COPYRIGHT UCT. Celera Genomics: Commercial Genomics and the US Biotechnology Industry. Case Study Research Report. presented to

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1 Celera Genomics: Commercial Genomics and the US Biotechnology Industry Case Study Research Report presented to The Graduate School Of Business University Of Cape Town in partial fulfilment of the requirements for the Masters of Business Degree by Zeanid Breyer 30 November 2000 Supervisor: Professor Gary J Stockport

2 Table of Contents Introduction...3 The Biotechnology Industry in Human Biotechnology...5 Genomics...6 Issues facing the Biotech industry...7 Background Dr Craig Venter...8 Celera Genomics...10 Making a start...10 Strategic Alliances...11 Internet based business model...13 Market segments...14 Pricing...15 Customer acquisition and retention...15 Celera s Patents and Copyrights...16 Celera s Products...17 Databases...17 Bioinformatics and comparative tools:...18 Rapidly evolving product lifecycle...18 The Celera Strategy...19 Speed...19 Staffing...20 Reaching for the future...21 Competitors...21 Celera and Proteomics: the next wave...24 Future challenges...25 Bibliography

3 Introduction Dr Craig Venter and his team at Celera Genomics had accomplished what sceptics in the Genomics industry held, was an impossible task. On May 1988 Dr Venter had launched Celera with the company s mission was to become the definitive source of genomic or human gene data to the life sciences industry. The company raised a handsome $ at IPO in June The first goal set by the brash company was to map the human genome. The human genome is the complete set of genes in our body and holds the key to unlock human physical frailty and how to cure it 2. Many efforts, public and private across the globe, had been underway to map the genome. One such public foundation, the Human Genome Project (HGP), set its target for the completion of the mapping of the human genome by the year Industry critics held that this was too ambitious a target. By May 2000, the HGP had spent $250 million on its effort to map the genome with nearly 1,100 scientists working on the project 3. That Celera accomplished the task only 9 months after it started it human genome project has received wide acclaim, even from Dr Venter s foremost critic, Dr Francis Collins, head of the HGP. The HGP criticised Celera s efforts and questioned the validity of Celera s data and the held that Celera had fallen short of sequencing the genome of 500 individuals. The debate and arguments over validity of data had begun and so had the race for the functions of the genes that Celera had just mapped. While the animosity between the organisations was well known, it epitomised the rivalry the Biotechnology era was entering. With this in mind, Dr Craig Venter proudly announced at the White House that, Today, June 26, 2000 marks a historic point in the year record of humanity. We are announcing today that for the first time our species can read the chemical letters of its genetic code. The genome sequence represents a new starting point for science and medicine with potential impact on every disease. 4 Despite having accomplished this, Dr Venter knew that the Genome was worthless unless he could make the genomic mapping useful to enable biotechnology and pharmaceuticals to speed up drug discovery. With pharmaceuticals and biotechnology companies discovering the opportunities that genomics offer, industry consolidation became more of likelihood. This would pose a threat to Celera as it profited from the current industry structure. Despite being first to market with the mapping of the 3

4 human genome, the company knew that it could not lose this crucial advantage and had to stay ahead of the game in order to be competitive. Dr Venter felt that individualised medicine would be a reality in the future but wondered about Celera expanding beyond the genomics field to include drug development. The alternative might be that Celera would have little to offer if the genomics boom died down, especially considering the genomics industry within the biotechnology sphere was a relatively young industry between 5 10 years old 5. Moreover, the company s soaring losses was similar to other companies in the genomics industry who were experiencing massive losses. Building a sustainable revenue model was therefore an imperative as criticism was increasingly levelled at biotechnology companies for not delivering on promises to investors. Celera was already facing litigation from several stockholders and this was a key concern to Dr Venter. The Biotechnology Industry in 2000 Biotechnology companies have received mixed reviews for their profitability. Ex Smith-Kline Beecham head, Jan Leschly stated at a biotech conference in London in November 2000, that over the past fifteen years, 1900 products were developed by biotechs in clinical trials, however only 37 drugs made it to the market. He called biotechs a bad investment 6. Biotechs therefore are increasingly under pressure to perform and deliver especially when compared to the more established pharmaceuticals. Dr Venter was acutely aware of these sentiments and expressed his strong belief at the Gene Media conference, that the genomics industry and mapping of the human genome would change this paradigm 7 Prior to 2000, companies used to be completely reliant on the financing provided by venture capitalists 8. This is however is no longer the case. Biotechnology industry sales are key indicator for the market size. Sales increased dramatically by 20% from 1996, which suggests the industry's commercial viability. Biotech sales reached $13 billion in 1997, a 20 percent increase over The number of patent applications has increased on average 10% every year with the number of patent examiners also doubling from 1997 to Biotechnology is one of the most research-intensive industries in the world with the U.S. biotech industry spending $9.9 billion in research and development in human biotechnology alone in The Federal Drug Agency (FDA), the Environmental Protection Agency (EPA) and the Department of Agriculture regulate the biotech industry. At the end of 1988, there were 1,283 biotechnology 4

