(FORTUNE Magazine) – Advances that win Nobel Prizes are uncommon, ones worth billions of dollars are even scarcer, and those yielding both are blue-moon rare. In biotech there have been just two blue moons, both in the 1970s. One marked the advent of gene splicing, which enabled genes to be implanted in cells to churn out medicines like EPO, the anti-anemia blockbuster that helped make Amgen a $5.5-billion-a-year giant. The other came with the development of monoclonal antibodies, molecules that single out diseased tissues for destruction--Genentech, the oldest biotech, gets most of its $2.2 billion a year in sales from monoclonals.

Now there's a spellbinding blue glow on biotech's horizon again. Its source is a fast-rising technology called RNA interference, or RNAi. Simply put, RNAi is a natural process in cells that researchers can harness to deactivate selected genes. It sparks intense excitement for two reasons: First, RNAi within a few years should yield a rough idea of what each of our genes does--knowledge that until recently seemed more than a decade away. Second, it promises novel drugs that disable genes that cause disease. Gene medicines have long been a biotech grail.

The biomedical buzz about RNAi recently became a roar with the publication of mouse and test-tube studies suggesting that drugs based on it will be able to treat cancer, viral diseases such as hepatitis C and HIV, and maybe even scourges like Huntington's chorea, the brain disorder that killed folk singer Woody Guthrie. If even a fraction of RNAi's promise is realized, the technology could lead to billions of dollars in new drugs. In December, Science magazine named RNAi advances the No. 1 breakthrough of 2002. Biotech senior statesman Phillip A. Sharp, a Nobel-winning biologist at MIT, declares that RNAi is the "most important and exciting breakthrough of the last decade, perhaps multiple decades."

Last year Sharp co-founded a company in Cambridge, Mass., Alnylam Pharmaceuticals, to develop RNAi-based drugs--only the second time he's donned his entrepreneurial hat. (The first time was in 1978 when he co-founded Biogen, a Cambridge gene splicer, with a market cap today of more than $5 billion.) At least ten other RNAi-focused startups, including Sequitur of Natick, Mass., and Benitec of Queensland, Australia, are jostling for the limelight. Pharmaceutical giants such as Abbott Laboratories and biotech majors like Genentech have plunged into RNAi research too.

"The interest in RNAi is not unlike what we saw with genomics in the late '80s," when the idea of decoding genes en masse galvanized biology, says John Maraganore, a former executive at genomics pioneer Millennium Pharmaceuticals who recently became Alnylam's CEO. (Alnylam, pronounced al-NYE-lum, is Arabic for "string of pearls" and was chosen as the company's name because it suggests the shape of RNA molecules.) The rage for RNAi has grown so fast that many of its champions already seem as concerned to avert euphoria as to play up its prospects. Says Maraganore: "We don't want there to be the kind of disappointment in a few years about RNAi that there is now with genomics. Therapeutics take time."

New drugs typically take more than a decade to get from the lab to market. And before RNAi drug developers can make much progress, they must solve a daunting problem: getting gene-silencing medicines to where they are needed in the body. Compounds used in test-tube studies to trigger RNA interference break down in seconds in the bloodstream. Once that stability problem is solved, researchers still must devise ways to deliver the drugs to desired tissues in a form that penetrates cells. Says Rockefeller University researcher Thomas Tuschl, an Alnylam advisor whose seminal work has made him a contender, along with several other RNAi pioneers, for a Nobel Prize: "Some tissues will be easier to target than others. For instance, we might use aerosols to get [RNAi-based drugs] into lung cells. But the delivery problem is not going to be solved very rapidly."

Still, at this point RNAi appears more promising than earlier gene-tweaking technologies such as "antisense," a 1980s technology that's yet to yield a major drug. One reason is that RNAi is remarkably user-friendly--less than two years after a study by Tuschl broke open the field, RNAi is already widely used as a research tool. A recent study led by Harvard geneticist Gary Ruvkun showed its power: In one fell swoop his team identified 300 genes that, when turned off via RNAi, reduced body fat in worms. Many of those genes have counterparts in humans, including ones that point to new molecular targets to hit with conventional drugs. Such medicines might reach the market to treat obesity long before RNAi drugs do.

