CEOs: Consolidation looms for biotech tool makers

Allison Connolly
Journal Staff

While drug makers and medical device companies have fared better than other industry sectors, executives at local companies that build the technical tools used by the industry say they are headed for a year of upheaval marked by a spate of mergers, layoffs and squeezed budgets.

Some of Greater Boston's best-known tools-company chief executives, who gathered at this week's Drug Discovery Technology 2002 conference in Boston, say the signs of a coming industry shakeout are piling up - slumping sales, public markets indifferent to new stock offerings, an oversupply of companies serving a small market and growing uncertainty among drug companies of their ability to quickly turn genome data into revenue-producing drugs.

"We don't have the trust of big pharma yet," said Richard Gill, chief executive officer of AnVil Inc., a Burlington-based company that analyzes and integrates large amounts of disparate data for genomics companies.

Tools companies - which don't have drug or biotechnology products of their own but which sell high-throughput screening, bioinformatics and other services to biotechnology and pharmaceutical companies - have struggled for some time. Their revenue is down because many of the research and development budgets have been slashed at the biotech and pharmaceutical companies that make up their customer base.

What's more, the public markets are all but closed to most companies looking to raise cash to survive, let alone grow. And, worst of all, venture capitalists, investors and analysts have repeatedly and publicly declared, "Tools companies are dead."

Still, an estimated 3,000 tools companies are vying for a market estimated to be worth, at best, $700 million and, at worst, $100 million. Most bioinformatics companies are not profitable: Many are selling services very similar to those offered by competitors, thereby forcing down their prices and intensifying the battle for an ever-diminishing market.

Those companies hoping to stage initial stock offerings are waiting out the chill in investor support. So far this year, only one biotech in the country has completed an IPO, while many have shelved their IPOs until the market turns around. Now, with no window in the market opening anytime soon, a handful of executives of area-based tools companies discussing the tools industry's critical condition during a break at this week's Drug Discovery Technology 2002 conference surmised that it is unlikely many of their counterparts will survive until next year.

The key to survival will be preserving cash, establishing a narrow but lucrative niche or merging with rivals - as many will ultimately be forced to do.

"We've seen informatics companies crash and burn because they're outpacing their revenue," said Andrew DePristo, president of Waltham-based GeneData Inc., which provides data management and analysis for genomics companies dealing with specific diseases.

"We expect to be a profitable survivor," DePristo said.

Gill said his business plan called for 45 employees by now. Instead, he is holding his staff to 30. And the company is looking for long-term partners and licensing deals that will help it ride out the storm.

"We're unabashedly building revenue-sharing deals," Gill said.

Genome Project backlash
The cash-consciousness is a far cry from two years ago, when investors were driving up the stocks of tools companies because they thought the tools companies would reap the quickest rewards from the human genome project - tools companies could identify drug targets without the time and money required for lengthy clinical trials.

But a January 2001 report by the brokerage house Lehman Bros. and consultancy McKinsey & Co. helped turn the tide against tools companies. The report concluded that the human genome project, which had been unveiled the year before, would yield so much new data that biotech and pharmaceutical companies would be bogged down by it, unable to turn it into drugs.

And, the dour report continued, drug makers would waste so much time developing targets - the majority of which would fail - that the cost of research and development would soar to as much as double the historical cost per drug.

The conclusion was dire: Drug companies will not increase R&D spending for drug discovery until 2005, when scientists would be likely to know more about the ways in which human genome data relates to the biology of disease, and when companies will be better at identifying drug compounds.

The executives hope to fashion their tools as vital to biotech and pharmaceutical companies. "Our proposition is, Wouldn't it be great if we could have an understanding of the disease before starting the drug discovery process?" said Eric Gordon, president of Lexington-based Ardais Corp., which uses bioinformatics, biology and pathology to comb medical histories and human tissue genes associated with disease.

Michael Griffin, president and chief technology officer of Cambridge-based Xpogen Inc., an informatics company, said the tools industry is just as guilty as the pharmaceutical industry of being naive about the complexity of disease biology and must acknowledge that data alone won't produce drugs.

While some say genomics research produced too much data of little use, Griffin believes the data to date are sparse. And, he adds, drug makers have had "their head in the sand" as to the tools that will be required to turn data into products.

"There's going to be plenty of innovation coming out of genomics," Griffin said. "What the industry needs to do is generate as much data as possible and use tools that can take advantage of that data."

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