5 companies in the United States. In terms of market potential the biotechnology industry represents a myriad of opportunities, for example, two University of Chicago researchers established in 1999 that that the economic value of reducing deaths from cancer in the U.S. comes to $46.5 trillion 10 The industry sports many broad fields such as environmental, industrial and agricultural biotechnology. The most significant impact though is human biotechnology. Human Biotechnology The Biotechnology Industry Organisation (BIO)based in the US, also the largest industry organisation in the world, holds that the most significant impact of biotechnology is the sector responsible for the development of nearly 350 biotechnology drug products and vaccines currently in human clinical trials and hundreds more in early development in the United States 11. These medicines are designed to treat different diseases such as cancer, Alzheimer's, heart disease, multiple sclerosis, AIDS, obesity and other conditions. BIO maintains that over 200 million people worldwide have been helped by the more than 80 biotechnology drug products and vaccines approved by the U.S. Food and Drug Administration (FDA) 12. Human biotechnology is also responsible for hundreds of medical diagnostic tests including pregnancy tests and DNA fingerprinting. The latter however has met with resistance in that it may contravene an individual s right to privacy. This is probably akin to the resistance to patent registration. Dr Venter expressed that even he was opposed to the idea of registering patents on life, as they became known as, but considering the amount of funds that biotechnology and pharmaceutical companies spend of research and development, he know believes that patents are the only way to ensure that these industries will continue to investigate cures to life threatening diseases. The biotechnology industry faces many challenges. Several days before BIO held its 2000 annual conference, environmentalists and other industry observers held the BioDevastation conference to voice their concerns over the impact of Biotechnology. Some environmentalists and biotechnology ethics proponents hold that advances in biotechnology raise ethical concerns regarding the medical sector of the industry 13. The rapid advances in the genomics arena may have fuelled these fears. While the broader sectors of environmental, industrial and agricultural biotechnology are well established, the field of genomics within the human biotechnology is considered to be the new kid on the biotechnology block 14. 5

6 Many different players dominate the different sectors within the human biotechnology. Companies such as Amgen and Genentech are established (more than 5 years old) with drugs on the market and several drugs in their pipeline. Many start-ups such as Lion Bioscience, a software provider to industry, are making inroads in establishing its computational biology tools as the industry standard. Incyte genomics is second to the US government in the number of patents it currently holds. Like Celera, the company started out with the genomics model and expanded into drug development. Celera was a two-year young company compared to veterans, such as Amgen and Genentech in genomics time. The company had the crucial first to market advantage and this aided it in raising the barriers to entry as it could apply for patents based on the genome information. While industry analysts have had scepticism over the usefulness of the genome, they have also doubted the company s ability to repeat its success. With Celera s fruit fly and mouse genome, sceptics may be proved wrong. Genomics Genomics is the study of genes and their functions. Companies in this sector typically sell services and tools, with some developing their own drugs 15. Technology has been crucial to this sector as it allowed researchers to collect data and human genes on a massive scale and to analyse how they cause diseases. Celera has set its goals to be the premier provider of genomics data within the genomics industry. Within the Genomics sector there are various sub sectors such as functional genomics, which seeks to find the therapeutic benefit of mapped genes as opposed to structural Genomics, which creates reference library of genes 16. The Genomics industry is said to be the engine driving drug discovery 17. Pharmaceuticals have long been the dominant players in the drug discovery and treatment of diseases arenas; drugs are usually developed over years time. In the drug development process, pharmaceuticals usually start with thousand of compounds and reduce the number to a few promising compounds as more information is gained. Genomics has changed this paradigm through introducing products and tools that significantly reduce the drug discovery process by targeting disease-causing genes more accurately and with larger analytic power. The genomics sector in particular is characterised by high losses with Celera reporting losses of $92 million as at June Its competitors such as Incyte Genomics, reported $million in losses in June

7 Within the genomics arena, there are in turn other sectors. While the sectors appear to be well defined, many companies are moving to add more services to include those offered in other genomics fields. These sectors within the genomics industry are: Table 1: Genomics subsectors and players Subsector through function Companies Make the tools or the equipment for gene discovery PE Biosystems, Hyseq & Affymetrix Use the tools to build databases and sell library subscriptions to Celera and Incyte pharmaceutical companies Use the tools to provide high throughput target screening Use the tools to build databases as well as develop the potential drug compounds they have identified Pure bioinformatics companies that focus on developing software Cubist, Aurora Bioscience Human Genome Sciences and Millennium, Amgen and Genetech Quark, Lion Bioscience to create the sequencing power Source: SalomonSmithBarney, 2000 The biotechnology value chain now includes these genomics companies. Some pharmaceuticals are developing their own bioinformatics capabilities, which they view as proprietary. While these pharmaceuticals have traditionally focussed on identifying therapeutic targets, then proceeding to an understanding of a confined set of genes, the genomics companies offer a greater understanding of genes on a large scale, which effectively opens the possibilities for therapeutic targets. An offspring of genomics, called pharmacogenomics, offers insights into how diversity affects drug toxity and efficacy. It is this area that particularly interest Dr Venter as many deaths are caused by patients suffering side effects from lifesaving drugs, due to their genetic diversity. This arena offers a glimpse of what Dr Venter considers being the future, i.e., that of individualised medicine. Pivotal to the realisation of individualised medicine, is that scientists know which genes together make up a protein. An incorrect coding for a certain protein is what leads to disease. This arena is known as Proteomics and is a relatively new specialised area in the biotechnology field. It is an evolution of genomics, the endpoint being a therapeutic cure to a disease. Issues facing the Biotech industry At BIO s congress in March 2000, it identified many priorities and likely legislative reforms for the biotechnology industry. BIO reported that medical aid reforms in the United States could affect capital 7

