Medical Device Link.

Originally Published January/February 2001

Mapping the Future of Gene Research

Plump profits could still be in the picture for the biotech industry.

Erik C. Dellith

Just 10 years ago, students in college-level genetics classes speculated about how advances in gene research would open the doors to new types of therapy and eventually produce a panacea for all of humanity's ills. What seemed like only a dream a decade ago became reality in the late 1990s when scientists revolutionized the biological world by cloning sheep and pigs. More huge news came last summer when the heads of Celera Genomics (Rockville, MD) and the U.S. Human Genome Project (a 15-year endeavor coordinated by the U.S. Department of Energy and the National Institutes of Health) jointly announced completion of a working copy of the human genome—essentially a map of the basic molecules that make humans what they are.

As pivotal an accomplishment as the mapping of the human genome is, it's only the first of presumably many life-altering discoveries that biotech firms will make in the years to come. In fact, the map of the human genome itself holds little value. It is estimated that only about 3% of the entire genome is of any commercial value. Instead, the real value of mapping the human genome will come from developing an understanding about which genes are linked to which proteins and how mutations and disruptions to these pairings cause disease (see insert below).

Researchers will be pressed to learn how all of the genes work, both separately and in tandem. After all, some diseases—including many cancers—develop because one gene fails to suppress the activation of another, not because of a single defect in one gene.

While the map of the human genome is not necessarily the Holy Grail that many in the medical community had expected, it is a trophy that Celera and the Human Genome Project can put on their mantles. And biotechnicians have come to realize that a multitude of similarly splendid chalices, once combined, will serve to provide physicians and scientists with new ways to combat disease and enhance life. Naturally, because gene research is such a diverse area and holds so much promise in both lifesaving discoveries and financial returns, many companies have entered this sector.

Biotech Players

Advances in gene research have led to a highly specialized industry. While it is possible to break down the gene-therapy segment of the biotech industry into many different areas, it is helpful to think in terms of three broad categories: therapeutics, diagnostics, and libraries.

Therapeutics, diagnostics, and libraries tend to work in tandem: therapeutics-oriented biotech firms develop patient treatments in the form of pharmaceutical or genetically engineered products. Diagnostics firms create the technologies and diagnostic products that will be used in conjunction with therapeutic products. And information services and gene-library companies provide other biotech firms with the information that will help them target specific genes for developing and testing new products.

Some of the most successful biotech companies, which are rewarding investors accordingly, have tackled several of these areas simultaneously. For example, a firm may develop and sell the technology needed for data mining as well as use this technology itself as it tries to develop its own gene library or its own new diagnostics and treatments.

One such comapny, Incyte Genomics (Palo Alto, CA), could possibly be placed in two categories: therapeutics and libraries. Incyte offers genomic information–based products and services, including databases, genomic data management software tools, microarray-based gene expression services, and genomic reagents. The company focuses on providing an integrated platform of information technologies designed to help researchers understand disease and discover new treatments.

In addition, Incyte's genetic research programs use its unique candidate gene approach to identify and validate drug targets, helping to facilitate effective drug design and eventual development of diagnostic products by studying the genetic variations among individuals. The company is researching the genetic source of many different conditions, including Type II diabetes, obesity, osteoporosis, cardiovascular disease, inflammation, immune disorders, Alzheimer's disease, and drug metabolism.

Celera and Incyte are two of the most recognizable names in the genomics segment of the biotech industry, but many smaller companies are also making great strides. Valentis Inc. (Burlingame, CA), which has a market cap of less than $220 million, develops novel therapeutics using its proprietary technologies, including multiple gene delivery and gene expression systems and PEGylation technologies designed to improve the safety, efficacy, and dosing characteristics of genes, proteins, and viruses. Valentis has a solid product pipeline, with many investigational products in clinical trials for treating different cancers. The company is also working on possible treatments for cardiovascular disease, among other disorders.

