- The Washington Times - Monday, August 2, 2004

Gene Logic executives are hoping the path to profitability lies with failed drugs.

The Gaithersburg biotech company has reached an agreement with Millennium Pharmaceuticals to find new uses for drugs that didn’t work in original testing.

Under the agreement announced July 23, Millennium researchers will join Gene Logic and examine so-called “stalled” drugs, then recommend alternative uses to biotechnology and pharmaceutical companies.

Gene Logic then would receive royalties if those recommendations lead to the production of an effective drug. The company will only issue opinions on potential uses for the drugs, and will not be involved in any drug production.

“The vast majority of the drugs that are developed fail,” said Gene Logic spokesman Bob Burrows. “We have the technology that will allow [drug companies] to recoup these lost costs.”

Gene Logic will pay Millennium about $9 million under the agreement. It will pay $4.5 million to allow access to a special database for three years, plus $3.5 million in stock or cash in 2006. In addition, Gene Logic will pay $1 million in cash or stock to the employees who are switching companies.

Gene Logic is one of the first companies to outsource testing of failed drugs. Most drug companies have been exploring ways to recoup lost costs of “stalled” drugs, but have not dedicated the resources needed to explore new uses.

Gene Logic signed on Cambridge, Mass.-based Millennium as its first customer, and will attempt to find new uses for MLN-4760, a drug produced by Millennium that failed in its original use as a treatment for obesity.

Analysts generally gave Gene Logic executives credit for seeking a new stream of revenue, particularly since the company’s base business of providing early-stage drug testing to pharmaceutical firms has failed to garner a profit.

Gene Logic on July 23 reported a net loss of $4.4 million, or 14 cents per share, for the second quarter, compared with a loss of $4.0 million (13 cents) for the comparable quarter last year. Revenues declined from $19.4 million to $18.6 million during the same period.

Share prices, meanwhile, have slumped, falling 13 cents yesterday to close at $3.76 on the Nasdaq, 28 cents above the 52-week low.

“At the end of the day, people are going to want to see much more revenue growth than we’ve been able to show,” Mr. Burrows said.

Biotechnology stocks as a whole have tumbled this year, as many companies have delayed testing on some drugs or seen sales of new products flop. The American Stock Exchange’s biotech index, which tracks most biotech companies from all U.S. stock markets, has fallen 14 percent from its highest point on April 27, and the Nasdaq Composite Index is down about 15 percent.

Gene Logic’s deal with Millennium could lead to a “dramatic increase” in research and development costs in the next year and a half, says a report by Edward Tenthoff, an analyst with New York investment firm Piper Jaffray.

Gene Logic said it could spend as much as $8.5 million over that time, but that investors should not be scared off because the company has about $101 million in available cash. But it acknowledged that the Millennium deal will not provide an immediate boost in revenue.

“The question is: ‘When is this all going to come to fruition?’ And that is the really unfortunate overhang of the stock,” Mr. Burrows said. “It requires people to have a long-term view.”

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