8 formation to fund research of the industry. Naturally this will raise questions as to whether the reimbursement is adequate to encourage research and development into cures and therapies. BIO noted that there was a likelihood of the US government setting price controls on biotechnology products, which would negatively affect the industry. Moreover, current patent registration and approval and regulatory protocols cause delays and patent interference, costing biotechnology companies both time and money. Current patent law is also restrictive as far as biotechnology s ability to maximise innovation in the industry. Protecting patents abroad as well as favourable trade barriers are key to sustaining biotechnology export markets and is one of BIO legislative priorities. Commercial genomics discoveries now necessitate regulating genetic information that will protect patient confidentiality. Already ethics proponents in the industry argue that confidentiality should take precedence to biomedical research, where certain ethical issues are in dispute. It is conceivable therefore that Congress could consider banning funding for certain types of research. Already in April 1999, a (US) National Institute of Health panel began to draft guidelines and oversight mechanisms for regulating federally funded research using pluripotent stems cells. These cells are the crucial in the development of a human beings during the early stages of cell division in a foetus and are important test cells for diseases that are likely to inflict the foetus as it develops 19. Background Dr Craig Venter Born on Oct. 14, 1946, in Salt Lake City, Dr Venter earned a Doctorate in Physiology and pharmacology from the University of California at San Diego. He entered the world of biochemical research at the National Institutes of Health. Frustrated at having to spend 10 years trying to isolate a single gene, Dr. Venter realized there was a quick way to fish out the genes, which in the case of humans occupy only 3 percent of the genome 20. Dr Venter served as a medial corpsman thirty-three years ago in Vietnam War. There he states he learnt firsthand how tenuous our hold on life can be. It is his experience in the Vietnam War that inspired his learning how the cells in the body work and interact to sustain life. Prior to 1992, Dr Venter served for several years as the Section Chief and a Laboratory Chief in the National Institute of Neurological Disorders and Strokes at the National Institute of Health (NIH). While at NIH, Dr Venter developed the Expressed Sequence Tagging (EST) method, which is a new 8

9 technique for gene discovery. He subsequently founded the The Institute for Genome Research (TIGR) in While at TIGR, he along with other researchers used the Expressed Sequence Tagging (EST) method to discover and subsequently publish one half of all human genes that have been sequenced. Using new algorithms developed at TIGR, Dr Venter and his TIGR colleagues went on to develop the whole genome shotgun method that led TIGR to completing the first three genomes ever sequenced 21. In this method, the human genome is in effect being torn apart as one would an encyclopaedia and then reassembled using mathematical algorithms contained in the special bioinformatics software. The conventional approach was to take each gene and methodically break it down into each building block and reassemble it. The controversial technique invited criticism form the scientific community. Dr Venter was convinced that in discoveries in science have to be achieved in the fastest possible manner. He later coined Celera s motto appropriately as Speed maters, Discovery cannot wait. While Dr Venter was known for his scientific accomplishments, he was also known for pushing the scientific limits by setting ambitious goals for the organizations he headed. The head of the National Center for Biotechnology Information stated, that "it has always been Craig's view that what is important is not some abstract view of the genome but its utility. Craig has always pushed in the right direction, and the public program at TIGR needed pushing. When he started Celera it made the public program open their eyes and take a different approach 22. During Dr Venter s time at TIGR he also successfully sequenced H.Pylori, the bacteria that causes stomach ulcers and B.burgdorferi, the pathogen that causes Lymes disease. TIGR published 14 genomes and chromosomes in scientific literature, for all to have access to. Dr Venter holds that there is likelihood that some will want to use the advances in human genomics knowledge as a basis for discrimination. Dr Venter disclosed that during a private discussion with President Bill Clinton, the President remarked that genetic discrimination is one of his major concerns about the genomics revolution. Regulation in this arena is therefore paramount and Dr Venter has addressed US Legislators on the reforms needed. Venter s vision was that, in the future, a simple genetic test may determine whether you are likely to be treated effectively by a given drug or whether you face the risk of being killed by the same drug. The future as I see it with medicine, it's going to get much more individualized. We are all treated as part of statistical populations that have nothing to do with each of us individually. Most drugs work on 30 to 50 percent of the population. They don't work on all of us. 23 9

