Thursday, August 16, 2007

Helicos Part III

This is the third in a series about Helicos Biosciences, a next generation sequencing startup

Helicos Part I
Helicos Part II

Helicos Financials

Raised in IPO: 48.6 million
Q2 Burn Rate Ending June 30 2007: 8 million
6 month Burn Rate Ending June 30 2007: 16.4 million
(18.1 million repaid in stock conversion)
Yearly Burn Rate 2006: 21.3 million
Total Assets June 30 2007: 68 million

The take home message from both the S-1 and the recent 10-k is that Helicos is burning money at an increasing rate. This however is to be expected from a company less than one year from their initial product launch, and from an investor's viewpoint nothing in the publicly available financials throws up any red flags. I am also assuming that the 18 million payout for preferred stock conversion pertains to a number of venture investors getting a return out of the IPO fund. Also keep in mind that the 48 million raised during the IPO was far less than the original 80 million that management was hoping for. Naturally anyone looking to invest in HLCS in the quarter following the launch of the Heliscope will have to take a much harder look at the financials, but for our purposes I think its safe to say that the numbers seem to be on track relatively speaking.

Helicos: to Buy or Not?
What a ride this analysis has been. To recap, everyone agrees that next generation sequencing is going to change the world of healthcare as we know it. Naturally therefore, the field of NGS is highly competitive, and the players include some of the biggest and baddest, as well as a lot more little guys in the wings hoping either to get a foothold in the market, or to get bought out for some of those ridiculous sums we talked about earlier. Any way that you look at it this field is a frothing pool of speculation.

Enter Helicos, a technological startup intellectually founded at CalTech by the now head of the Stanford Bioengineering Department and an HHMI investigator Stephen Quake. Backed by Flagship Ventures who, if you aren't already aware, are a very well connected firm out of Cambridge. In fact, Stanley Lapidus leaves Flagship to become the CEO of Helicos. In addition, the Helicos scientific advisory board reads like a who's who in the sequencing and bioengineering field. These include, Leroy Hood, developer of automated Sanger sequencing instrumental to the human genome project, Steven Chu director of LBL and Nobel laureate, John Quackenbush, previously of TIGR, and Eugene Meyers, co-developer of BLAST, to name only a few.

On the surface, the concept of sequencing single DNA molecules is enticing to any biotechnical investor for a multitute of reasons. Not least of which are that the words "single molecule" are white hot at the moment in both acedemia and in industry, not to mention that the whole concept smacks of "nanotechnology" another concept on the tips of everybody's tongues. I will readily admit that "true single molecule sequencing" was precisely what piqued my interest in researching Helicos in the first place.

Under the surface, the technology seems feasible, in other words I have no doubt that it actually works. How well it works on the other hand, is another matter. Helicos is keeping entirely mum about what I believe to be their achilles heel ... accuracy. Now that we are armed with an in depth understanding of the fundamentals of the technologies it becomes plain to see that the error rate of any single molecule system is going to be higher than those methods which use a PCR step to make millions of identical copies and essentially increase the signal available to detect millions-fold. Furthermore accuracy is so important in this field because the major market, that of human resequencing for disease or genetic anomalies, must be 99.9% accurate for reasons which need no explanation. I think that it also goes without saying that 1000MB per day is of no use if the accuracy is 97% and you have to do sequences in triplicate. It is perfectly possible that the Heliscope does provide an accuracy comparable to the other NGS systems, however as an investor I would be more comforted to see Helicos release this information along side their 1000MB/day claims.

So Helicos is talking a big game but holding their cards close. Adding to these mixed signals, the company is absolutely stacked with some of the biggest names in the field. They have also been awarded a handsome grant from the NHGRI which further inspires confidence. Yet, when so much is at stake battling for supremacy in this truly revolutionary field the skeptic in me remembers the last time genomic hype was at its peak. In this, I feel that some sort of academic coup is not entirely out of the question. That being said, this particular academic coup would have a very good chance of pulling off say, the backing of some very big name institutions.

The entire speculative business of evaluating biotechnical IPOs notwithstanding, I am inclined to jump on the bandwagon and buy myself a small stake in HLCS. Therefore should Helicos not commence shipments on an acceptable Heliscope "next generation sequencing system" that lives up to its expectations by say, the first quarter of 2008, I will indeed have egg on my face. However in this, I will also be in some very distinguished company.

Disclosure: I am long shares of HLCS