MONEY AND BUSINESS/FINANCIAL DESK

The Race to Cash In On the Genetic Code

By LAWRENCE M. FISHER (NYT) 3569 words

But now, as the international race to spell out the precise sequence of the three billion letters in the human genetic code sprints to the finish line, the markets are demanding that the gene merchants deliver the goods. Investors are starting to demand not just science, but a viable business model, too.

To the victors will belong an asset of almost unfathomable value: the source code of life itself. By sequencing the DNA in all 100,000 genes in the human body -- that is, by divining the order of the four chemicals that make up the genes -- scientists hope to treat diseases in much the same way that software engineers fix faulty computer programs: by isolating flaws in the code.

If the effort is successful, health care will shift from a paradigm of detect and treat, typically with toxic drugs that sometimes do no more than mask symptoms, to predict and prevent, with therapies of exquisite specificity aimed at the causes of disease. By identifying the genetic roots of illnesses like cancer and heart disease, some experts say, the science of the genome, or genomics, may make it possible for a child born today to live to 150 -- or, some say, much longer.

''Death is a series of preventable diseases,'' said Dr. William A. Haseltine, chairman and chief executive of Human Genome Sciences here, declaring the philosophy behind the industry he is helping to invent.

Other genomics leaders have less trouble with that assertion than with Dr. Haseltine's contention that his company already has sequences for 95 percent of the human genes and is amassing a patent portfolio that will make it the gatekeeper for the entire biopharmaceuticals industry.

Assertions like that have always irritated Dr. Francis S. Collins, the director of the Human Genome Project at the National Institutes of Health in Bethesda, Md. For some of the companies, he said, ''financial viability appears to be tied to claims of exclusivity,'' while the Government's goal is to sequence all the human genes and place them in the public domain for the common good.

Indeed, the whole concept of patenting the bits of biochemical information known as genes offends many, from religious leaders to scientists, including James Watson, a co-discoverer of DNA, who resigned as the original head of the Human Genome Project over this issue. While the Patent Office has established rules meant to clarify what kind of genetic discoveries can be patented, the issue is by no means resolved.

The genomics companies have filed patents by the thousands, but only a few hundred have been published, fewer still issued and none of those yet defended in court. So any claims of strong patent positions remain unproven.

But genomics is all about big claims. Last year, Dr. J. Craig Venter, a former N.I.H. researcher, shook up the field when he started a new company, now called Celera Genomics Group, a separately traded subsidiary of the PE Corporation, which he said would complete the sequencing of the human genome in 2001, about two years ahead of the public labs.

Dr. Venter's announcement was greeted with considerable skepticism, but it prompted Dr. Collins to move up his goal for completion, too; he now expects a rough draft of the human genome by next spring and a complete genome a year later.

The acceleration of the public and private efforts has already led to a rough winnowing of the genomics field, with some companies disappearing in mergers and others trading at such low share prices that their ability to raise capital and remain independent is doubtful.

A couple of broad strategies have emerged, meanwhile, among the best-capitalized companies.

Human Genome Sciences and Millennium Pharmaceuticals Inc., of Cambridge, Mass., intend to sell drugs, developed with capital raised in a few high-value deals with pharmaceutical companies. Two others, Incyte Pharmaceuticals Inc., of Palo Alto, Calif., and Celera, in Rockville, sell only data that others use to identify potential drug targets.

Shares in Human Genome and Millennium have soared this year, while Incyte, once the market leader, has fallen, primarily because of the perceived threat from Celera, which has deep pockets and a similar business model.

''The human genome is going to be sequenced, with absolute certainty, within the next two years,'' said Dr. Eric Lander, director of the federally financed Whitehead/M.I.T. Center for Genomic Research in Cambridge and a founding scientist at Millennium. ''The game has moved on. Now it's: How do you add value to the genome?''

The Code as a Cure

Perhaps the most obvious way to add value to the genome is to turn genetic discoveries into drugs, but so far Human Genome Sciences is the only company that has done so. The stainless-steel fermentation vats at its 80,000-square-foot manufacturing plant here in Rockville would be a common site at a traditional biotechnology company, like Amgen or Genentech, but they are unique among the genomics players.

These vats produce the proteins that are Human Genome's first two drugs. One, intended to protect blood-forming cells from the toxic effects of chemotherapy, is being tested in women with breast and ovarian cancer. The other is being tested as a wound-healing agent. Both are in the second of three phases of trials typically required of new drugs by the Food and Drug Administration; that means that they are at least two or three years away from the market.

But it is Human Genome's third drug candidate that provides a glimpse of the real promise of genomics. Using a gene injected directly into a diseased area, it prompts the body to grow new blood vessels. The drug is being tested as an alternative to bypass surgery for treating blocked arteries in the heart and limbs.