10 While at TIGR, Dr Venter entered into discussion with Dr. Michael W. Hunkerpillar, president of the company, PE Biosystems, a division of Perkin Elmer Corporation. PE Biosystems later became known as Applied Biosystems and was known for its leading brand of DNA sequencing machines. Dr Hunkerpillar had developed a new, labour-saving generation of gene sequencing machines. He felt that a Private Company using a large suite of the new machines could decode the human genome faster than the government could. Dr Venter s technical judgment and organizational abilities appealed to Hunkerpillar, who later approached Dr Venter to launch the Private Company, Celera Genomics. Celera Genomics By May 1998, Perkin Elmer Corporation and Dr Craig Venter, then still working at TIGR, had signed letters of intent for the formation of a new genomics company, later to be called Celera Genomics. Dr Venter chose the name, Celera, as it is Latin for accelerate. Perkin Elmer Corporation would in part fund the organisation. Perkin Elmer, Celera s parent organisation, is considered to be the leading supplier of systems for life science research and related applications. It develops, manufactures and markets life sciences systems and analytical instruments used in markets such as pharmaceutical, biotechnology, environmental testing, foods, agriculture and chemical manufacturing. The company has more than 7000 employees worldwide with annual revenues of $1.5 billion in fiscal year Perkin Elmer is also the owner of Analytical Instruments Division, leader in the supplying a broad range of instruments to the pharmaceutical, environmental, food, chemical, petrochemical and related industries 24. Making a start Celera chose to locate its headquarters in Rockville, Maryland. Maryland was particularly appropriate choice given that local state officials embarked on a strategy to lure Biotechnology companies to the state with promises of competitive facility development rules 25. The facility houses a supercomputer with processing capacity few institutions can compete with. Many of the leading scientists, who worked with Dr Venter at TIGR, joined Celera Genomics. By the 31 st December 1999, a mere 18 months since the launch of the company, the staff had grown to 450 employees. The new Genomics Company was to become the definitive source of Genomics information that would be used by scientists to develop a better understanding of the biological processes in humans 10

11 and to deliver improved technology. Despite launching Celera in 1998, Dr Venter remained chairman of the board of TIGR. He was also a scientific founder of Human Genome Sciences, Inc, a company that is now one of Celera s competitors. In launching Celera, Dr Venter used the resources of its sister company, Applied Biosystems extensively. Applied develops and markets instrument based systems, reagents, and software and contract services to the life sciences industry and the research community. The company is headquartered in Foster City California. It has reported sales of $1.4 billion during fiscal 1999 and is a successful company in its own right. Dr Venter set up Celera s offices in record time and used Compaq and Oracle for infrastructure and database development. The recruitment of staff was heavily underway with many of the TIGR scientist leaving the organisation to join Celera. As at November 2000, staff numbers had grown to Dr Venter also launched Celera s its two other divisions, namely AgGen and SBU Genscope. AgGen specialises in agricultural biotechnology. While this division is not a huge revenue earner yet, it harnesses the technological successes that will enable it to use the same processing and sequencing speed for agricultural products such as seeds. In June 2000, the division purchased a 40% of the equity of Agrogene, an agricultural DNA testing laboratory in Moissy- Cramayel, France. The investment will enable Celera AgGen to extend its automated DNA sequencing and genotyping services to the European market 27. SBU Genscope offers genomics-related products and services including gene discovery, target discovery and validation, efficacy and safety assessment, and pharmacogenomics study services Strategic Alliances During 1998, Celera entered into a strategic alliance with Compaq, it provided Celera with state of the art integrated hardware, engineering support networking and services solutions. Compaq holds that Celera s computer centre is comparable to the US Department of Energy s Defence laboratories. Celera s data centre went online in February Celera s gene sequencings power was made possible by Celera s ongoing partnership with Applied Biosystems (AB). This alliance was crucial in providing the young company with much needed technological competencies that would enable it to do its business. Through the existing skills of AB, Celera s learning curve was dramatically reduced. This could potentially be a double-edged sword if 11

