October 29, 2002
During the “genomics boom” of 2000 and 2001, biotech companies based on platform technologies were all the rage among investors. These companies promised to take advantage of the knowledge gained from sequencing the human genome and other advances in modern biology to improve the speed and efficiency of drug development.
To say that these companies have fallen out of favor in the past year would be an understatement. BiotechTracker Target Validation segment, which includes Exelixis (NASDAQ:
EXEL), Deltagen (NASDAQ:
DGEN), Lexicon (NASDAQ:
LEXG), Rigel (NASDAQ:
RIGL), Large Scale Biology (NASDAQ:
LSBC), and Paradigm (NASDAQ:
PDGM), has been trading at close to a zero enterprise value (market capitalization plus debt less cash).
In addition to the general biotechnology and market downturn, the stock prices of smaller platform technology companies have been depressed due to doubts about the liquidity of these companies. While the technology of many of these companies continues to mature nicely, the liquidity issue has to be resolved prior to their stocks experiencing a sustained recovery. With depressed stock prices and a very difficult market for raising equity, pharmaceutical and larger biotechnology companies will be the likely source of cash for the companies that will survive. An example is the deal that Exelixis announced with GlaxoSmithKline (NYSE:
GSK).
The six-year drug development deal is structured so that Exelixis will use its expertise in target validation based on model organisms to develop small molecule drugs and begin clinical testing on the most promising candidates. Glaxo then has the option to take over development when the drugs reach phase II trials. Glaxo will help Exelixis finance the initial stages of drug development with up to $90 million.
The deal not only validates Exelixis’s approach, but also shows that big pharma intends to continue to invest in platform technology companies. We expect to see similar deals with other leaders in the target validation field, particularly Lexicon and
Rigel.
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