''At this point, we are the only company to create genomics assets and to use those assets to move drugs into the clinic,'' said Dr. Haseltine, who did pioneering work in sequencing the genome of HIV, the virus that causes AIDS, as a scientist at Harvard's Dana-Farber Cancer Institute.

But these three drugs, and three others that Human Genome hopes to begin testing next year, are only the tip of a very large iceberg. Dr. Haseltine said the company has discovered -- and, more importantly, filed patents on -- a vast data base of genes.

''Any company that wants to be in the business of using genes, proteins or antibodies as drugs has a very high probability of running afoul of our patents,'' Dr. Haseltine said. ''From a commercial point of view, they are severely constrained -- and far more than they realize.''

Some drug industry executives dismiss this is as self-promotion, though as Human Genome's patents begin to be published, it is clear that the company is assembling an arsenal of intellectual property.

Still, Human Genome is itself constrained by the terms of a deal it struck in 1993 with SmithKline Beecham P.L.C., the British pharmaceuticals giant. For $125 million, then the largest biotechnology deal ever, SmithKline obtained exclusive rights to use Human Genome's gene discoveries to produce so-called small-molecule drugs, the kind that can be taken in pill form. The agreement expires in June 2001.

The deal left Human Genome free to develop drugs based on proteins -- the easiest kind to take quickly to the clinic. But such drugs are commercially problematic, because they must be injected, and few patients want to take a shot if a pill is available. The company can also develop gene therapies, like its heart drug. But gene therapy has yet to produce an approved drug for anyone.

Nonetheless, Dr. Haseltine said the SmithKline deal was worthwhile, because it gave Human Genome the resources to grab a big lead in genomics. And when it expires, he will be free to strike new partnerships based on the same data base of genes. ''Two years from now, we have a big opportunity to remonetize our asset and still have plenty of intellectual property to ourselves,'' he said.

Partners in the Marketplace

For now, however, the undisputed champion of deal making is Millennium, which has raked in over $1 billion in financing from partners like Roche Holding A.G., Eli Lilly & Company, Monsanto and Bayer A.G.

The arrangements are exclusive only for specific diseases (or, in Monsanto's case, for use in agricultural products), so Millennium remains free to pursue its own small-molecule drugs. It has also created subsidiaries for biotechnology drugs and for predictive medicine, like tests to identify genetic conditions showing a predisposition to diseases or adverse drug reactions.

Millennium's executives don't claim a lock on the intellectual property of the human genome, but their deal-making shows the value that drug makers see in the company's work.

A year ago, for example, Bayer agreed to pay Millennium up to $460 million over five years for 225 of what the industry calls validated genetic targets -- that is, genes plus the accompanying biological data to show their relevance in areas like cardiovascular disease, cancer, osteoporosis, pain, liver fibrosis and viral infections. Targets that Bayer doesn't choose for drug development revert to Millennium.

''We did a huge search before we went with Millennium,'' said Wolfgang Hartwig, Bayer's executive vice president of pharmaceutical research. He said Bayer was attracted to Millennium's continual refreshing of its technology and to its freedom from the encumbrances of exclusive deals.

Millennium sprawls around Cambridge in leased space, most of it near the Massachusetts Institute of Technology. In its early days, the company made much of its connection to Dr. Lander and M.I.T.'s genome center. But today, Dr. Lander's role is more clearly advisory. The personalities who define the company are those of its chief executive, Mark Levin, a soft-spoken former venture capitalist, and his head deal maker and chief business officer, Steven H. Holtzman, a Rhodes Scholar with a degree in philosophy.

Mr. Levin tends not to make big claims, but he is building a big company, drawing on experiences early in his career at Genentech, the biotechnology pioneer, where he worked in process engineering in the mid-1980's.

''Genentech put in place the largest molecular biology lab in the world at the time,'' he said. ''We've gone out and put together the largest critical mass in biotech today.''

Later this year, Roche is expected to seek permission to begin trials of an anti-obesity drug developed from a genetic target supplied by Millennium. Becton Dickinson & Company in Franklin Lakes, N.J., will soon offer a melanoma test using technology from Millennium's predictive medicine unit.

But for all the depth and breadth of its science and technology, Millennium is conspicuously lacking a drug of its own in clinical trials.

''We're developing genes and targets and leads,'' Mr. Levin said. ''By the end of 1999, going into 2000, you will see us make additional acquisitions, and these acquisitions will take us into the clinic.''

Analysts note that while Millennium has the cash and high-value shares to acquire a drug -- and many struggling biotech companies have drugs for sale -- the best drug prospects attract multiple bids, and there are many far larger companies out shopping.

The Knowledge Merchants

If Millennium and Human Genome aim to be the next Genentech and Amgen, Incyte and Celera have a different role model in mind: Bloomberg L.P. Just as Bloomberg sells information to the securities industry but isn't in the brokerage business, these companies sell data bases of genetic information to drug companies but never intend to produce drugs.