12 AB provides its products to Celera s competitors. The parent company, Perkin Elmer has however stated that the groups may compete in a business that is not a principal business of the other group, as to do so may destroy shareholders value. The Celera Genomic group's operations require a variety of raw materials, such as chemical and biochemical materials, and other supplies, some of which are occasionally in short supply. The Celera Genomics group depends on the AP Biosystems (AP/PE) group for several critical materials required for sequencing. March 1999 saw Celera AgGen entering into a research alliance with Rho Bio, a biotechnology company. Rho Bio has an extensive network and reputation for delivering agricultural products. Celera s alliance here would allow it to receive royalties resulting from sales of any products developed through this research-based alliance. Moreover, the alliance with Rho Bio s parent, Rhone Poulenc Pharmaceuticals was to identify targets for a number of human diseases. In November 1999, Pfizer, a large pharmaceutical purchased subscription to Celera s database. A key part of the agreement was also a collaborative gene discovery arrangement. Celera would provide Pfizer with genomics data, on a non-exclusive basis. Pfizer would then incorporate these genes into their discovery development and commercialisation pipeline. The collaboration confirmed Celera s dual role of being a supplier to Pharmaceuticals in the drug development value chain. Celera s longterm objective is to develop drugs hence the alliance with Pfizer supports this course. The company has reassured pharmaceuticals that it would use large pharmaceutical partners who have the infrastructure, skills and resources to test the drugs and commercialise them 28. During December 1999, Celera entered into an agreement with Molecular Applications Group to use their Panther technology. The technology includes powerful software tools designed for rapid and accurate determination of gene and protein function. The software focuses amongst other areas, on protein classification. This alliance supports Dr Craig Venter s contention that the key is focussing a huge amount of resources on Proteomics. Proteomics is considered to be the next stage in genomics. Its association with Geron Corporation, a leader in pluripotent stem cell biology in early human development, to help development of small molecule pharmaceutical, protein therapeutics, cell and gene therapy products and prenatal diagnostics. Celera s collaboration with Life Science Technologies, a provider of products and technologies for life science research and bio production to 12

13 create a comprehensive collection of clones containing human full-length genes and the corresponding sequences of such genes. The agreement provides that the parties will share revenues generated by the results of this agreement, which will include sale of clones and licensing of intellectual property. While the move confirms the company s commitment to developing therapeutic drugs, is it also a mixed blessing. In November 2000, Celera entered into an alliance with Lion Bioscience. The company s founder was the inventor of software that Celera s discovery system is currently using to deliver its products via the Internet. Lion s vice president holds that It goes far beyond the usual gene sequence analysis software. We crawl further up the value chain to include the chemical side, and also pharmacological and toxicology data. The statement exemplifies the changes in the biotechnology industry with many companies realising that they need to move into other fields in order to boost their revenue. Lion s also provides its premier bioinformatics software to pharmaceuticals such as such as Smith Kline Beecham, Novartis and Bayer. Because Celera also develops it own bioinformatics capabilities, industry analysts considered Lion Bioscience to be Celera s competitor in terms of establishing industry standards for bioinformatics tools. The alliance signals Celera s strategic choice to not enter into an all out war with competitors (including Incyte) to establish it own bioinformatics software as the bioinformatics industry standard, but to ally with a company that large pharmaceuticals are already using. Internet based business model Through the use of Celera Genomics' comprehensive and flexible technology platform, it has the capability to package and market life sciences information solutions specific to the needs of customers that seek to use the information for commercial applications in the pharmaceutical and life sciences industries. This has been done through Celera s Discovery system that delivers information to its customers via the Internet and customer Intranets. In this way, Celera Genomics has taken advantage of portal opportunities for the creation of e-commerce revenue. The company was acutely aware that it needed to deliver its products to customers with different platforms in different geographical areas. Celera designed its databases and platforms that can be integrated with databases of other Genome efforts worldwide. To ensure interoperability between platforms, management are proactive in setting industry standards for the type of architecture in use. Through Celera s alliance with Lion Bioscience, software provider whose products are being used by nearly 50% of the industry, Celera is attempting 13

14 to set the industry standards. Because of its newfound power as a result of the mapping of the human genome, it can safely dictate standards at this stage. Subscribers have access to Celera s database via the company s on-line system called Celera Discovery system (CDS). This system provides a fast and convenient way to execute a thorough genome analysis using Celera s proprietary database, public and third party databases with visualisation tools in one system. The Celera databases are integrated with public and third party content. CDS provides access to state of the art assembly and annotation/marking of Celera genomes. Through Celera s information infrastructure, clients can manage and mine the complex information. Celera users have access to the databases and analytic tools by means of dedicated and secure communications through secure VPN or the Web. CDS has customer support centres that provide technical training and support to subscribers and users. First time customers however cannot subscribe on-line and are instead directed by the website to call Celera s offices 29. Market segments While the company set its goal in May 1988 to eventually have all life science organisations and private companies as their subscribers, they have had to make incremental progress because of the nature of their products. The first step was for Dr Venter to hire Scott Patterson, who has a successful career in customer relationship management. The company currently has 13 customers, which include hospital, academic institutions, pharmaceutical companies, other genomics companies as well as governments such as the Australian Government. The pharmaceutical customers are Pharmacia Corporation, Novartis, Amgen, Takeda and Pfizer. The pharmaceutical industry is a US$350 billion a year global industry 30. Pharmaceuticals are therefore key customers in terms of the revenue they bring to Celera. They also provide input for improvement to Celera s databases. Through a unique arrangement with the Australian Government, Celera has allowed all the Australian Government key hospitals and state run research institutes, membership. The agreements provide that should Celera assist the customer in finding a specific target pre-identified by the customer, Celera would not have any rights over the resulting product. In some instances Celera has agreed to share in the result of a therapeutic product. Celera s own mission is develop medically important genes for use by the pharmaceutical and biotechnology companies form among the human genes. 14

