You'd think the marketplace would show unprecedented confidence in a company that had just completed the historic first draft of the human genetic makeup. No such luck for

Celera Genomics

(CRA)

.

The company has yet to prove to investors, customers and even competitors that it has a business model that yields a financial return to reflect its leap in human genetic knowledge. And with worries that an economic slowdown might put the brakes on a giddy tech sector, investors increasingly want to see a clear road to profits -- a path that's all but certain for Celera.

Celera, one of two publicly traded units of

PE Corp.

, raised nearly $1 billion earlier this year in what was then the largest biotech

IPO ever. It did so on the back of science impresario J. Craig Venter's contention that the company could map the human genome faster than a public-private consortium called the

Human Genome Project

. Venter, president of the 2-year-old company, achieved the goal last spring, alongside the Human Genome Project, which had accelerated its duplicate effort as a result of his challenge.

Big Deal

Now competitors publicly scoff that Celera's map is of limited utility to its main customers, pharmaceutical companies and academic researchers, since it doesn't focus on identifying genes -- those chemical bits that control proteins and regulate cell function. Since many drugmakers now primarily work to find and manipulate genes to make new drugs, the Celera database is less useful than those of competitors like

Incyte

(INCY) - Get Report

,

Millennium

(MLNM)

or

Human Genome Sciences

(HGSI)

, they say.

Same Difference
Rising and falling with Celera and Incyte.

Source: BigCharts

It's a charge that rankles Celera executives. "Everyone focuses on genes, but the regions outside the gene are extremely important," Peter Barrett, Celera vice president, told investors at a

UBS Warburg

conference last week. "It's just naive to say we only need the genes and the rest is junk."

Still, the focus on genes has given competitors a battering ram against Celera. "The horrible truth is that genetic sequences yield no genes," declared Incyte CEO Roy Whitfield in a thinly veiled attack on the Celera approach at the conference. In an interview, Whitfield later denied that he had attacked Celera, but said the issue of the utility of human genome sequences is "widely misunderstood."

"What they're doing is not what we're doing," says Whitfield. "That's the No. 1 message we want to get across. We have a very targeted approach, focusing on the prime real estate of the human genome."

Going Down With the Ship

This trash-thy-neighbor strategy in a normally gentle scientific industry is short-sighted, some say, since the failure of a competitor can mean a loss of confidence in a whole subset of the industry. And a vote of no confidence means crucial funds dry up, although Celera faces no immediate threat: With $1.1 billion in cash, Celera could survive for 10 years at its current spending rate.

But both companies have to demonstrate that their approach to the human genome can produce viable products, particularly since most of the basic information is available free from public databases through the Human Genome Project and elsewhere.

"You'd like to think they are solving the problems of finding a business model, but they are out there hacking each other," says Stefan Loren, biotech analyst with

Legg Mason

, which has no formal rating on either company. "It doesn't do anyone any good."

But the industry row is showing no signs of abating. "I'm not going to comment on Roy's getting up in an aggressive, desperate way and attacking us," said Barrett when asked about Whitfield's remarks on the previous day.

Models Inc.

Analysts say the rift between the competitors clouds the main issue, which is whether either has a sustainable business model. Both companies sell access to their databases to major drugmakers. And, although Incyte has been in the business a lot longer, neither company is profitable, mainly due to what they've had to spend to compile the databases.

While it's not unusual for biotech companies to lose money, both business models are ultimately dependent on the development of drugs from which royalties can be derived. While few experts view genetics as anything less than a potential gold mine for new drugs and diagnostic tools, the budding industry can point to few successes so far, and that's made some investors impatient.

"They both have a pile of information, but I have not seen one product come out of any of their data," says Brandon Fradd, fund manager for

Apollo Medical

, a New York hedge fund that doesn't hold either company. "All we have is the promise that this will accelerate research."

Whitfield says the question is unfair, since it takes up to a dozen years to develop drugs and the company has formed the bulk of its business alliances with 19 of the 20 largest drug companies since 1997. Still, citing contractual agreements, he wouldn't disclose any drugs derived from Incyte's database that have made it as far as clinical trials, a major step forward in the process of drug development.

Bearing Fruit?

"The issue is not whether there are any

drugs in clinical development; the issue is what percentage of drugs will be royalty-bearing for us," says Whitfield. He said Incyte now has 30,000 potentially income-generating licenses, which he said are "a huge part of the future value of Incyte."

Still, some investors have detected a shift in Celera's strategy since its stock fell from $270 at the height of the March biotech frenzy to around $80 today. Rather than simply selling access to its database, Celera is now looking to take royalties on drugs that eventually come out of the database, as well as selling findings in human genetic variations called SNPs, similar to

Orchid Biosciences

(ORCH)

,

Variagenics

(VGNX)

,

Gennaissance

(GNSC)

and other recently floated biotech stocks.

Shekhar Basu, principal of

Basu Capital Management

, which doesn't hold either Incyte or Celera, says "They are trying to make their package unique, but the big issue is whether Celera is going to evolve a business plan."