing its proprietary technology to larger gene-seeking firms and counts as its customers American Home Products, Merck, Schering-Plough, Smithkline Beecham and Human Genome Sciences. Its current competition includes Hyseq Inc. and Incyte Pharmaceuticals.
Affymetrix has a market capitalization above $800 million and has been trading in the $30-$35 range. Its 52-week high is 43 3/16 and its 52-week low is 16 1/8. Net sales increased to $52 million last year. The company does not expect to be profitable in the near future, but it does expect a substantial increase in revenue over the next several years due to demand for its DNA technology. Affymetrix is positioning itself to be one of the leaders in proprietary genetic technology as the race to unmask the human genome heats up.
Curagen [CRGN>CRGN]
- www.curagen.com
- 888-436-6642
This Connecticut-based firm, also founded in 1991, went public in March, 1998. It develops gene-identifying software technology and applies it to the discovery of new drugs. Curagen also is in the business of bioinformatic technology used to uncover genes linked to cancer and diabetes for pharmaceutical exploitation. Its products include software used by other companies to help develop genetically derived drugs and to allow Internet access to their proprietary information.
Like Affymetrix, Curagen licenses its technology to generate revenue and will grow as the gene industry grows. It currently has alliances with Biogen, Genentech, Glaxo Wellcome and Dupont. Competition includes Incyte Pharmaceuticals and Millennium Pharmaceuticals.
Curagen’s market capitalization is $92 million and the stock trades under $10 per share (with a 52-week high of 12 3/4). It generated revenue of $9 million last year and had an operating income loss of $14 million. The Soros Fund Management has a 13% stake in the company.
Hyseq Inc. [HYSQ>HYSQ]
- www.hyseq.com
- 408-524-8100
Hyseq Inc. was founded in 1992 and develops diagnostic DNA technology used in gene discovery. It has a unique gene sequencing system that efficiently analyzes genetic data. The company also is involved in developing software technology used to facilitate new drug development once a gene is discovered. Hyseq has an alliance with Perkin-Elmer, a leader in the gene sequencing field, to develop DNA sequencing chip products (Perkin-Elmer also owns 6% of Hyseq). Other partners include Kirin and Chiron.
Hyseq Inc. has a market capitalization of $40 million and trades in the $2-3 range (52-week high of 15 1/4, low of 2 1/2). Net sales were close to $10 million last year and company officials expect revenue to rise substantially over the next two years.
Millennium Pharmaceuticals [MLNM>MLNM]
- www.mlnm.com
- 617-679-7000
Millennium Pharmaceuticals is a Cambridge, Mass.-based company founded in 1993. It is in the business of perfecting technology necessary to sequence DNA to discover genes exploitable for drug development. Millennium also has the ability to discover new genes and has uncovered genes associated with obesity, diabetes, and some psychiatric disorders. With its in-house technology, the company is accumulating an impressive database of genetic information for a variety of diseases. The company also is developing bioinformatics software to sift through its own genetic library for disease-linked genes.
Millennium Pharmaceuticals made news in September 1998 when it sealed a monstrous alliance with Germany’s Bayer AG for $465 million. With this alliance, Millennium will supply Bayer with over 200 drug target genes for such diseases as cancer, artherosclerosis, osteoporosis, chronic pain, and a variety of infections. In exchange for the money, Bayer also will own 14% of the company. Millennium has alliances with Pfizer, Eli Lilly, American Home Products, and Monsanto as well. The Monsanto venture pays Millennium $218 million for its technology to develop genetically engineered farm products.
Millennium Pharmaceuticals has a market capitalization of over $1 billion and trades in the $30-35 range, with a 52-week high of 38 3/4. The company had revenues of $130 million and has $170 million in cash from Bayer. It will not see a profit for several years, but revenues are projected to grow substantially over the next two years.
Millennium has already positioned itself to be the dominant player in this crowded arena of fringe companies. Unlike some other companies, it appears to have all the technology in house to isolate genes, develop new drugs, and carry them into clinical trials. It is attacking the gene pool from all sides and hopes to have several new drugs in clinical trials by the year’s end. Millennium Pharmaceuticals is poised to bring its technology into the new millennium.
Next Article: May 15. Now that cloning has made the transition from science fiction to science, companies are actively exploring the financial possibilities of this new biotech frontier. We’ll take a look at some of the players in this wide-open field.