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Celera: A Biotech That Needs a Boost

By David Shook To many investors, Celera Genomics (CRA) could do no wrong as recently as two years ago. Never mind that it didn't have a clear business strategy. It had nearly finished mapping the human genome, well ahead of a government consortium it was competing against, and Celera's stock had soared to $220 per share.

Today, however, the Rockville (Md.) biotech is struggling. Its share price slid during the past year from $44 to close at $20.20 on Feb. 28. And it stands leaderless after founder and President Craig Venter, its often unpredictable chief scientist, stepped down in January.

Meanwhile, Celera is burning through about $150 million a year in cash as it scrambles to put together a strategy to turn a profit by developing its own drugs. But analysts are projecting losses through at least 2004 and won't hazard a guess as to when it will move into the black. Celera clearly is in transition, and "every transition has its challenges," admits spokesman Robert Bennett.

WORK TO DO. The company does have some considerable strengths, including a $900 million cash hoard and a still-sizable $1.4 billion market cap. "We believe we remain on solid footing," Bennett says. If used astutely, its pioneering work in gene sequencing could give the company an inside track on developing drugs, and its cash could give it five or six years to succeed.

Given Celera's lack of a track record in drug development, though, there's no guarantee that even Venter's legacy -- the vast pool of information on human chromosomes -- will be enough to complete the transformation.

In short, it might be a time to avoid or even sell Celera, some analysts believe. Until parent company Applera and its CEO, Tony White, put forth a compelling growth strategy and hire a new leader, Celera's tracking stock could remain under pressure, analysts and people close to Applera say. "When the company finally decides on the right senior management team, then it should still have a chance of success," contends one former executive.

AFRAID TO JOIN? Finding a replacement for Venter is crucial. "I would say the company needs a dynamic leader from the biotech field, someone who can step in and take Celera in a new direction," says another former manager. But with many biotechs now generating profits from new drugs hitting the market, Celera and other genomics companies may have trouble drawing the best and brightest execs to their corner offices. "In a lot of cases, the business plans are not going to pan out," so ambitious execs may be leery of joining the genomics industry at this stage, says Steve Cox, biotech analyst at Commerzbank Securities.

Celera is divided into three parts -- database subscriptions and licensing, molecular diagnostic tools, and drug discovery -- with the first expected to generate nearly all of the company's $129 million in projected revenues this year. The genomics database business has dozens of subscribers, from the largest pharmaceutical companies to the smallest academic labs. Each member pays for access to Celera's gene-sequencing information, which helps scientists better understand what causes disease and how to alter a gene to create a new drug.

Unfortunately, because genomics information is nearly a commodity these days, with many companies offering products similar to Celera's, the database sales and licensing agreements may be nearing a plateau. It now appears that Celera's database business will level off at just above $100 million annually and be only a modest contributor to the bottom line over the long haul, said Merrill Lynch analyst Paul Kelly in a recent note to clients. He has a neutral rating on Celera.

NOTHING IN TRIALS. That means drug discovery will have to generate the company's future growth. The payoff, however, won't arrive any time soon. Last year, Celera shelled out $175 million in stock to acquire Axys Pharmaceuticals, which specializes in drug chemistry and early-stage drug testing. Axys gives Celera the skills needed to identify and eventually develop new drugs based on genetic research, but Kelly describes the company as "still in the formative stages." Even with Axys in its stable, Celera has no drugs in clinical trials. "This year is not likely to produce many galvanizing events," Kelly says.

As the clock ticks, Celera's resources are being drained. It lost $15.7 million on revenues of $27.3 million in the first quarter of 2002. While that was significantly less than the $25.7 million lost during the same quarter a year earlier on revenues of $18.3 million, analysts expect higher operating expenses from its drug-discovery efforts to increase red ink in the second quarter -- to $33.8 million on revenues of $35 million. For all of 2002, analysts project a loss of $133.6 million, slightly more than Celera's expected sales.

Of course, Celera deserves credit for sparking the genomics revolution. Venter & Co. provided much of the buzz for the biggest biotech rally in history. But other companies that also helped ignite the fervor, including Millennium Pharmaceuticals (MLNM) and Human Genome Sciences (HGSI), are now much further along in developing their own drugs. With Venter gone and Celera burning through millions per month trying build its in-house drug unit, the onetime king of the genomics revolution doesn't look so invincible anymore. Shook covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online

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