15 Amongst Celera s customers is the Weizmann Institute in Israel as well as the Shanghai Gene Core company, a wholly owned Chinese Republic biotechnology company. The geographical boundaries are no barrier because of the Celera Discovery System (CDS). Pricing While Celera provides press releases on the customers, financial details of the agreements are not disclosed. The company maintains that pricing for subscriptions to their databases and other services varies depending on the product, the customer and the application. This varied pricing also prevents Celera from allowing potential customers to sign up on-line. The rates are dependant on the customers resources and the appraisal of the value that Celera adds. Celera created an information based business model for Biotech companies where Celera s compensation is a combination of subscription fees and potential milestones and royalties from products developed from Celera s information. An example of this is Celera s relationship with Immunex, a biopharmaceutical who became Celera s first customer under this program. Under Celera s academic subscription, customers pay rates dependant on the nature of the subscription, size of the institution and the number of users. Customer acquisition and retention In order to generate significant additional revenues, the Celera Genomics group must obtain additional customers and retain its existing customers. Celera Genomics' ability to retain existing and add new customers depends upon customers' belief that Celera Genomics' products can help accelerate their drug discovery and development efforts. Although customer agreements typically have multi-year terms, there is no assurance that any will be renewed upon expiration. The Celera Genomics group's future revenues are also affected by the extent to which existing customers expand their agreements to include new services and database products. It is therefore important for the company to regularly add to their existing product offering. In some cases, the Celera Genomics group may accept milestone payments as mentioned earlier or even future royalties on products developed by its customers as consideration for access to Celera Genomics' databases and products in lieu of a portion of subscription fees. Celera has publicly admitted that current arrangements with customers with respect to these royalties are unlikely to 15

16 produce revenue for Celera Genomics group for a number of years, if ever, and depend heavily on the research and product development, sales and marketing and intellectual property protection abilities of the customer 31. In order for Celera to obtain customers, they have to convince the potential customers that Celera s genomic information products and value-added programs will help accelerate the customer s drug discovery efforts. The company maintains that its group's sales cycle is typically lengthy because the Group needs to educate potential customers and sell the benefits of its products and services to a variety of constituencies within the customer s companies. In addition, each agreement involves the negotiation of unique terms. Celera may expend substantial funds and management effort with no assurance that an agreement will result. Furthermore, the customer base is also dependent on the existing structure of the industry, in terms of which pharmaceuticals have limited competencies in the specialised field of Genomics and other areas such as bioinformatics. Celera s Patents and Copyrights Under US law, provisional patent applications are filed with the Patents and Trademark Office. The responsibility then rests on the company to file an actual patent application within one year of the provisional application filing date, failing which the provisional application lapses. US legislators are currently considering raising the bar to registering patents. While Dr Venter welcomes the recognition that legislators are giving patents, he fears that the bar may be raised too high which would discourage innovation and research. He has therefore participated in speaking to legislators on Capitol Hill and suggesting the type of reforms that are needed. As at November 2000, the company has filed nearly provisional patent applications fuelling the debate that scientists intend to register the much debated patents on life. At the Gene Media conference in 2000, Dr Venter stated that most of these applications would lapse. Provisional and actual patents however, no doubt constitute a significant barrier to entrants to this market. Despite this advantage, Dr Venter disclosed that of all these provisional applications, it is likely that only 3 will be developed by pharmaceuticals on behalf of Celera

17 Another key concern for the CEO is the fact that copyright law currently provides uncertain protection to the companies such as Celera, that provide database information to subscribers via the Internet. Celera is uncertain whether it can prevent others from reselling their data under current law. Even if legislation did protect intellectual property, Celera is uncertain of the logistics in terms of enforcing the law abroad. Celera s Products In terms of Celera s strategic alliance with Compaq, it provided Celera with state of the art integrated hardware, engineering support networking and services solutions. Celera s data centre went online in February It is said that Celera has the world s largest computing centres and has assembled more sequencing power under one roof than anywhere else on earth 33. Through Celera s proprietary gene tag technology, subscribers can accelerate drug discovery and development by simultaneously discovering novel genes and monitoring known genes for applications in molecular toxicology, gene discovery and pharmacogenomics. Subscribers therefore have access to Celera s databases as well as Celera s analytic, computational tools. It is these very bioinformatics tools that industry critics hold, has caused the rise in commercial genomics and the proliferation of genomic techniques in biology and medicine. By some estimates, the total market for bioinformatics including custom databases could exceed US $2B by Celera s product offering can therefore be summarised as follows: Databases These evolving and integrated databases comprise of both genome and functional genomics information. These genome databases can be compared with others within the CDS system and other database residing on other genomic companies computers to help researchers understand gene function and the ways in which genes and proteins operate within cells. The databases and their functionality are listed below: 17

