GENOMICS DRUGS are expected to show increased efficacy and lower toxicity because they will be directed at better understood disease targets. But it's uncertain whether they will have any greater success rate in the clinic, company executives say. It's too soon for answers anyway, since most genomics companies are less than a decade old and not enough time has passed for products to have gone through clinical development and regulatory approval.

Nevertheless, Human Genome Sciences (HGS) believes it is likely to be among the first to succeed, having directly put into clinical trials six genomics-based drugs and two via partner GlaxoSmithKline. Its most advanced candidates are in Phase II trials.

"There has been a mismatch between expectation and reality," says William A. Haseltine, HGS chairman and chief executive officer. "I'm actually very pleased with the reality of genomics, but the expectations have been unreasonably high--the notion that sequencing the entire human genome and understanding the correlation between phenotype and genotype would lead to a rapid revolution in drug development.

"I always did my best to cast cold water on those unrealistic expectations," he continues. "But I don't think that in a raging fire one bucket does much good."

The problem, Haseltine explains, is that generally no direct or immediate link can be made between understanding the genetic cause of a disease and a route to treatment or prevention. He points to several inherited genetic diseases--Huntington's, Alzheimer's, and Parkinson's--where a genetic link has been found, but "we don't have much idea what to do about it."

On the plus side, understanding genes and finding validated disease targets have helped accelerate early drug discovery work, Haseltine says. However, while genomics has facilitated finding drug candidates, he notes, "it hasn't shortened in any substantial way drug development times and the length of clinical trials."

HGS was founded in 1991 and began its move toward drug R&D much sooner than most of its genomics rivals. It was the first to isolate a virtually complete set of functional human genes in a form in which the genes can be used to make drugs and proteins, Haseltine says, and it has established a strong intellectual property position. Glaxo or its predecessor firms have been partners with HGS since 1993 and have invested $125 million.

The company has an integrated set of technologies that aid discovery through manufacturing and clinical trials, he notes, including monoclonal antibody technology through an alliance with Cambridge Antibody Technology. HGS opened its first manufacturing operation in 1999 and acquired protein-engineering capabilities in 2000. In 2001, it announced plans to complete a commercial-scale plant by 2005. The company employs more than 1,000 people.

Although HGS has collaborative R&D revenues of only a few million dollars per year and no product sales, it has a market capitalization of more than $1.5 billion and about $1.6 billion in cash and short-term investments. At its current spending rate, the company has enough money to operate for more than a decade. If a product moves forward with Glaxo, HGS could get a 20% share of North American and European sales and 10% royalties on certain sales.

HGS took an important step in June 2001 when it didn't renew a consortium agreement with five drug producers; the agreement had given them exclusive access to HGS targets for at least five years and brought in about $20 million in annual revenues. Although it maintains alliances with Glaxo and others on selected targets, HGS became free to use its technology for internal or new partnership programs and has since signed a handful of licensing agreements.

INTERNALLY, HGS has focused exclusively on the creation of human proteins and monoclonal antibodies as drugs. "For us, it takes two to two-and-a-half years to move from wanting to treat a disease to clinical trials," Haseltine says. "I attribute that almost exclusively to our genomics foundation and that we selected to work on only proteins and antibodies.

"That time frame is very important when you are building a company," Haseltine says. "If we were to attempt to develop chemical drugs, I think you could add an average of six years to the process. Plus, it takes far more resources than developing proteins as drugs."

David S. Block, Celera Genomics executive vice president, agrees that whether it's small molecules, proteins, or antibodies, there are still "many hundreds of steps between the gene sequence and the drug." Block is also chief operating officer of the company's therapeutics division, which is less than one year old. A former executive vice president for international operations at DuPont Pharmaceuticals, he joined Celera in January as part of a new management team.

"Celera was not originally intending to be in the therapeutics business," Block explains. "It was going to be a services and information business." Yet the four-year-old company has "gone from being a supplier of information to being both a supplier and user of that information. And we're moving as hard and fast as we can down the path of being a therapeutics company."

Celera has sold plant and animal genomics businesses and exited contract gene-sequencing work. In April, it signed an exclusive marketing agreement with its sister company, Applied Biosystems Inc (ABI). Both companies, and their Celera Diagnostics joint venture, are owned by Applera.

ABI will market Celera's genomic database along with its own reagents, assays, data mining tools, and services. The combination is expected to create long-term financial value for the products, Block says.

"As a stand-alone product, it was in competition with free databases," Block explains of Celera's database. "And, if you are selling a high-quality product and are in competition with something the government is giving away for free, that makes for a difficult business model."

