The success of the Human Genome Project has spawned dozens of new companies focused on unlocking the secrets of why genes behave the way they do. The goal: Find clues about the causes of genetic disease and, ultimately, the next blockbuster medicines that will treat or prevent these diseases (see BW Online, 6/21/01, "Rosetta Inpharmatics: Translating Genes into Profits?"). In the middle of this hunt is Geoffrey Duyk, one of the many pioneering scientists at a new genomics company.
As chief scientific officer at Exelixis (EXEL ), based in South San Francisco, Duyk is overseeing the company's primary technology -- the study of genetic mutations in simple organisms, such as the fruit fly, to better understand how mutations cause disease in humans. Because we share thousands of genes with even the simplest organisms, the genetic mapping of a fly can reveal much about human genetics.
The big question for Duyk: Will Exelixis yield the kind of results it needs to reach profitability? The company's stock has doubled from $8 to $16 in the last two months, but that's way down from a high of $50 a year ago. For the first quarter, the company reported a net loss of approximately $9.8 million, or $0.22 per share, excluding noncash charges for stock-compensation expense and amortization of goodwill and intangibles. This compares to a net loss in the same quarter last year of $4 million, or $0.14 per share. Revenues increased to $7.7 million from $6.0 million in the last year, but sales come entirely from collaborations with the pharmaceutical industry, which buys Exelixis' science.
Recently, BusinessWeek Online biotech correspondent David Shook talked with Duyk about the company's science and business strategy. Here are edited excerpts from their conversation:
Q: Why Exelixis is looking at simple organisms as a means to discover drugs for humans?
A:One of interesting observations of the last 20 years in biology is that Mother Nature has been very conservative. Once she has found a signaling pathway in cells responsible for carrying out certain biological functions, she has tended to reuse it over and over again as opposed to inventing a new pathway. This is evolution reusing components that are already there. It's sort of like computer code: If it works, you modify based on the original model, not rewrite from scratch. That is why we start with simple organisms.
Q: So how does mapping the genome of a fruit fly translate to human drug development?
A:There are two major conclusions drawn from the human genome sequence this past year: First, there are fewer genes than we thought, maybe 35,000 in humans. Second, fruit flies, zebra fish, and other simple organisms have many of the same genes we do. We're taking advantage of the simplicity of these organisms. They provide a rational basis for identifying drug targets by looking at evolutionary conservation.
We take information from the fruit fly and use it as the basis to test a hypothesis in human microbiology. We say: "This is how these genes probably behave in more complicated organisms." We've found it to be very predictive.
Q: Give me an example.
A:A good example can be found in the genetics of cancer. There is a gene called p53, the most commonly altered gene in cancer which, through a series of mutations, lead to cells growing in aberrant fashion -- forming a tumor. Normally, the gene has a protective mechanism which tells the cells to kill themselves when they reach a certain point. In cancer, cells accumulate because they don't have the gene to control abnormal growth.
So from a therapeutic point of view, we figure out how to restore that mechanism in absence of p53. It's like trying to bypass a short circuit. We're trying to bypass p53 and restore normal regulation of cell proliferation. We want to remove the activity of the gene altogether and systematically turn on and off other genes that might help restore normal control.
In a simple organism, we're rewriting its genetic program so that it no longer has p53 activity, or has reduced activity. It's like if someone steals a car by breaking the steering column. They can't put the key in, but by crossing wires, the thief bypasses the normal mechanism by looking at alternative ones.
Q: And from there, you look at the genetic code in humans for similarities?
A:From there, we look at a mammal to make sure the wiring is still the same in the genetic code. What we want to do is genetically rewrite the program. We can't do that in people, but we believe we can develop a drug candidate which can do it.
Q: This is fascinating laboratory work, but how do you justify your research in the commercial sense? Exelixis is a public company, after all. It doesn't seem like you'll be able to develop a drug from this technology for several years.
A:What we're doing is sharing knowhow with other companies, doing research collaborations with many of the biggest names in the pharmaceutical industry. Each of our partners tends to work with us in a particular field. So, for example, with Pharmacia [PHA ], it's Alzheimer's and Type 2 diabetes. With Bayer, it's insecticides. With Aventis [AVE ], it's agricultural plant traits. And with Bristol-Myers Squibb [BMY ], they're providing us with proprietary compounds in which they don't completely understand the mechanism of action. All of these companies pay us for information we develop, and if they eventually produce products from that information, we get milestones and royalties.
Q: Exelixis has $108 million in the bank, compared to $112 million six months ago. So what about developing drugs internally? Is that part of the company's long-term business model?
A:Yes. We've been successful enough on the collaborative front to invest in our own internal discovery program. [Exelixis spent $15.7 million on R&D in the first quarter, compared to $7.7 million in the year-earlier period.] Internally, we're working on cancer and angiogenesis [the study of blood-vessel formation that accompanies tumor growth].
Q: When do you hope to turn a profit?
A:We haven't talked about profitability at this point. We've talked about what our cash burn rate is and what it will be going forward. Right now, we're looking at a burn rate of between $30 million to $35 million a year. Remember, we're still an early-stage company still building out our infrastructure. We have sufficient capital, but profits are still far off.
We have over three years of cash in the bank even if we sign no more deals going forward. But we're committed to doing at least two pharmaceutical collaborations each year. This year, Exelixis has signed one deal so far, a partnership worth $38 million over two years with Protein Design Labs [PDL ] to develop anticancer agents.
Q: You're working with some top-secret information, for instance, Bristol-Myers' proprietary developmental compounds. With so many external relationships, doesn't that limit your ability to be acquired by another company?
A:Almost every relationship Exelixis has contains a change-of-control provision that says, "I'm willing to purchase Exelixis with these collaborations still in good standing." But to answer the question, yes, it does create a barrier to being purchased. That's fine with us. We'd like to be able to prove to ourselves that we can actually bring products to the market. We're not setting ourselves up to be sold.
Edited by Douglas Harbrecht