By Randall Osborne


Can we agree, then, that the field of genomics is still sorting itself out ¿ even as it grows more crowded, with companies eager to leap aboard the bandwagon ¿ and that timing its yield for investors remains so problematic that they might just as well stick with good, solid, traditional "drug development" firms?

Is that where it all stands now?

Uh, no.

Not according to Charles Duncan, analyst with Dresdner Kleinwort Wasserstein Securities Inc., who says in a new, 70-page report that the sector "stands at a productivity inflection point," with "evidence of a coming tsunami" of investigational new drug applications that will pique the interest of investors over the next year.

Duncan, formerly with Prudential Vector Securities, has identified 10 firms with particular promise: Celera Genomics, Celgene Corp., CuraGen Corp., Exelixis Inc., Human Genome Sciences Inc., Millennium Pharmaceuticals Inc., Myriad Genetics Inc., Sangamo Biosciences Inc., Tularik Inc. and Vertex Pharmaceuticals Inc.

It's not exactly hot news that an analyst thinks the likes of HGS, Millennium and Vertex might be going places. Duncan, though, notes that he has introduced a "new metric" for judging genomics firms, and has plenty to say in his report about the sector ¿ which has given forth "a new breed of cat," as a result of combining (in some instances, anyway) what genomics offers with what biotechnology always did.

"There's no value in me coming out and covering genomics," Duncan told BioWorld Financial Watch. "This is biotech coverage. We're talking about genomics-enabled drug development."

With six genomics-derived therapeutics in clinical trials, including two small molecules, the stage seems set. Duncan points out that "experience" does not equal "old," in this realm, since some of the established players have wholeheartedly taken up genomics, not just as a way of milking what investors went crazy over, not so long ago.

"The common thread of the 'new' biotech is the construction of an industrialized discovery platform with the power to provide a broad and deep understanding of an entire disease mechanism or pathway," Duncan says in the report.

Although the first names that might come to mind after such a dual definition are the heavyweights HGS, Millennium, and then probably Vertex, Duncan numbers among such firms Celera, CuraGen and Exelixis, too.

"The intriguing aspect about all of the genomics platforms is the idea of creating multiple drugs, but with the genomics-enabled drug development just now gaining traction, the first signs of success will be seen as 'IND-generating engines,'" Duncan writes in the report. More than one IND per year is required for investors to take such firms seriously, he adds, and said that two INDs annually make for a good measure.

Duncan calls genomics "disruptive technology," rewriting the previous rules of drug discovery. Just as in the 1980s with biotechnology generally, there's a window of opportunity for sincere, earlier-stage genomics companies to get a leg up before the more established firms begin to compete.

"Monoclonal antibody-based drugs are possibly the molecular class most readily convertible into commercialized product," Duncan writes. Once again, biotechnology comes full circle, with the once ballyhooed, then maligned, then cherished-again monoclonal antibodies coming again into their own ¿ with help from the human genome map.

Notable by their absence from his list, Duncan acknowledges, are the antibody companies, but there were just too many to sort out. He's focused instead on firms making the transition from genomics to making drugs.

Duncan offered even-handed specifics about the firms on his list.

Celera, once the genomics hero with its map of the human genome competing against the government's, still shows promise ¿ although, even as he praises the firm, Duncan offered warnings.

"I was pretty much the first analyst to downgrade this stock, back in May," he said. "My call, back then, was that they were making a big deal out of the process of proteomics, and the kind of news flow you expect from proteomics is fundamentally different from that which investors have come to expect out of structural genomics."

Celera, he said, is "now employing technologies where they don't have a competitive advantage, and they're doing it to identify proteins. Well, other companies have been doing that for a while, including HGS and CuraGen. But [Celera's] processing abilities are second to none, and they're an extraordinarily cheap stock."

A smaller firm, Celgene, "like Tularik or the Vertex of old, is really a genomics-enabled drug developer, though that part of the story is not well appreciated by Wall Street, and is only beginning to emerge," Duncan said.

He pointed to Celgene's acquisition of Signal Pharmaceuticals Inc., last month, and cited the deal with Novartis Pharmaceuticals Corp. for dexmethylphenidate HCl, a refined form of Ritalin (dl-methylphenidate). The companies got an approvable letter from the FDA in August; on approval, Celgene wins royalties for the entire line of Ritalin products.

"Getting the [attention deficit disorder] franchise kicked off with Novartis is about the only thing people have an interest in talking about, and it's a tribute to [Celgene CEO John] Jackson and his lieutenants that they were able to negotiate it," Duncan said.

"That's the good news," he added. The bad news is royalties vary for each Ritalin product, and Novartis is "incentivized, at least in the first two years" to sell those from which Celgene will gain less.

It's the Signal buy, in which Celgene acquired a selective estrogen modulator and kinase inhibitor, that Duncan likes ¿ as well as the company's own immunomodulatory drugs, called ImiDs; Selective Cytokine Inhibitory drugs, called SelCIDs; immunotherapeutics; and its angiogenesis inhibitor.

