Rosetta Inpharmatics: Translating Genes into Profits?

Merck's acquisition of the genomics pioneer may give the No. 2 pharmaceutical company a huge advantage in developing new drugs

By David Shook

For years, it has been a mantra in the field of biotechnology: Someday, the study of genetics will dramatically accelerate the discovery of life-saving drugs. There was just one problem. This area of science, better known as genomics, was mostly left to pioneering startups, while the big pharmaceuticals watched and waited on the sidelines.

Until now, that is. Merck & Co. (MRK ) widely regarded as having the best research and development shop among the major pharmaceuticals for the discovery of medicines, announced on May 11 its acquisition of Rosetta Inpharmatics of Seattle for $620 million in stock. Suddenly, the nation's second-largest drug company appears to be embracing genomics, which could could mean a big leap forward in this promising area of medical research. "This is a hallmark event for Merck," says Richard Evans, pharmaceutical analyst for Sanford Bernstein & Co. in New York.

While the acquisition of Rosetta didn't grab much attention at first, scientists are now calling it a coup. "There aren't many companies in the same league as Rosetta," says Viren Mehta, of Mehta Global Partners in New York. Adds Geoff Duyk of the biotech firm Exelixis, "They've been one of the cornerstone technologies in this first generation of genomics."


  Founded five years ago by scientists at the University of Washington's Fred Hutchinson Cancer Research Center, Rosetta went public a year ago amid a flurry of biotech IPOs. The industry quickly embraced its technology involving functional genomics, which gives scientists the ability to predict how a medical compound will interact with different kinds of cells in the body. This huge area of genomics is filled with great potential for the discovery of new medicines.

Granted, the payoff won't come anytime soon. But Merck's acquisition, which is pending approval from Rosetta's shareholders, gives the pharmaceutical giant a decided advantage over its peers in the long run, industry analysts say.

"There's a realization among the big drug companies that it may not be possible to build this kind of genomics technology in-house," says Chris Stanley of Cambridge Pharma Consultancy in Cambridge, England. "You can almost feel sorry for these companies in the genomics era because they've purchased huge and complex databases and technologies from the likes of Incyte Genomics (INCY ) and Affymetrix (AFFX ). Now the industry is overloaded with information. Rosetta is above that. It takes all that information and produces something understandable and manageable."

To understand Rosetta's science and why it may be so important, first consider the cost of developing drugs in the traditional manner. Pharmaceutical companies labor through a painstaking process that involves a little bit of luck with thousands of repetitive, manual tests of compounds and how they react on different cells.

"Historically, the way companies pursued drug development was to spray and pray. They would take a compound and just try to see if it had any activity in addressing a certain disease," says Peter Cohan, an independent investment manager in Marlboro, Mass. It can cost companies $400 million to $500 million and 10 to 14 years to develop a drug that way.


  Rosetta's science could help Merck quickly sift hundreds of its own promising drug targets and identify the most likely blockbuster medicines. At the very least, it should save Merck hundreds of millions of dollars in discovery and development costs. "One of the things we realized early on was that genomic capabilities may be more significant after a company has chosen a lead compound or target rather than before," says Stephen Friend, founder and CEO of Rosetta. Scientists, adds Friend, "now say that finding drug targets is less significant than taking some of the existing targets forward."

Why? The answer lies in the science of genomics. A cell's DNA encodes a substance called messenger RNA, which makes the proteins that regulate all the functions of the body. The Human Genome Project gave scientists a rough catalog of genes in the human body, but deciphering their RNA and the proteins they yield is a far more arduous task. Such a catalog can't be constructed using computers alone, so Rosetta is using a proprietary screening technology to validate and refine the computational predictions about genes and their role in disease. This "gene expression" information provides an understanding of how a drug compound might affect any type of cell.

"The problem isn't a shortage of drug targets. There are way too many of those with not enough known about them," says Merck's Tony Ford-Hutchinson, chief of discovery and the architect of the deal. The problem, he points out, is figuring out which are the best to go after. "Every time you do something with a cell, even if you have a very selective drug, it implements many other processes in the cell," he says. "There's a need to look at the whole pattern of changes in a cell. It requires a completely new way of thinking."


  Therein lies Rosetta's value. Just as archaeologists used the the Rosetta Stone to unlock the mysteries of Egyptian hieroglyphics, Rosetta's scientists aim to crack the codes in genes that explain how and why proteins in the body cause or prevent disease. While scientists have mapped the genome, nobody has deciphered what the map tells us.

For Merck, Rosetta's technology provides answers to the most expensive question scientists ask: Will the body accept a compound that seems effective in treating disease in the lab? "The way we traditionally do things, we lose most of the development candidates -- I'd say four out of five -- to toxic side effects," Hutchinson says. "The power of this technology is that the side effect probably can be predicted early on by some changes in gene expression patterns."

With Rosetta at its side, Merck is the first of the major pharmaceutical companies to fully embrace genomics internally. Now it's preparing to reinvent the way it goes about discovering new drugs. Five or ten years from now, Pfizer (PFE ), Bayer, or Johnson & Johnson (JNJ ) may be kicking themselves for letting Rosetta slip away.

Shook covers biotech for BusinessWeek Online

Edited by Douglas Harbrecht

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