By Malorye A. Branca
December 15, 2002 | The genomics cash crunch is feeding the biggest shakeout in biotech history, and it’s playing itself out with agonizing slowness.
Two years ago, virtually everyone who knew what the word meant was starting a genomics company. Today is much different. “[Genomics] companies are cash flow negative, and stock prices are down,” says Bryan Roberts, a general partner at Venrock Associates in Menlo Park, California.
That’s because genomics’ compatriots and customers aren’t doing so well, either. Biotechs as a whole are taking a bath. Most unusual is the fact that everyone’s favorite client, Big Pharma, is suffering too. Finally, because it’s coming on the tail of the dot-com bomb, genomics’ troubles are drawing unfortunate comparisons.
As a result, embattled CEOs are faced with a growing number of problems -- and a dwindling set of options.
“Genomics was a darling in 2000, and now it has swung to the other end,” Roberts says. This reversal was prompted by the realization that profits are not imminent. For a short time around late 1999 and early 2000, he says, “People somehow forgot that genomics was early in the cycle and drugs take 15 years to get to the market.”
Dig deep enough, however, and there is a bright side. Some well-positioned companies are benefiting from others’ plights. More importantly, there is a real market opportunity out there, and most experts believe this adjustment was inevitable. Now, it’s just a matter of getting beyond the pain.
Right now, some great deals are available, and genomics companies are selling assets more valuable than what dot-comers could ever hope to produce.
“I got an offer recently that I couldn’t believe,” said one biotech executive on condition of anonymity. “Millions of dollars of good technology, really cheap.” That comment was made at Massachusetts Biotech Council’s late October “Mass Opportunities” meeting in Boston. About 30 public companies and almost 50 private ones presented at that meeting, and the opportunities abounded. “Half these speakers sound like they’re trying to sell their companies, or at least a part of them,” the same executive said.
In circumstances like these, careful shopping and optimal timing makes the difference in getting the better end of the deal (see Table: The Incredible Shrinking Genomics Arena).
David Green, president of Harvard Bioscience Inc. in Harvard, Mass., sounded almost giddy after its acquisition of Genomic Solutions went through in late October. On the surface, Genomic Solutions’ business looked more like an impending train wreck than a glowing opportunity. The company was headed for the inauspicious distinction of becoming the first in a string of genomics players about to be delisted by Nasdaq because the share price dipped below $1 for too long (120+ days).
But Harvard didn’t purchase that Genomic Solutions. Instead, it arranged to buy a streamlined version with 30 percent fewer employees but still featuring some top brass, a few manufacturing facilities, an experienced sales force, and three technologies that Green says are a “good fit” for Harvard Bioscience.
Those tools include a line of products for automated mass spectrometry sample preparation in proteomics, products for ultra-low volume sample preparation for high- throughput screening, and tools for microarray production and analysis. The first two are the type of “hot niche spots” that Green says he covets.
Because Genomic Solutions is already selling to high-throughput screening laboratories, its sales force could help increase sales of Harvard Bioscience’s COPAS Biology system, obtained through the 2001 acquisition of Union Biometrica Inc. COPAS may be the company’s brightest jewel -- a unique approach to high-throughput screening in small animals such as nematodes, fruit flies, and zebra fish.
“Genomic Solutions’ tools address some important niches, and they fit well with what Harvard Bioscience already has,” says Cambridge Healthtech Institute President Phillips Kuhl. “It’s a great deal for Harvard Bioscience.” Genomic Solutions’ products were already bringing in a gently rising revenue stream, up from $4.5 million in Q2 2001, to $6 million a year later. But its cash situation was dire: It had only about $5.2 million by the end of Q2 2002, down from about $35 million a year earlier.
Like everyone else, Harvard Bioscience is still having a tougher year than it expected. But even though it isn’t hitting projections, it has grown 38% since last year, with revenue in 2002 expected to be in the $56-58 million range, partly because of its recent acquisitions.
Green credits the company’s business approach. “We put the emphasis on building a business, and then putting in a growth plan,” he says. “It’s hard to maintain the infrastructure for a $100 million company if your revenues are far below that.” Just as important, Green says, is to try and figure out what your clients need before you invest in it. “You can’t just build a technology and hope they will come.”
Invitrogen Corp. has also made a move, buying up bioinformatics leader InforMax for $42 million. InforMax had $47 million in assets and was also on Nasdaq’s infamous “about to be delisted” list. (Other purported members are Lynx Therapeutics and Genaissance Pharmaceuticals Inc.) While Invitrogen’s purchase looks suspiciously like what Roberts calls a “financing transaction,” there are some clear synergies, and it appears to be a real acquisition.
Dueling and Dealing
In the end, it’s a shootout. There will be more deals for cash, for technologies, and for client access.
“You have lots of genomics companies with instruments, reagents, or software, from which there will emerge several significant players,” Roberts says. Companies such as Applera Corp., Amersham Biosciences, and PerkinElmer Life Sciences are all vying for those spots.
“When all the shooting is done, we think we will be left standing,” Green says.
Buying and selling is not the only survival strategy for the tool companies. Sydney, Australia-based Proteome Systems Ltd. and Charles River Laboratories International Inc. of Wilmington, Mass., for example, are establishing a proteomics services joint venture. Charles River Proteomics Services Inc. will be based in Worcester, Mass., and will combine Charles River’s research tools and services with PSL’s ProteomeIQ and integrated platform for proteomics that includes equipment for automated sample handling, mass spectrometry hardware, and bioinformatics.
“Generally, it’s difficult to gain leverage and scale as a services business,” says Roberts, who hasn’t scrutinized this particular deal. But in these times, the strategy has some advantages. “A services-to-product evolution helps work out the kinks in the product,” he says. It also provides the opportunity for an income stream that does not require forging several large deals that can each take several years to close, at least with Big Pharma.
Beyond the tools arena lies the universe of genomics companies now striving to become pharmaceutical companies. Two main types of deals will be found here, Kuhl says. “Companies will be picking up a piece that is complementary to what they are already doing in the target discovery and validation arena, or, companies with plenty of targets in hand will be trying to pick up tools, in areas like combinatorial chemistry or lead optimization, to help convert those into drug candidates.”
San Diego-based Sequenom Inc.’s acquisition of Axiom Biotechnologies Inc. late this summer is a perfect example. For a mere $4 million, the genotyping tool giant scooped up cellular assays for target validation and lead optimization, as well as medicinal chemistry. Those tools and skills fill the holes in their new drug development arsenal. “We were beginning to build that capability in house,” says Sequenom spokesman Pete De Spain. “But this deal let us acquire everything we needed in one fell swoop, at a bargain price.”
Axiom, which is also based in San Diego, had approximately 25 employees at the time, and had spent about seven years and $18 million to develop its capabilities. De Spain says most of that staff stays on, as Sequenom must soon start delivering validated drug candidates. Even healthy sales of its genotyping equipment are unlikely to sustain a drug discovery effort. The company posted revenue of $30.7 million but an operating loss of $37.7 million in 2001.
It’s going to be painful, and some good talent and products will be lost along with everyone else. But, ultimately, “consolidation makes sense,” says Mick Savage, an independent consultant and formerly at Pharmacopeia and MSI. “It will provide value to the customers.” Having overseen multiple mergers and acquisitions himself, Savage cautions that it is also difficult. Companies need to pick their partners carefully. “Really putting companies together at a management level is tricky.”