18 Table 2: Databases DATABASE Celera SNP Reference Database. Human Gene Mutation Database (HGMD) The Human Genome Database Human Genome Index DESCRIPTION The database boast some 2,000,000 SNP s representing 75% of common alleles in the human genome. The genome sequencing is based on the sequencing of 5 individuals from an African, Hispanic and Chinese ethnic backgrounds. The reference genome is fully integrated with other databases This database contains known Human Gene Mutations This database contains the complete human genome sequenced through the whole shotgun method developed by Dr Craig Venter and colleagues This database contains 1.6 million expressed sequence tags (EST S). The EST s are assembled using proprietary algorithms resulting in a higher degree of confidence. The database contains links to other genomics libraries, which include public databases, mapping data and detailed genomic data. Drosophilia Genome Index. Mouse Genome Database. Celera Humanised Mouse Source: Bioinformatics and comparative tools: This database contains the gene sequencing information from the Drosophilia Melanogaster and the Drosphilia gene index. The Drosophilia Genome index contains EST s and was built with the same functionality as the human gene index The database contains the preliminary sequencing of the mouse genome. The database is not complete and will eventually contain tools for comparing the mouse to the human genome, orthologs and chromosomes Celera has integrated the genome of the mouse with that of the human, which creates opportunities for a new model for human disease exploration. Celera s aim with this project is to perform regional assemblies of the mouse genome, which are similar to that of the human to make a humanised mouse The databases are only meaningful with the comprehensive set of bioinformatics tools that allow users to search, browse, visualise and analyse information and information relationships. They also allow the customers to integrate their own data with external data sources. Bioinformatics also allows the researchers to perform the comparative analysis across different genomes. Rapidly evolving product lifecycle Several model organisms such as the mouse, nematode worm and fruit fly, are attractive to drug companies because their proteins closely resemble that of the human. These model organisms are used to study diseases that afflict human beings. Generally model organisms are easier to keep in laboratory and it is said that a random human gene will have 50-80% likeness to that of a worm or fruit fly 35. The studies on model organisms are important to drug discovery and development. Through the use of model organism genomes, researchers can identify the genes or alleles they should target and determine with greater accuracy the drug toxicity and efficacy. In fact, the DNA of the mouse is 90% similar to that of humans. Mice are also mammals, which make them particularly suited to drug tests. Celera has encoded the genome of the fruit fly, human, and will complete the mouse genome by December While the Human Genome effort was started while Dr Venter was at TIGR, once the 18

19 Celera took over this responsibility, it completed the human genome in 9 months. Through the unique use of the supercomputers at Celera s headquarters, the company started its efforts to encode the mouse. This project has not been completed. At the same time, Celera has also encoded a humanised mouse genome, as it is an integral part of one the drug approval phases. The NIH had donated roughly $21 million to various organisations to lead the sequencing of the mouse genome. As at July 2000, they had completed only 3% of the mouse genome and their goal was to have a rough draft ready by Celera began sequencing the mouse genome on the 6 th April So far it has already sequenced 1.15 billion base pairs of mouse DNA and expects to complete the sequencing before the end of 2000, once again renewing its product offering. In May 1999, Celera started sequencing the fruit fly. On 24 th March 2000, Celera published the complete genome sequence of the fruit fly in Science. The fruit fly genome is 77 times as large as the first genome that was completed in 1995, and was sequenced in the same period of time as that of the first genome. In the process, the utility of the whole genome shotgun technique for gene discovery was also demonstrated. The mapping of other genomes are therefore clearly earmarked and in some cases running in parallel so that Celera s product offering is renewed upon completion of every genome. The information is continuously updated on the databases. Through developing the humanised mouse database customers have a better model organism for exploring the causes of disease. In this way the company has also maximised the utility of the mouse and human genome products. In order for Celera to complete the mapping of the mouse genome, it requires normal and diseased human and other tissue samples, biological materials and related clinical and other information, which may be in limited supply. In this regard, Celera is dependant on government regulation in the United States and foreign countries regarding access to these materials. The Celera Strategy Speed The companies motto Speed matters, Discovery cannot wait, epitomises the Celera strategy of pushing the speed of medical discoveries at an unprecedented rate. Dr Venter set the pace by launching Celera and providing an infrastructure with premier scientists in the field, in record time. 19

20 The strategy paid off by Celera being first to market with the mapping of the human genome, a historic event in the scientific/medical community. This has allowed the company a crucial advantage in applying for some 6500 potential patents, which has significantly raise the barriers to entry for other genomics companies. The company s first to market strategy was also crucial in garnering the interests of pharmaceuticals. The essentiality of Genomics arises from the fact that a crucial start for pharmaceuticals in drug development is to understand what causes a human disease on the genetic level. More accurate targeting of genes through SNP s (single nucletide polymorphisms/ defective genes) provide pharmaceutical more detailed information on the genomes which will improve pharmaceuticals return on drug efficacy and toxicity through a targeted and less time consuming procedure. Staffing Celera s senior management hired during 1998 and subsequently shows the company s realisation of the critical success factors in order to achieve its goals. Some of the most notable staffing appointments are: Dr Eugene Myers, vice president of Informatics Research who brings his knowledge as a professor and scientist in the field of computational biology. Dr Myers is widely known in the scientific community for developing a technique called BLAST, one of the most widely used analysis tools for genomics. Dr Myers appointment confirms the company s attitude of speeding up the discovery process even if it means inventing new techniques to do so. A crucial factor for computation biology is also knowledge of bioinformatics software. Celera appointed James Peck, who was vice president of Lexis Nexis, a company known to be a pioneer in on-line research. Mr Peck has extensive knowledge of intranet based knowledge management tools. His appointment along what that of Marshall Peterson signalled the company s intent to deliver its premier tools and databases to its customers via the Internet. Mr Peterson used to be the President of Infrastructure Technology and was responsible for complex mission critical systems implementations for its customers. He brings his expertise as hardware and software solutions architect to Celera. While the company s mission was to become the premier reference source of genetics, a critical factor is the delivery of this information over interoperable platforms to customers. Another key staff member is Dr Hamilton Smith, molecular biologist and a Nobel prize winner in medicine. Dr Smith used to work as a part-time investigator with Dr Venter at TIGR. He is widely 20