Incyte is based in Palo Alto, Calif., deep in Silicon Valley, and it is no coincidence that the heart of its headquarters is a vast, glass-enclosed room full of powerful computers. ''At the end of the day, it's the information that matters,'' said Randy Scott, the president and chief scientific officer. ''We are all about the application of Moore's Law to biology,'' he said -- a reference to the observation that computer processing power doubles every 18 months. Applying that exponential growth to genomics should produce similar gains for drug discovery, Dr. Scott said.

Until recently, Incyte had something unique among genomics companies: operating income from sales of its products. Instead of signing huge deals to bankroll its own drug programs, Incyte sold subscriptions to Lifeseq, its genomic data base. Some 25 companies subscribed, including most of the leading pharmaceutical and biotechnology concerns, and Incyte showed steady earnings growth without big outlays on drug development.

But the creation last year of Celera -- cash-rich and in no hurry to show a profit -- put Incyte on the spot. While Incyte's data base offered gene fragments that point the way to full-length genes, Celera said it would provide whole genomes at a competitive price.

At the same time, the Government's Human Genome Project, now on an accelerated timetable, was placing thousands of genes in the public domain. And companies like Pangea Systems of Oakland, Calif., were supplying software tools to analyze this data, at a fraction of the cost of a Lifeseq subscription.

Facing a classic squeeze, Incyte management moved rapidly to improve its product, adding data from the Government's work, cutting the price and introducing new data bases. But the moves cost money, and as the company began reporting losses, investors fled, cutting the share price in half.

''I've been hearing this story -- that Lifeseq's dead, it's all in the public domain -- and maybe we even started to believe it ourselves,'' said Roy Whitfield, Incyte's chairman and chief executive. ''But it's just not true.'' No customer has failed to renew its subscription, he said, and he predicted that profits -- and investors -- would return in the second half of next year.

Celera is the spoiler in genomics, or intends to be. The company plans to sequence the entire human genome and offer the data to subscribers. Other genomes of interest to scientists -- like that of drosophila, a fruit fly used in many experiments -- will be offered in a similar fashion. Dr. Venter's critics say Celera's hurry-up human genome will be full of gaps and errors, but the company has attracted three blue-chip subscribers: Novartis A.G., Amgen and Pharmacia & Upjohn.

As a sibling of PE Biosystems Group, also part of the PE Corporation, Celera received first access to PE Biosystems' latest automated gene-sequencing machines. (The two companies were created this spring in a reorganization of the old Perkin-Elmer Corporation.) Celera now has 300 of these $300,000 devices, some arrayed in neat rows, some lining the hallways still in their wooden shipping crates, some piled in elevators. The largest public genome center, Dr. Lander's lab at M.I.T. has 120 such machines, and most genomics companies have just a handful.

Combining the powerful equipment with an army of robots and vast amounts of computing power makes it practical and cost-effective to sequence whole genomes, Dr. Venter said.

The idea is that subscribers will pay Celera for partial genetic information as it becomes available, just as they have paid Incyte -- but with the kicker that the company will ultimately supply complete genomes for many organisms. Companies can use this information royalty-free, except where it involves a gene sequence patented by Celera. Dr. Venter said he ultimately expects a mixture of revenues -- from subscriptions, royalties on drug sales and even individual researchers paying to use the Celera Web site.

''They say I'm going to be the Bill Gates of biology; I'm not sure that's meant to be flattering,'' he said. Still, ''the upside to this business is very, very large, and different from what anybody else is doing.''

Many Eager Competitors

Wall Street loves to anoint winners, and given the impact of capital flow, these prophecies can become self-fulfilling. Despite talk that Celera or Human Genome may achieve a Microsoft-like dominance of biological information, many smaller companies are also pursuing opportunities.

The first real product of genomics was a diagnostic kit developed by Myriad Genetics Inc. of Salt Lake City, drawing on its discovery of two genes responsible for hereditary breast cancer. Genome Therapeutics Inc. of Waltham, Mass., has built a subscription business based on bacterial genomes. Genset S.A. of Paris has signed up two partners for what is called pharmacogenomics -- the enterprise of applying genetic data to existing drugs to screen out people more likely to have side effects.

There are many more, and their continued proliferation suggests that genomics remains a fertile field.

''The current effort is rather like building the periodic table,'' said Dr. Collins, head of the Government's project, comparing the work to the fundamental plow work of chemistry.

''The real challenge of genomics -- the real fun, the real payoff -- is being able to take the periodic table and figure out how it works,'' he said. ''All of that will be poorly understood and will be grist for research for decades to come.''

A Vitalizing Gene, Straight to the Heart

Born with a genetic defect that caused his body to overproduce cholesterol, the Rev. Charles Wilson started having heart problems when he was 27. Over the next 30 years, he suffered a heart attack and had surgery many times. But by last summer, the blood supply to his heart was so reduced by atherosclerosis that he could barely get out of bed without severe chest pains.

