Winners and losers emerge in genomics industry

A separation is already occurring between those companies in the genomics arena that will reap the rewards of their activities, and a second tier that will struggle to survive as the economic downturn continues, according to analyst Edward Tenthoff of UBS Piper Jaffray.

"The three-year bear market has imposed a Darwinian discipline on the sector. Investors are demanding a visible 'path to profitability' and, as a result, companies are conserving cash, reducing burn rates, and focusing their efforts on later-stage/downstream programs,"​ said Tenthoff. The result is that companies with weak balance sheets are beginning to fail, often getting acquired at, or even below, cash value, he added.

At present, there is ample opportunity for investors to back the winners, i.e. those companies that are providing future drug targets for the pharmaceutical industry, he noted.

The report suggests that the features that characterise the winners in the genomics industry include a focus on target discovery and drug development, a combination of both genomics and proteomics capabilities and expertise in both biology and chemistry. The cream of the crop tend to have compounds already progressing in the clinic and/or Investigational New Drug filings and are active in securing partnerships and collaborations.

Tenthoff believes that Human Genome Sciences, Exelixis, Myriad Genetics, Lexicon Genetics and ZymoGenetics are distancing themselves from the rest of the pack. HGS, for instance, should start several Phase II trials of genomics-derived drug candidates over the next several months. However, "this not to say that the remaining genomics discovery names will fail,"​ he cautioned.

For example, he pointed to Celera Genomics as being very well financed and with a significant drug development capability. Meanwhile, CuraGen has strong partnerships with Abgenix for antibody development and Bayer for small molecules, and deCODE genetics has what he described as a unique discovery platform with near-term drivers. Nuvelo and Incyte are also mentioned, as they have reinvented themselves through acquisitions and new management teams.

However, Tenthoff maintains that these smaller discovery names will have to file INDs and/or enter into significant collaborations to generate value, otherwise they risk being acquired.

Other trends in the genomics sector at present include an acceleration in partnering, which has slowed over the last couple of years but looks set to go up a gear as the capital markets pick up and provide more funding for drug development. Genomics companies stand to benefit from this trend, notes Tenthoff, because many of the biotech pipelines have been picked over and partners are looking at earlier-stage projects to find value.

"Since the genomics discovery sector lacks sufficient resources to develop the vast number of novel targets on its own, we expect pharma and biotech to more aggressively in-license or partner validated targets and clinical compounds to augment diminishing pipelines,"​ continues the report.

Once this kicks in, those companies that have added to their capabilities with technologies such as functional genomics, proteomics, pharmacogenomics and chemistry, and particularly downstream drug development capabilities, will be in a stronger bargaining position, according to Tenthoff.

"As a result, these companies are able to negotiate with more to offer, retain a greater portion of end product ownership, and maximise return on their discoveries,"​ he said.

This trend has been most prevalent in the bioinformatics space as databases have fallen out of favour, resulting in declining subscription revenues, and leading companies to concentrate instead on using their technologies for in-house drug development.

For more information on this report, entitled Genomics Discovery Industry Overview, please contact Susan Beatty​.