21 known in the scientific community for his contribution in molecular biology. Dr Smith s appointment confirms Celera s commitment to being a credible research facility with published and acclaimed scientists. Dr Adams is another acclaimed scientist who was also a TIGR scientist. Dr Venter considers Dr Adams to be so crucial to the future of Celera, that shareholders are warned that the loss of staff such as Dr Adams, could have a dramatic impact on the company 36. Reaching for the future The mapping of the human genome and other model organisms has been an important short-term goal for the company. The mouse genome sequencing will only be completed in December 2000, however in the interim, Celera publishes the available mouse genome data via its on-line system. Alongside the mapping of the model organisms, Celera also is building a comprehensive database of SNP s. Dr Venter has stated that he ultimately foresees moving into the arena of developing vaccines or therapeutic drugs for life threatening diseases such as cancer. Celera is therefore working on its long-term objectives through incremental steps, while it accomplishes short-term goals. Competitors While the biotechnology industry is considered to be a mature industry, the genomics industry is relatively young and industry rivalry is high. Celera considers its competitors to be private companies such as Curagen, Gene Logic, French company Genset, Inc., Incyte Pharmaceuticals, Inc., Affymetrix, Millennium Pharmaceuticals and the SNP Consortium 37. Celera and the public US Human Genome Project have long been at odds, with each respective CEO, Dr Venter and Dr Francis Collins, engaged in what the media touted as a bitter genome battle 38. While the genomics industry is relatively young, Dr Venter showed his mettle as a seasoned veteran of the biotechnology industry by approaching Dr Collins for a ceasefire on the eve of the announcement of the mapping of the Human Genome at the White House. The ceasefire ended subsequently abruptly when Dr Collins disputed the validity of the human genome data because of the use of the untested whole genome shotgun method. Of these mentioned competitors, the most formidable are however Incyte, Millennium pharmaceuticals, Curagen Inc and the SNP consortium. Incyte genomics was launched in The company has 18 of the top 20 pharmaceuticals as their clients. They provide a broad data set that 21

22 includes gene sequences, patterns of gene and protein expression and genetic variation amongst individuals. The company s key challenge is akin to that of most biotechnology and specifically the genomics companies, which is to turn the genomics into a sustainable business 39. The company exhibits one of the lowest percentage losses in the genomics industry and in October 2000, entered into global distribution alliances with 19 companies in Asia, Europe and Latin America 40. The company ranks second in terms of the top patent holders in the US. Millennium Pharmaceuticals was founded in The company develops personalised therapeutics ad medical tests. The company has strategic alliances with drug developers such as Eli Lilly, Pfizer, Bayer and Pharmacia. Millennium. Its key challenge is to translate the genomic information into proprietary products 41. On 30 September 2000, the company reported losses of $204 million, up from $1.4 million the previous nine months. The losses were attributed to the costs of preclinical and clinical trials of cancer and cardiovascular therapeutic treatments 42. Curagen on the other hand specialises in large capacity mapping of the interactions of proteins and announced during October and September 2000, that it had licensed 5 drug targets to Biogene as well as 25 cancer therapeutics to another pharmaceutical partner, Abgenix 43. The company has a staff component of 300 compared to Millennium and Incyte s approximately 800. The key challenged faced by the company is to advance the companies Proteomics technologies while it develops its own drugs. The SNP consortium is a non-profit collaboration that was established in April 1999 and is supported by a group of ten major pharmaceutical companies, the Wellcome Trust, IBM and Motorola, Inc. The SNP Consortium's objective is to develop, patent and make public a group of 300,000 SNPs over the next two years. Celera maintains that there are also several small public and private companies with which they indirectly compete in certain lines of business, such as in gene discovery and the development of drug targets. The public institutes in particular are a formidable force as their resources have fewer restraints and are more limitless. The US government leads all biotechs in the number of patents registered. Some of Celera s partners or even potential subscribers, such as pharmaceutical companies, may develop technologies and information similar to those offered by the Celera. In the Proteomics arena, Celera may be facing new competition. As the company moves towards development of drugs, the number and scope of competitors will increase. 22