By Randall Osborne


Students of archeology know that the town of Rosetta, in northern Egypt, is where the famous Rosetta stone was found a stone slab bearing marks and inscriptions that helped researchers figure out ancient hieroglyphics.

So the phrase "Rosetta stone" came to mean any clue, breakthrough or discovery that opens the door to understanding a puzzle. Picking up the word, Rosetta Inpharmatics Inc. aimed its efforts at understanding toward the rich puzzle of the human genome.

To pharmaceutical heavyweight Merck & Co. Inc., Rosetta's name meant simply "a smart buy," and Merck, of Whitehouse Station, N.J., said late last month it will take over Kirkland, Wash.-based Rosetta for about $620 million in stock.

Rosetta, which was founded in 1996, went public in August 2000 and was rather quietly going about its work with gene expression (signing Merck as an early customer), saw its stock skyrocket on the news. In one day, Rosetta's shares gained a whopping 75 percent.

It was enough to have investors, many of whom lately had grown cool on genomics, ready to walk like Egyptians.

In the merger, Merck got Rosetta's Resolver Expression Data Analysis System, FlexJet DNA microarrays and its coherent expression profile data sets. Rosetta got 0.2352 shares of Merck stock for each share of its own, a value of $18 per share based on Merck's closing price the day before the deal was disclosed.

Companies doing similar genomics work got something, too: more credibility, a kind of reflected value. The deal had industry observers speculating about future buyouts along similar lines pharmaceutical companies (many of which already have some in-house genomics departments) taking over firms with differently focused efforts, or genomics companies themselves merging.

Then, about two weeks later, another happened.

As May ended, Sequenom Inc., of San Diego, which focuses on finding genetic variations (single nucleotide polymorphisms, or SNPs) using its MassARRAY genotyping platform, said it would merge with Gemini Genomics plc, of Cambridge, UK, which aims at gene-based drug targets by analyzing SNPs, in a stock swap valued at $238 million.

Sequenom will issue 12.9 million shares to Gemini stockholders at an exchange rate of 0.2 Sequenom shares for each Gemini share (or 0.4 shares of Sequenom for each American depository share), along with 1.5 million options related to outstanding Gemini warrants and options.

The marriage means more precise and quicker validation, the companies said.

"They'll do it better together than either of them will do it alone," said Joe Dougherty, senior analyst with Lehman Brothers in New York. "Companies whose emphasis was on information providing, or who had some very cool high-tech things, almost all of them are trying to get downstream, and hang on to more value."

Although, like Merck and Rosetta, Sequenom and Gemini already had been partners, the latter merger is hardly in the same category as the former. Merck, known as a rather more traditional, "research-driven" pharmaceutical powerhouse in developing treatments for humans and animals, makes its move in order to bring more genomics capabilities inside its walls. Sequenom, on the other hand, is supplementing an already strong capability with muscle from another area of the field.

The deals are "very different," said Thomas Dietz, head of biotech research for Pacific Growth Equities Inc., in San Francisco. "[Rosetta's is] an excellent technology. You look at it and weigh it and think, 'What if the competition gets it?'"

They are alike, though, in that everybody seems to want the same thing. The success of Cambridge, Mass.-based Millennium Pharmaceuticals Inc., which combines sophisticated genomics work with the making of actual drugs, has brought a new model for other companies to emulate. Millennium may have found a way of being all things to all people, whatever their polymorphisms.

Dougherty said Millennium "is one heavily partnered model, with a lot of collaborations and acquisitions. The other pioneer is [Human Genome Sciences Inc., of Rockville, Md.], which has tended to build internally."

Dietz noted that Millennium has a "valuation gap" that must be filled.

"The way to do that is to start owning something more down the value chain," he said. "If you take Millennium right now, and it's got a market cap of $8 billion that's an equivalent market cap to MedImmune, Immunex, Biogen, and it's close to Genzyme, with $893 million in revenue.

"So, Millennium has a market cap that suggests revenues today of approximately a billion dollars. What's going to happen five years from now? Are they still going to have 25 or 50 percent growth, without having substantial revenues like these other companies do? They might; they might have a blockbuster drug. Some people believe they have enough shots on goal, and people bet on the promise. I'm not saying it's not a questionable bet. What I'm saying is, there's valuation gap they have to fill."

Investors "need to walk in there and ask them, 'When can you be profitable? What kind of blockbusters do you have potentially in the pipeline? How long will it take to get there?'"

