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Deltagen: The Oracle of Genes

Simply put, genomics is the relationship between genes and their functions. With the mapping of the human genome, companies are trying to find ways to make sense of the complex genetic information. After all, the human genome consists of three billion nucleotide bases that encode about 100,000 genes. Of these genes, perhaps 3,000 to 10,000 may have uses for curing diseases.

Of course, there are a variety of software firms that want to make genomics development much easier. One is Deltagen . Like all other companies in this field, Deltagen is a recent IPO.

The company has a product called Deltabase. This is a comprehensive database of about 1,000 genes. Companies have access to the information through a subscription model. With this information, companies can validate new drugs and get them to market faster and more cost-effectively.

Another product is Delta-GT. With this, genes can be better identified, as well as inactivated.

The company is very early stage, as reflected in its recent financials. In the past quarter, revenues were a mere $206,000, which was actually a decrease from $244,000 in the same period a year ago. Why the fall-off? Well, the company changed its business model from fee-for-services to subscriptions.

Although, subscription revenues could prove to be very lucrative. Currently, Deltagen has a $5 million per-year deal with Glaxo Wellcome.

Of course, Deltagen is showing significant losses. In the past quarter, losses were $8.6 million. But the recent IPO will be a cushion. The company raised about $110 million.

While the company has validation from a major customer and is building a valuable intellectual property database, the stock price is high risk. In the past few months, the stock has ranged from $9-$32. Currently, the stock is at $15-5/16, sporting a $457 million market cap.

In fact, US Bancorp Piper Jaffray does not see significant profitability until 2005 (the estimate is 96 cents per share). Thus, in the meantime, expect quite a bit of volatility. There is definitely no rush to jump in.