Profiting In the Biotechnology Sector: It’s All In The Genes
Right now a biotechnology race is on that could drastically change how physicians treat disease and how pharmaceutical companies develop new drugs. The challenge: to decipher and map the entire human genome–that is, to locate and identify each gene on each human chromosome.
The financial stakes are as high as the scientific ones. The first companies to discover new genes, patent them, and then exploit their inherent information to treat major killers like cancer and heart disease will profit tremendously.
Right now several companies are on the inside track to developing lucrative genetic databases and genetically derived drugs that could make them financial powerhouses in the coming years. Weâ€™ll explain the nature of the new genetic research and take a look at some of the most promising companies in the field
The playing field
There are two important scientific and economic issues at work here for several of the biotechnology companies working in this field.
The first issue is the discovery of the genes themselves. By identifying and patenting normal and abnormal genes, companies will be able to create genetic libraries containing a wealth of information critical to the development of new drugs.
Several small biotechnology firms already are amassing extensive databases of genetic information that will serve as a reservoir for larger pharmaceutical companies interested in expand in this area. These companies, like Merck (MRK), Pfizer (PFE), and Smithkline Beecham (SBH), will pay handsomely–either in royalties or takeover money–for access to these genetic databases in their quest to create new drugs.
The second issue behind the use of genetic information for drug development revolves around the cell products these genes actually make. Genes act like conductors, instructing different cells, organs, and organisms on how to function and dictating what substances they produce. These substances, many of which are proteins, are involved in both normal and abnormal cell function.
Some companies, in addition to discovering new genes, are uncovering new proteins these genes produce. Many of these proteins are being tested as treatments for many major diseases. As a result, these
companies have the potential to financially benefit both from amassing genetic databases as well as from translating these databases into new drug treatments.
Several companies are on the forefront of unmasking the entire human genome. In a way, many of these companies are analogous to Internet companies: They have little or no current profitability, but have highly specific technology with the potential for enormous growth and earnings. Also, like a Yahoo or a Lycos, these companies will act as “portals” for the bulkier pharmaceutical companies who seek to enter the world of genetically directed drug development.
Incyte Pharmaceuticals Inc.
Incyte Pharmaceuticals [INCY>INCY] is a Palo Alto, Calif.-based biotechnology company in the gene-mapping business that initially went public in November, 1993. It is in the process of building a huge database of normal and abnormal genes and genetic sequences that will serve as the basis for much of the new genetically driven drug development. Incyte will continue to generate revenue by selling access to this evolving database in collaboration with other pharmaceutical companies.
Incyte has traded as high as $51 a share, but lately it has stayed in the $25 to $35 range. It has distinguished itself as being one of the few companies in this field with earnings (close to $16 million in 1998). The company recently created the Incyte Genetics Unit, dedicated solely to decoding the entire human genome. It will finance this venture internally, spending close to $200 million over the next two to three years. This will impact short-term earnings, but over the next three to five years the company expects a 30 to 40 percent growth rate and increasing sales.
In addition to a relationship with Johnson & Johnson (JNJ), Incyte also collaborates with Pfizer (PFE) and Novartis AG. It also plans to develop alliances with other companies as its genetic database expands. Despite competition, over the next five years Incyte is poised to become a leading supplier of genetic information to the major pharmaceutical companies.
Genset [GENXY>GENXY] is a French biotechnology company whose mission statement is similar to that of Incyte Pharmaceuticals–i.e., to seek out and identify all the genes on the human genome. Genset is a global producer of what is called short-strand synthetic DNA, an entity that allows scientists to focus on specific gene sequences on human chromosomes.
Genset also focuses on identifying genes that predispose people to a wide range of diseases, including cancer, heart disease, and high blood pressure. Exposing disease-specific genes raises the possibility of producing novel drug treatments that might be able to eliminate a disease like breast cancer, for instance, before it even becomes a palpable mass in the human breast.
Genset already appears to have identified two distinct genes related to prostate cancer, a disease that afflicts over 300,000 men each year in the U.S. By exploiting the differences in these genes that make them cancerous or not cancerous, companies will be able to create innovative drugs with lasting revenue potential.
Like many of the emerging biotechnology companies, Genset is not currently profitable. It has traded as high as $38 per share, but recently has fallen under the $20 mark. The company has current annual sales close to $17 million, and it has several relationships with established pharmaceutical companies, including a $22.5 million collaboration with Abbott Labs.
Obviously, investing in Genset has its risks. However, the company is accumulating a large database of genetic information that will be in high demand over the next five years. At its current price, Genset has the potential to be an attractive long-term investment.
Human Genome Sciences
I have saved the best for last. The final competitor in the race for the holy gene grail is a Rockville,
Maryland-based company called Human Genome Sciences [HGSI>HGSI]. This company also is in the business of gene identification for the purpose of developing new drugs.
Like Incyte Pharmaceuticals and Genset, Human Genome Sciences generates revenue from royalties on access to their evolving genetic database. However, HGSI has taken their mission statement to a higher level: They are currently grooming products made by their newly discovered genes as potential treatments for common diseases.
HGSI has the potential to create revenue far beyond the royalties generated from a peak at their genetic library. Over the next several years, they could have a number of gene-based drug treatments aimed at afflictions like coronary artery disease and cancer.
For instance, HGSI has identified a naturally occurring protein that protects certain vital cells in the bloodstream and bone marrow against the toxic effects of chemotherapy. This treatment has the potential to become a medical and financial windfall for HGSI; it could have an enormous impact on the way physicians treat all types of cancer because many of the toxic effects of chemotherapy limit how much treatment patients can receive.
Another product in HGSI’s evolving pipeline is a genetically derived substance that can cause certain cells to regenerate. HGSI is about to start clinical trials that examine its effectiveness in regenerating cells for certain types of wounds, specifically burns and pressure ulcers–a large and lucrative market.
But another gene product discovered by HGSI, called Vascular Endothelial Growth Factor-2 (VEGF-2), may have the most promise. Researchers have shown VEGF-2 is very active in the creation of new vascular channels, a process called angiogenesis.
One scenario has physicians injecting this growth factor (or the gene) into beating hearts with severely blocked arteries to spur new blood vessel growth around these blockages. Early clinical data supporting VEGF-2 is very encouraging. Patients who are not candidates for heart bypass surgery could greatly benefit from this drug, as might diabetic patients with severely blocked leg arteries. Coronary artery disease affects over 10 million people in this country, making the market for such a treatment huge (VGEF-2â€™s regenerative capabilities also have been shown potential to treat other medical problems as well). HGSI is collaborating with a company called Vascular Genetics Inc. on the VEGF-2 project.
Human Genome Sciences has been trading in the low to mid-30s over the last several months, but has been as high as $48 per share. The company has several relationships with major pharmaceutical players, including Smithkline Beecham, Schering-Plough (SGP), and Takeda Chemicals, as well as partnerships with Vascular Genetics Inc. and Transgene SA.
Like many companies in this arena, HGSI is not turning a profit. However, its losses are shrinking with each passing quarter, and it has close to $200 million in cash and short-term investments on hand.
I believe Human Genome Sciences is poised to become a profitable leader in the field of genomic research in coming years (I have owned stock in the company for several years). Its evolving product line will enable the company to break away from the rest of the pack as biotechnology advances into the twenty-first century.