There's another reason for guarded optimism, says Mark Davis, a California Institute of Technology professor who advises Alnylam: RNAi is extremely potent--minuscule amounts of RNAi inducers can silence genes. That will simplify delivery, for it means that even modestly effective ways of getting the medicines into targeted cells may yield therapeutic benefits.

Several companies claim to have made significant progress in the race to develop prototype RNAi drugs that are stable in the bloodstream. (Most of the medicines probably will have to be injected--getting them through the digestive gauntlet appears infeasible.) In Boulder, Sirna Therapeutics says its chemists have synthesized a breakdown-resistant RNAi compound that in experiments on rats shows signs of efficacy against macular degeneration, the leading cause of blindness in the aged. (The proto-drug blocks genes that promote the growth of abnormal blood vessels in the eye.) Based on that progress, Sirna, which until April was known as Ribozyme Pharmaceuticals, recently landed $48 million in venture capital financing from Oxford Bioscience Partners, Venrock Associates, and other firms with long biotech track records.

Sirna's leap into the niche came naturally, says CEO Howard Robin: The company has spent years tinkering with RNA-based molecules called ribozymes, which are akin to those that silence genes. Many academic biologists and other biotech companies have also fiddled with RNA over the years, which partly explains why RNAi research has taken off so fast. In fact, scientists have known since 1961 that genes encoded by DNA are transcribed into "messenger RNA" in the process of making proteins--the main stuff of living things. RNAi simply knocks selected messenger RNAs out of action, blocking production of the corresponding proteins.

Scientists believe that RNAi's gene-silencing mechanism evolved eons ago in plants and animals to stifle foreign genes that viruses and other parasites sneak into cells in order to replicate themselves. Later RNAi apparently was also brought into play to help regulate genes early in life.

The story of RNAi's discovery arguably began in the 1830s, when European plant breeders stumbled onto "star" petunias, whose pigments form asterisk patterns. The source of the colorful stars was a puzzle of little interest until similar patterns turned up in a 1990 study by geneticist Richard Jorgensen. Working at DNA Plant Sciences, a biotech firm in Oakland, he was trying to intensify purple petunias' color by equipping the plants with extra copies of a purple pigment gene. "To our amazement, we got the opposite," says Jorgensen, now at the University of Arizona. Some of the altered petunias were white. Others came out looking like Rorschach tests.

Jorgensen was mystified--somehow he had silenced the very pigment gene whose action he was trying to boost. In hindsight, it's now clear what happened: Think of yourself as one of his petunias. Suddenly new genes are jammed into your cells. You've seen this sort of thing before--it's what viruses do. So you mobilize your RNAi defenses. But since the invasive genes are nearly indistinguishable from your own pigment gene, you wind up silencing it too. (Something similar seems to have happened naturally in the 1830s star petunias.)

As scientists pondered the petunia mystery, geneticists studying tiny worms called nematodes ran across a similar anomaly--inserted genelike fragments unexpectedly silenced their natural counterparts in the animals. In 1998, Andrew Fire at the Carnegie Institution of Washington, in Washington, D.C., pinpointed the cause of the oddity. Working with University of Massachusetts biologist Craig Mello, Fire's lab discovered that the fragments had formed "double-stranded RNA"--abnormal versions of RNA whose molecules resemble closed zippers--and triggered the RNA interference phenomenon in the test worms. That work put RNAi on the map.

But excitement about the finding soon turned to frustration. When scientists tried the same trick in mammal cells, it usually caused wholesale genetic shutdown, killing the cells. That led them to think that RNAi was probably useless for genetic studies or for making drugs.

