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DeCode's Science Can't Keep the Gene-Finders Solvent

by John LauermanBloomberg Press
November 6th, 2008

Nov. 6 (Bloomberg) -- Kari Stefansson, DeCode Genetics Inc.'s chief executive officer, made good on a promise to create new ways to identify disease-linked genes. Now his company is struggling to survive after taking too long to convert its many discoveries into profits.

Stefansson, 59, may have to sell assets, including gene tests for cancer and heart disease and a genetic profiling service, to save DeCode, the company said in an Oct. 15 statement. After burning through $676.2 million, DeCode has few prospects for raising cash amid the global credit crunch and in a country struggling with a collapsed banking system.

DeCode, based in Reykjavik, Iceland, has been among the most prolific in using new techniques to identify genetic variations that raise the risk of disease, said Eric Topol, director of the Scripps Translational Science Institute in San Diego. In a conference call tomorrow, Stefansson may detail his plans to sell off DeCode's assets and salvage what is left of the company's gene research.

``Their contributions are enormous,'' Topol said in a Nov. 4 telephone interview. ``They've made more contributions to the discovery of key gene pathways than any academic institution. What their troubles portray is that being a discovery engine isn't enough to make a profitable business.''

The Iceland government took control of the country's banks last month after they were unable to secure funding. DeCode has about $12 million in cash and marketable securities, the company said today in a statement reporting third-quarter results. It needs about $60 million to $65 million to fund operations for a year, according to the company's regulatory filings. Stefansson declined to be interviewed for this story.

12-Year History

DeCode, which traded at $28.75 a share on Sept. 11, 2000, after a July initial public offering, fell 15 cents, or 33 percent, to 30 cents in Nasdaq Stock Market composite trading at 4:02 p.m. New York time.

Two years ago, Stefansson was explaining how the company he founded in 1996 with money from American venture capitalists and a genealogical-database license from the Icelandic government was about to remake drug making.

DeCode was on its way to putting five molecules into human testing by the end of 2006, and had published research linking separate pieces of DNA to heart attacks and diabetes. The company had $140 million in cash and marketable securities, and was preparing to raise more money with sales of stock and convertible debt.

The company planned to use its gene science to remove time and guesswork from drug development. That would be a boon to patients, who risk side effects in drug trials and often wait years for effective therapies, Stefansson said. DeCode expected to cut drug-development costs by finding key proteins involved in heart disease, diabetes, and other conditions.

`Great Idea'

``It sounded like a great idea at the time,'' said Paul Abel, who manages the $20 million Kinetics Medical Fund, including 11,000 DeCode shares, in White Plains, New York. ``We all should have considered how long it would take to go from identifying a genetic marker to development of a pharmaceutical.''

A former Harvard Medical School professor, Stefansson appeared to have the perfect strategy to take advantage of Iceland's precious resource: its population. Because of their isolation, Icelanders' genes are remarkably alike and can be paired with birth, marriage and medical records that stretch back 1,000 years.

Sale Eligibility

DeCode collected tissue samples and patient data from Icelanders for its genetic studies. The samples and medical records might not be eligible for sale, said Gudridur Thorsteinsdottir, director of legal affairs for Iceland's Ministry of Health. Samples can't be transported from the country and a buyer would have to show that it could protect patient data, she said.

``If the company was sold, I suppose we would have to look at what that would mean,'' she said yesterday in a telephone interview.

That data has been the springboard for discoveries in which DeCode linked variations in DNA sequences to heart disease, diabetes, breast cancer, eye and hair color, prostate cancer, and eye disease. The company's scientists published 25 papers in Nature Genetics alone since 2002, according to Myles Axton, editor. They outpaced the U.K. based Wellcome Institute and the Harvard University-affiliated Broad Institute, Topol said.

DeCode hasn't kept all its discoveries confidential or locked them up in patents, said George Church, a geneticist at Harvard Medical School in Boston. This ``altruism'' may have got in the way of profits, Church said.

`Hoarding Data'

``If they had hoarded all their data and kept the results private, that might have given them a competitive advantage,'' he said in a telephone interview.

Small biotechnology companies, such as Cambridge, Massachusetts-based Alnylam Pharmaceuticals Inc., which is making drugs with recently discovered DNA blockers, have been able to fund their research by licensing science to bigger drugmakers. Alnylam said yesterday it has $520 million in cash.

``The scientific work that we've done, combined with the intellectual property that allowed us to do substantial alliances, have brought a financial stability to the company that's unique,'' said John Maraganore, Alnylam's chief executive, in a telephone interview yesterday.

DeCode, on the other hand, has $230 million in convertible security debt due in April 2011. With a share price that hit a low of 19 cents on Oct. 6, the company is in danger of being delisted from the Nasdaq Stock Market. With just $24 million left in cash and no easy way to raise more, DeCode is treading a path well-worn by research companies that found out how hard it is to become drugmakers.

Prime Example

The prime example of a DeCode misstep is DG031, which blocks a protein that DeCode's studies linked to heart attacks. Early studies looked promising until tablets intended for use in a clinical trial lost potency on the shelf, showing DeCode had stumbled on the basic issue of drug formulation.

As DeCode found more genes linked to specific conditions, Stefansson saw that he had the makings of tests that would show people whether they were at high risk.

In April 2007, the company began selling, for about $500, its DeCode T2 test, which can spot a gene variation that doubles the risk of Type 2 diabetes. Tests for breast cancer and heart risk were also developed, and consumers can get all of them, along with ancestry information, for $985 through the company's profiling service, called decodeme.

Unknown Revenue

DeCode won't say how much revenue the tests generate, according to a Jeffries International analyst, Robin Campbell, in an April 4 note to clients. He estimated DeCode may make $4 million from them in the second half of this year, not nearly enough to pay off its debts.

DeCode's methods for finding disease-linked genes may have also become outmoded, Church said. While Stefansson's scientists have used gene chips made by Illumina Inc. to find relatively common gene variations, new sequencing technologies have been developed that give more detail on mutations that may account for a greater proportion of disease.

``This is always the gamble with a start-up biotech,'' Kinetics' Abel said. ``They looked smarter than some other companies 10 years ago. Something might still come of their work, but as of now there's no fruition.''



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