Celera and the government's Human Genome Project called it a tie after racing to complete the sequence. Whereas Celera's plan was to sell online access to its sequence data, the government data became publicly available faster and was of a higher quality than had been expected, Block says.

In the deal with ABI, Celera will get revenues from its existing database customers and royalties on ABI's sales. Online subscriptions brought in $73 million, or about 60% of Celera's revenues in the fiscal year that ended June 30. Total revenues for fiscal 2003 are to reach about $90 million. Despite these figures, the company has reported sizable losses.

Celera expects lower operating expenses to decrease its cash burn rate to about $80 million in fiscal 2003. It has eliminated about 16% of its workforce, or 132 jobs, with the recent changes. R&D spending--of which 65% will go to drug discovery and development--is to be about $135 million.

Celera's strengths have been in genomics, proteomics, informatics, and computing. To build its therapeutics effort, the company bought small-molecule drug developer Axys Pharmaceuticals last November for $170 million in stock. The acquisition brought medicinal chemistry, structural biology, screening capabilities, proprietary products, and partnerships with major drug firms, including Merck, Aventis, and Bayer.

Unlike Celera, which has about $890 million in the bank, Axys had been cash-strapped for several years and had trimmed its operations. Celera quickly began rebuilding the business and now has about 330 employees in its therapeutics unit. The company's cash position should allow for additional acquisitions and self-support for several years.

Axys did not have the resources to take forward its own compounds and looked to license them, Block says. "So it's been a substantial shift in thinking to realize those compounds could in fact be retained and developed here." Celera is deciding exactly which compounds it will keep and which it may advance to a point where they have greater licensing value, usually through about Phase II clinical trials.

In 2003, Celera plans to generate and identify differentially expressed proteins in lung cancer, and to validate a number of these as therapeutic targets to move into small-molecule screening and/or antibody development. It also intends to initiate a second disease-specific proteomics program.

Although it, too, is building a therapeutics business, Incyte Genomics emphasizes that it has not stepped away from its database business. "We are building upon it and leveraging it for drug discovery," says CEO Paul A. Friedman, the former president of DuPont Pharmaceuticals Research Laboratories who joined Incyte in November 2001.

"Incyte has a far richer genomic and proteomic database than what's available in the public domain," Friedman boasts, "and an extremely large intellectual-property portfolio built up over the last five or six years." The company was formed as Incyte Pharmaceuticals in 1991.

"The potential value from using our genomics information and intellectual property to discover drugs is far more than could be created by remaining a pure database play," Friedman says. "If it remained a tool company, I don't think the stock price would ever again begin to approach the numbers seen previously."

The rapid upward movement in genomic company stock prices was unsustainable, Friedman says. "To keep the stock price up and keep yourself growing, you need products and revenues. And a couple of products on the therapeutics side for a company of Incyte's size would catapult it to a markedly different market capitalization," he adds.

Information products--including database subscriptions and licensing to more than 50 companies and academic institutions--accounted for 79% of Incyte's 2001 revenues of $219 million. The company has discontinued or sold what Friedman calls "low-margin, noncentral" businesses in custom sequencing, microarray production, and protein-expression databases.

Without these revenue sources, and by using its gene data differently in collaborations and on its own, Incyte expects 2002 revenues to be about $100 million to $130 million. This estimate from September is 15% lower than an earlier one following a slowdown in spending by potential information database subscribers and licensers.

Like other genomics firms, Incyte has cash--about $475 million. "The money gives us a lot of flexibility and, if we spend it prudently, it gives us a reasonable time period to create value," Friedman says. "That's something most small therapeutic discovery companies would envy."

Regarding expectations, he believes observers were somewhat naive about the time frames required for developing genomics-based drugs. "There certainly will be more targets based on all the gene sequences, but once you get into drug screening and optimization, those activities aren't dependent on the sequences and still will take time."

Although the expense involved in generating and maintaining its gene data is significant, Friedman says, Incyte intends to keep its cash flow positive and use that cash to defray some drug discovery costs. It is also discussing in-licensing compounds or a possible acquisition to help jump-start its drug development pipeline.

Creative deal-making is important at Hyseq Pharmaceuticals. Although the 10-year-old company once had a market value of $1.6 billion, it did not cash in on the stock bubble and has limited cash today. It recently raised about $36 million through two private placements and got a $20 million line of credit. The company is pursuing other financing strategies as well.

In the past three years, Hyseq has brought in George B. Rathmann, a founder of biotech industry leader Amgen, to serve as chairman, and hired Ted W. Love as president and CEO. Hyseq's goal of creating biopharmaceuticals is "eminently doable," Love says, based on his experience as senior vice president of development at Advanced Medicine (now Theravance) and in senior management positions in medical affairs and product development at Genentech.

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