MIT's Sharp and other optimists refused to give up. By 2000 they had found signs that cells chopped double-stranded RNAs into small pieces before they actually came into play as gene silencers. Chasing that lead, Tuschl, a former Sharp protege then at Germany's Max Planck Institute, managed to isolate the active fragments, called small interfering RNAs, or siRNAs. In April 2001 his team reported in the journal Nature how to make siRNAs that could inhibit desired genes in mammal cells without the broad killing effect.

The report triggered a gold rush. Much of the excitement sprang from the fact that Tuschl's study provided a handy way to turn off genes of interest in test-tube studies. That's immensely valuable because observing what happens to cells with silenced genes sheds light on the genes' functions--a key step in winning gene patents and discovering drugs. At Abbott Labs, for instance, researchers have launched a major RNAi-based effort to identify cancer-promoting genes and related proteins--the project has already yielded exciting finds, says manager Stephen Fesik.

Meanwhile, Sharp, Tuschl, and their colleagues joined forces to form Alnylam. They had little trouble finding backers--venture capitalists queued up as if the tech bubble had never burst. First in line was an astute Harvard M.D./Ph.D. who had long tracked RNAi research, Christoph Westphal of Polaris Venture Partners in Waltham, Mass. He and other VCs arranged for $17 million of startup capital and assembled a team of advisors that reads like a who's who of RNAi--besides Sharp and Tuschl, it includes Gregory Hannon, an RNAi pioneer at Cold Spring Harbor Laboratory on Long Island, and David Bartel, an MIT biologist who has elucidated RNAi's normal role in cells.

Alnylam holds exclusive rights to therapeutic applications of Sharp's and Tuschl's pioneering research. But many teams have contributed pieces of the RNAi puzzle, setting up possible patent disputes at least as complex as the phenomenon itself. Ribopharma of Kulmbach, Germany, last year was awarded the world's first patent on the use of short RNA molecules to silence genes. Meanwhile, Sirna, the Colorado company, asserts that it holds key patents for making RNA molecules stable enough to work as drugs.

The competition will become even more fierce as companies race to solve the RNAi delivery problem. There are two basic approaches to the challenge. One, favored by companies like Alnylam and Sirna, involves chemically tweaking siRNA--the small, gene-silencing molecules--to stabilize them and facilitate their entry into cells. Intradigm, in Rockville, Md., and other players are pursuing a variation on the theme: packaging siRNAs with other molecules that serve as guiding chaperones.

The alternative approach, however, may reach the clinic first. It entails using viruses to ferry siRNA-making genes into cells. The genes then churn out siRNAs, potentially silencing targeted genes for months. The strategy is considered riskier than injecting siRNA directly, because the viral carriers may spark dangerous immune reactions. But it promises to speedily address the delivery problem for certain diseases--AIDS, for example.

With colleagues at other centers, John Rossi at City of Hope, a biomedical institute near Los Angeles, recently launched groundbreaking studies aimed at using viral delivery to suppress an HIV-like virus in monkeys. His ultimate goal is an RNAi drug that both "knocks down" several HIV genes and silences certain human genes that enable the virus to enter cells. To reduce the risk of bad reactions to viral carriers, the scientists plan to extract blood precursor cells from patients and introduce the carriers into those cells outside the body. Meanwhile, high-dose chemotherapy would be administered to the patients to wipe out their diseased immune cells. Then the treated precursor cells would be infused back into the patients, repopulating their immune systems with cells containing HIV-silencing genes. The result, the researchers hope, would be a lasting cure.

The technique may be ready for human tests within three years. Maryland's Intradigm and Germany's Ribopharma say they, too, hope to launch clinical trials with RNAi drugs in that time frame.

Realizing such aspirations would move RNAi from discovery to clinical tests with astounding speed. That prospect may be hard to buy after so many biotech hopes have fallen flat. Still, biotechnology hasn't had a blue moon for a quarter century. One is due.

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