Another relatively small company making good advances in this arena is Transgene (Strasbourg, France), which has a market cap of about $151 million. This biopharmaceutical company is developing gene delivery technologies and gene therapy products for the treatment of various diseases. The company's technology platform includes various vector types, both natural (those using a virus) and synthetic (lipid compounds). The company has several investigational products in early-stage trials, and has several more at the preclinical level. As part of its efforts to develop treatments for cancer, cystic fibrosis, and muscular dystrophy, Transgene has teamed up with some key players in both the biotech and pharmaceutical arenas, including Human Genome Sciences (Rockville, MD) and Schering-Plough Corp. (Kenilworth, NJ).

Another promising small company is Epoch Pharmaceutical Inc. (Redmond, WA), with a market cap of about $220 million. Epoch is developing and commercializing technologies to enhance the study of genes. The company explains that its technology is based on designing and synthesizing oligonucleotides, synthetic DNA strands that can be modified to better find and bind to specific genes. Through its technology, Epoch is developing better tools for enhanced gene sequence analysis.

The firm has shown good revenue growth, which stems from sales of its specialty probes, first shipped in December 1999, and various license fees. As one would expect from the introduction of a new product (and a relatively substantial source of revenue), the company has posted very strong top-line growth rates. Furthermore, Epoch continues to make significant research advances and obtain patents. In addition, it has inked deals with some strategic partners and recently expanded its agreement with PE Biosystems Group (Norwalk, CT). Now, PE Biosystems will incorporate Epoch's technology into its entire line of Applied Biosystems TaqMan reagent products. In return, PE Biosystems will fund research at Epoch and pay license fees.

The progress made in gene research therapy by these and other companies captured investors' attention in 2000.

The Red Hot Healthcare Sector

Even before Celera and the Human Genome Project's joint announcement, the biotech sector was gaining a larger audience on news that significant headway was being made toward mapping the human genome. Research advances in other segments of the industry also attracted new investment interest.

In fact, over the past year, healthcare stocks that fall under the category of biotech and drugs have been among the top-performing issues, advancing about 95% on average as new investment money has flowed into this arena (see Table I).

Table I. Health and biotechnology stocks scored the strongest returns for investors in 2000. Listed here are 18 of the best-performing large-cap stocks in the biotech sector. Analysts predict continued strong performance in 2001. Source: Market Guide Inc.

The biotech and drugs category is not the only segment of the healthcare sector to perform well despite the current technology slump. Investors looking for significant stock-price appreciation through exposure to healthcare also flocked to other segments of this sector. And, on average, these investors did quite well. For example, healthcare facilities stocks, on average, advanced more than 70%. Medical equipment and supplies stocks gained just shy of 40% on average. The major drug companies rounded out the healthcare sector with an average return of 11.5%.

Looking Ahead

While 2000 was quite favorable for biotech and other healthcare-related issues, the future also appears promising. In terms of stock-price gains, the healthcare sector has been one of the best-performing areas over the past year since significant research advances have sparked substantial interest in this sector. The unveiling of a working copy of the human genome by Celera and the Human Genome Project set the stage for more significant research gains and should help biotech firms to develop fully functional, gene-based therapeutic products.

The many biotech companies currently working to meet this end should continue to see excellent returns. In fact, many of the nearly 480 biotechnology and drug companies tracked in the Multex Investor's Market Guide service offered investors market-leading returns in 2000, and a substantial number were newer companies that returned more than 1000% as their shares grew from penny stocks to $20-some status.

Biotech investing success should benefit equipment manufacturers as well. As the need for more precise and intricate genetic analysis grows, so, too, will the need for more enhanced equipment to perform the necessarily more detailed research. That is, a spillover effect will occur: biotech firms will rely on manufacturers to provide the necessary equipment both to allow their research to continue and to deliver their finds to patients.

In short, the future looks bright for the biotech companies doing the research, the pharmaceutical companies selling the treatments, and the equipment companies that serve those markets.

Erik C. Dellith is an equity analyst for Market Guide Inc. (New York City).

To the MX main page | To the Jan/Feb Table of Contents