''My doctor said to me, 'Charles, there's nothing else we can do; you've just got to sit still until technology catches up with you,' '' said Mr. Wilson, 57, a Presbyterian minister who lives in Charlotte, N.C.

One day, though, he read a newspaper article about research on coronary gene therapy.

''I went looking on the Internet to find the actual report,'' Mr. Wilson said. ''From that, I found the name of the doctor and the hospital.''

He got in touch with Dr. Jeffrey M. Isner, chief of cardiovascular research at St. Elizabeth's Medical Center of Boston, and ultimately entered one of the first clinical trials of a drug developed through genomics.

Physicians in Boston made an incision in Mr. Wilson's chest and injected -- directly into his heart -- a gene that prompts the creation of new blood vessels. (Subsequently, the gene has been administered through a catheter.)

Although his recovery was slow at first, Mr. Wilson gradually gained strength.

''On the 42d day, as I was walking through the mall with my wife, when we had walked about a quarter-mile, I said, 'Honey, I haven't had any discomfort today,' '' he said. ''From that point on, I've been able to walk increasingly longer distances, faster and without pain.'' He now walks a mile and a half a day.

The gene he receives, VEGF-2, is being tested as a drug by Human Genome Sciences Inc. and is a product of Vascular Genetics Inc., which is a joint venture of Human Genome, Dr. Isner, St. Elizabeth's and Cato Holdings, a contract research organization. The drug is at least three to five years away from the market.

Although Mr. Wilson still has scar tissue and will have to take a variety of medications for the rest of his life, electronic scans of his heart show that it has grown new blood vessels in about 60 percent of the area that was previously blocked. LAWRENCE M. FISHER

Correction: September 5, 1999, Sunday Two picture captions last Sunday with an article about competition in the genomics industry reversed the photographers' credits. The picture of Dr. J. Craig Venter, founder of Celera Genomics Group, was by Marty Katz for The New York Times; the picture of three executives of Millenium Pharmaceuticals was by Rick Friedman for The New York Times.

CAPTIONS: Photos: The Rev. Charles Wilson received a genetic treatment in a clinical trial. (Donna Bise for The New York Times); Two companies working to make profitable use of the decoding of human DNA are Millennium Pharmaceuticals, led by, from left above (Marty Katz for The New York Times), Steven H. Holtzman, Mark Levin and Dr. Eric Lander, and Celera Genomics Group, whose founder is Dr. J. Craig Venter, at right. (Rick Friedman for The New York Times)(pg. 12)

Chart: Rival Strategies
The leading genomics companies have contrasting business models: two aim to develop drugs; two aim to sell data about genes.

MILLENNIUM PHARMACEUTICALS
HEADQUARTERS: Cambridge, Mass.
BUSINESS: Provides genetic targets for partners' drug discovery and agricultural programs. Develops small-molecule drugs; proteins and antibodies; gene-based diagnostic tests.
ACCOMPLISHMENTS: Partnerships with Bayer, Monsanto, Pfizer, Eli Lilly, American Home Products, Astra and Roche.
MARKET CAPITALIZATION: $2.15 billion
'98 REVENUE: $134 million
'98 OPERATING INCOME: -$8 million

INCYTE PHARMACEUTICALS
HEADQUARTERS: Palo Alto, Calif.
BUSINESS: Provides data bases of gene sequences and related analytical software by subscription. Manufactures and sells drug discovery tools.
ACCOMPLISHMENTS: More than 25 major pharmaceutical and biotechnology subscribers. First genome company to report earnings from operations.
MARKET CAPITALIZATION: $713 million
'98 REVENUE: $135 million
'98 OPERATING INCOME: $12 million

HUMAN GENOME SCIENCES
HEADQUARTERS: Rockville, Md.
BUSINESS: Provides genetic targets for partners' drug discovery programs. Develops proprietary proteins, antibodies and gene therapy drugs.
ACCOMPLISHMENTS: Established first major genomic partnership, receiving $125 million from SmithKline Beecham. Has three drugs in clinical trials.
MARKET CAPITALIZATION: $1.55 billion
'98 REVENUE: $30 million
'98 OPERATING INCOME: -$32 million

CELERA GENOMICS GROUP
HEADQUARTERS: Rockville, Md.
BUSINESS: Provides genomic and biological information. Plans to offer complete genomes of human and other species, plus analytical software.
ACCOMPLISHMENTS: Partnerships with Novartis, Pharmacia & Upjohn and Amgen.
MARKET CAPITALIZATION: $650 million
'98 REVENUE*: $6 million
'98 OPERATING INCOME*: -$16 million

*Six months ended Dec. 31.

(The New York Times/Illustration by Chris Gould)