Other genomics firms may scramble to keep up with the likes of Millennium and HGS. Having a database is no longer enough, as Celera Genomics, also of Rockville, is realizing. The pioneer of gene mapping recently said it's aiming to move into proteomics-based drug discovery, through licensing its findings to partners.

Charles Duncan, analyst with Prudential Securities in Deerfield, Ill., said in a research note that Celera is "ideally positioned to become a proteomics leader," after making its transition.

The company, Duncan wrote, "is taking a focused approach to proteomics, different from its comprehensive sequencing of the genome." First taking on breast, colon, pancreatic and lung cancers, Celera wants to identify proteins differentially expressed in disease cells and tissues, and decide drug targets based on accessibility.

Dougherty told BioWorld Financial Watch he hasn't "had a conversation with them since they have settled on what they're doing. When Celera came and spoke at our biotechnology conference a couple of months ago, they were in the midst of a strategic review. They're taking a serious look. Just competing with the diaDexuses of the world may not give them the market cap they want." Based in Santa Clara, Calif., diaDexus LLC was formed in 1997 by the former SmithKline Beecham plc of London (now GlaxoSmithKline plc), and the former Incyte Pharmaceuticals Inc., of Palo Alto, Calif. (now Incyte Genomics).

Although Gemini brings to its deal with Sequenom a string of already established partnerships with such firms as CuraGen Corp., of New Haven, Conn., and Medarex Inc., of Princeton, N.J., (it even has one with Rosetta), full-fledged drug development is "still some time in the future for Sequenom," Dougherty said.

"Gemini had a deal with Medarex, and I think they, as everyone, recognizes that antibodies are probably the quickest way through preclinical development," he said. "Neither company has substantial clinical expertise. That's something they will have to build or buy. Some companies don't build that early enough, and you don't see that the preclinical work hasn't been done as well as it could have been until the drug gets to the FDA."

Merck and Rosetta, for their part, have been collaborating since the fourth quarter of last year, and had been talking about broadening the partnership. Rosetta has other deals with such firms as Amgen Inc., of Thousand Oaks, Calif.; GlaxoSmithKline plc, of London; Immunex Corp., of Seattle; and Monsanto Co., of St. Louis, and will keep operating under its name after the merger. Also, Merck said Rosetta's deal with Palo Alto, Calif.-based Agilent Technologies Inc., exclusive distributor of the Resolver system and seller (to Rosetta) of DNA microarrays, will continue.

Nobody is expecting Rosetta's presence to have a Millennium-like influence on Merck. The company faces a number of drug patent expirations in the next several years, even as it boasts high-selling treatments in various indications, including cardiovascular disease, osteoporosis and inflammation.

And Merck's plans, at any rate, are hard to guess, Dietz told BioWorld Financial Watch. "They're very close-mouthed," he said. "The reasons [for the Rosetta buyout] will never become grossly apparent."

From another standpoint, Dietz added, the reason for acquiring Rosetta unlike the markings on unearthed Egyptian stones hardly requires deciphering. Merck, like other firms, wants more value, as far down the line as possible. And shareholders dig it.

"Another company in that same vein is Exelixis," Dietz said. "They've built chemistry up, and they're internally focused on the oncology franchise and biotherapeutics." Exelixis Inc., of South San Francisco, also has a cancer antibody deal with Protein Design Labs Inc., of Fremont, Calif.

"You can get bigger royalties for an [investigational new drug application]-ready candidate, or maybe even Phase I or Phase II data, and you're going significantly down the value chain of the molecule," he said. "It can cost more to get there, but the payback is higher."

Yet another example of building on genomics is LION biosciences AG, of Heidelberg, Germany, Dietz said. "I don't think they're ever going to be a drug company, but they're trying to build vertically in their company," he said.

Dougherty said HGS and Millennium "have been doing it forever, but even Incyte and Celera are talking about it. Aurora's acquisition by Vertex is also a move that way." Vertex Pharmaceuticals Inc., of Cambridge, Mass., said in May that it is buying out San Diego-based Aurora Biosciences Corp. in a $592 million stock swap.

Without planning to use as much data as possible from what they generate, and to keep mining it for as deeply as possible into the drug development process, genomics firms risk becoming mummified relics, entombed in pyramids of loss.

"It's clear that the market for drugs is probably 15 times larger than the market for drug discovery technologies," Dougherty said. "They're going where the money is."

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