The Daily Interview: Dresdner RCM's Camilo Martinez

On Monday, in what was widely viewed as a historic moment for research into the human genetic blueprint, two competing groups of scientists published maps of the human genome. (The maps, currently available on the Web, will appear in print later this week.)

Camilo Martinez Co-Manager, Dresdner RCM Biotechnology Fund

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The eagerly awaited event gave a nice pop to Celera Genomics(CRA), whose for-profit version of the database has garnered kudos from researchers.

Celera's stock, which hit a 52-week low a little more than a month ago, finished up 14.8% in yesterday's trading, though it's still nowhere near its high of $276 one year ago.

Now that it's delivered the goods as promised, what's in store for Celera? And which biotech companies are best positioned to profit from the genetic database?

We talked to Camilo Martinez, co-manager along with Faraz Naqvi of the (DRBNX)Dresdner RCM Biotechnology fund, whose performance ranks in the top 1% of specialty health funds over the past three years, to get his take on the latest events.

TSC: Yesterday Science and Nature both published maps of the human genome. What's the significance of this? And how does this compare to last June, when scientists released a first draft of the human genome?

Martinez: Scientifically, I think it's extremely significant, because basically now for the first time more people are actually seeing what the data looks like.

One thing that's been surprising to all of us is how few genes there are -- 30,000 to 40,000, whereas initially we thought it was closer to 100,000. I think what's really important here is that makes understanding biology that much more important -- from a small repertoire of genes, you still have to end up with a complex human being.

TSC: In terms of actual biotech stocks, do you own Celera? And why do you think the stock is so far off its high from last spring, given how important this genetic database is? [The stock, which reached a high of $276 last February, was trading yesterday afternoon at $47.75].

Martinez: We do own Celera. One problem I think the Street has had is validating what Celera is promising. Celera has been saying we're going to be completing the human genome first, and it will be of such very high quality such that companies are going to want to subscribe. And really for the first time, we can see that. They have made the goal they set out to achieve.

The other problem the Street has had is, what's the value of a database company? The value of the database alone is probably not enough the support Celera's value. Now the next step is Celera has these other aggressive goals: to be involved more in drug discovery, to capture more of the value in its database in developing drugs.

Celera did execute on its initial goals, and we have a feeling they can probably do the second part. But there's a lot of confusion on how they do it, and even Celera's a little unclear on the specifics.

TSC: It seems like Celera must be pretty small, in terms of resources, relative to lots of other pharmaceutical companies.

Martinez: Celera has a cash position of over $1 billion, and their enterprise value is around $2 billion. The thing is, what is the potential of Celera? If it decides to take more risk and develop its own drugs, it starts to look cheap, but does Celera have the capability? No doubt it has a very high-powered team, but is that enough.

They are being more involved in the drug-discovery efforts themselves, and it may come to the point where the next logical step is to say, 'We're going to keep this and develop these drugs [ourselves],' but they have not said that at this point. Or they may decide they have enough parts in their business to justify continuing as they are now, developing the database and using that to interface with patient care and discover drugs.

TSC: So the question is whether drug discovery will become their primary focus?

Martinez: Exactly, and will they be able to do it.

TSC: Besides Celera, what are some stocks that could get a boost from having this genetic database available?

Martinez: Those who don't subscribe to Celera will probably have to access information with other bioinpharmatics companies, such as Rosetta (RSTA). Using Rosetta's software, you can look for the genes and validate them and help understand their function. It enables you to be able to use the genomic information in a useful manner.

TSC: What are some other biotech companies worth looking at on the drug-development side?

Martinez: Though it's a little difficult now to look company by company, you can probably develop a nice basket of companies, and chances are they will look very good in a few years. We would recommend more of a basket approach, depending on the amount of risk an investor wants to take. Those that are extremely focused on the long-term who want to capture the value of genomics [should look at] companies like Millennium Pharmaceuticals (MLNM), Human Genome Sciences (HGSI), Deltagen(DGEN) and Charles River Labs (CRL). That could be a good portfolio -- you just put it in and tuck it away, and chances are most of the companies will be doing really well five, six years from now.

If you want to capture more of the value immediately, [look at] companies that are producing things right now, or with late-stage clinical products in development, the Amgens (AMGN) of the world. Genentech (DNA) is another very good company with lots of products. These companies will use this information now; they already have the biological expertise to assess it.

Some companies that stand to benefit a lot that may not be on the radar screens of the usual health care investors are those that supply the tools to do this kind of work. In order to use genomic information, you will have to do hardcore molecular biology --clone the genes, express them, sequence them. You can take a low-risk play on genomics by going on to the tools plays, companies like Invitrogen (IVGN), Applied Biosystems (ABI), Waters (WAT), Charles River, which basically are providing those tools necessary for the research side. Their products are being used in every research lab. So as people gear up and do more research initially, they will benefit right away, way before any products come to market. All those companies are now profitable.

TSC: Can you comment on time to market? Because it will probably be years before we see products based on this information, won't it?

Martinez: It'll still be years before actual products come to market. However, what this gives us is a more solid foundation in terms of developing drugs. So the hope is that in the future, we probably will have drugs that are more specific and effective than in the past.

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