As for CuraGen, Duncan said, the firm "is clearly trying to transition from being a technology integrator, platform provider, albeit one with not any real differentiating features. Some of these companies, such as Myriad and Millennium, did a fantastic job of being able to partner, and sell off their technologies."

CuraGen did not, he said, but has come up with many potentially useful targets. "What we expect is the filing of their first IND will really put them on the [genomics] map," he said.

Exelixis, too, has proven its ability as a target generator. "Frankly, I think Exelixis has a better established position [than most] as a platform provider and, from a biologist's standpoint, I believe there are certain targets you can get out of Exelixis' platform that are more highly validated than those out of other platforms, including those from differential expression." Duncan, who has a Ph.D. in pharmacology, also lauded Exelixis' medicinal chemistry capability.

Because of their ambitions and size, HGS and Millennium might be spoken of in the same breath, although Duncan said the former is "very focused on proteins, and Millennium has a much broader focus, to include small-molecule development over time." HGS, he said, "will probably be able to access small-molecule development over time, probably through collaborations."

Millennium, Duncan added, "has a very different business model, one that HGS used early on but is not using anymore, which is reflective of the [companies'] different cultures. Millennium diversifies risk and generates cash by collaborating with pharmaceutical companies ¿ albeit not the strongest of the pharma world ¿ and HGS does not do that anymore."

On the other hand, because of its branched business model, "in a given full-time-equivalent employee's day, at Millennium, they're using a portion of it to work on projects not fully owned" by the firm, he noted.

Myriad Genetics is one company on Duncan's roster that has a genomics-derived product, a test called Melaris, that is used to assess the risk of developing melanoma based on the detection of inherited mutations on the p16 (CDKN2A) gene.

"We believe that [expertise] creates a certain set of disciplines that is not yet apparent at most of these other companies," he said, and the firm has a process for establishing gene-disease associations that provides better-validated targets.

"[Myriad] can walk down a biochemical pathway with their protein-protein interaction technology, and generate product opportunities," he said. "We put [the company] alongside CuraGen and Exelixis."

Sangamo, which Duncan called "one of the more acquirable companies," itself acquired Gendaq Ltd., in the UK, which supplements the firm's own program related to zinc finger DNA-binding proteins for regulating gene expression.

"It's an interesting platform play at this point, with the Medarex [Inc.] deal and similar ones that you could see in the future," Duncan said, referring to the agreement signed in June with the mouse antibody company. The deal is to develop and commercialize fully human antibodies using cell lines that overexpress selected G protein-coupled receptors (GPCRs) created with the zinc-finger technology.

"Zinc-finger technology is one that we think is potentially very powerful, and we make the analogy to early monoclonal antibody technology, or maybe even the promise of antisense, although that may be the good and the bad," Duncan said. "It has some technical hurdles that need to be cleared, but Sangamo probably has a lock on zinc-finger proteins."

Duncan's thesis on Tularik "is similar in some respects to our thesis on Celgene," he said. "You really have to look beyond the current clinical candidates to their platform." Drug development initiatives are "interesting," he said.

"The negative view is that those initiatives have an element of risk, and people right now are not giving [Tularik] much credit for later-stage products, in Phase II," he added. Vertex's stock took a hit late last month, losing a quarter of its value after bad news from animal testing with high doses of its oral p38 MAP kinase inhibitor VX-745 for rheumatoid arthritis caused the firm to suspend development of the drug.

"The [market's] 25 percent 'haircut' on an already cheap stock was overdone," Duncan said. "It was a double whammy, but I understood why. This has not been the first time they've had a clinical-stage product not get through. It's well and good to put products in the clinic, but you've got to get them out, too, and that was potentially a blockbuster for them."

Vertex said it's going ahead with second-generation drugs in the class, though. Whether the failure was serendipitous or part of a larger plan, Duncan said, "you could argue they would want to do the experiment with what is not their strongest candidate first. Once you start clinical trials, the competition can get some insight as to where you're going. It costs money, but in the long run, may prove to be cheap."

Seems like the long way around, just to hide research, though.

"Look at Scios [Inc.]," Duncan said. "They have a MAP kinase inhibitor, and they haven't told anyone what the molecular structure of the drug is. Nobody can find out. Reasonable people are very sensitive about it."

Vertex, anyway, is "not out of the RA game," he said. "It's not pleasant to have a year or so delay, but we have a thesis that is more broad than just that program. That doesn't mean [Vertex] is out of the 'show-me' category."

In general, he said, "the moniker 'genomics' has lost its patina," and smart investors are looking at biotechnology companies that include genomics among their strengths ¿ especially those companies ready and willing to become true drug developers.

"Some [on the list] have not yet shown evidence of an ability to do that, at least through traditional metrics of identifying targets and moving lead candidates through the clinic," Duncan allowed. "Those would be Sangamo and Celera, but it's clearly where they are going."

Almost all are at slightly different stages of development, adding that, in some instances, "maybe you have to be real creative to appreciate [my] thesis."