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Hunkapiller Leaves as ABI Prepares For Phase Three and a Fuzzy Future

In one of his last public statements as president of Applied Biosystems, Mike Hunkapiller wrapped up a presentation on ABI’s finances in July by identifying two important trends in life sciences research.

“The first is the trend to systems biology, or integrated science, and the second is the trend towards targeted medicine,” Hunkapiller said. “At Applied Biosystems, we need to ensure that we continue to introduce products that support these research trends.”

On Aug. 23, Hunkapiller suddenly resigned from the company. Was his last statement a Cassandra’s warning, or a bugle call marking the start of a new era in the development of molecular biology tools?

Only time will tell. Hunkapiller has gotten it right before. A co-developer of capillary sequencing technology, he helped jet-fuel the commercialization of the tool that enabled the sequencing of the human genome.

Tony Kerlavage, senior director of bioinformatics research for ABI, told BioCommerce Week that the company is now working towards a large-scale integration effort that will involve its genotyping, gene expression, proteomics, and small-molecule research instruments along with its LIMS and data management systems and even third-party instruments.

“That is part of the new face of AB,” he said. “We are very open to that third-party integration.”

The company is expanding its professional services offering, as well as rolling out a LIMS product that has evolved from the lessons learned in managing the human genome sequencing effort at ABI’s sister company Celera Genomics, he said.

But these plans are in the early stages and the company is still to complete the last phase of a year-long reorganization without the 55-year-old Hunkapiller at the helm. The changes that Phase III will bring remain to be formalized and announced.

The company began this reorganization by engaging the Boston-based Bain & Company consultancy in February to conduct a strategic and operational review. At the end of the third and final phase, the company expects to be able to fully answer the question of who it is.

The review is expected to finish at the end of the calendar year, Cathy Burzik, former ABI executive vice president and COO and now president of Applied Biosystems, said earlier this year. Burzik has been leading the company’s operational review.

The second phase of the review, announced in July, included a layoff of 145 people and a reorganization of ABI’s business operations into four separate divisions, each with its own leadership, strategic planning resources, R&D, marketing, and sales. Additionally, the company created several new cross-divisional functional groups (see chart, page 5) to add to the previously created Advanced Research and Technology unit.

ABI is among the largest pure-play multi-platform enterprises in the molecular-biology tools market. The company has a visceral connection to the most sophisticated life sciences laboratories that have installed its DNA, protein, and small-molecule technology platforms, connected to the Celera databases, and purchased its reagents, software tools, and services to create revenue flow of over $6 billion since June of 2000, the early days after the bursting of the dot-com/high-technology stock bubble.

Is the Foster City, Calif.-based giant of the sequencing world aligned for the future? Clearly ABI is taking aim at leading the molecular biology tools space with its dramatic efforts at reinvention. But it is not alone. There are many other companies that are puzzling over Excel spreadsheets and pie charts, conducting weekly brainstorming sessions, and holding off-site executive retreats to get some sort of reasoned insight into how to profitably conduct business in a market that has pressing here-and-now demands, while also heeding the inexorable tug toward an integrated future.

Diminishing Returns

In its 2004 fiscal year, which ended June 30, ABI posted $1.7 billion in product revenues from five product categories — DNA Sequencing, SDS & Other Applied Genomics, Mass Spectrometry, Core DNA Synthesis and PCR, and Other Products. But over the last three years, including FY ‘04, total revenue has been growing at an anemic single-digit rate.

However, the company’s mass spectrometry line has recorded double-digit revenue growth since FY ‘02, and contributed 24 percent of the company’s top-line revenues for FY ‘04. But even that pace has slowed from 29 percent growth in FY ‘02 vs. FY ‘01, to 24 percent in FY ‘03 vs. FY ‘02, to 17 percent in FY ‘04 vs. FY ‘03, according to Applera statistics.

The SDS & Other Applied Genomics line contributed 25 percent of FY ‘04 total revenues with $430.9 million, with 22 percent year-over-year revenue growth in ‘04, compared to 9 percent in ‘03, and 23 percent in ‘02.

ABI’s core DNA sequencing technology still provides some 33 percent of total revenues, but this has slipped from 37 percent of total revenues in FY ‘02 and FY ‘03. Sequencing revenues topped out at $631.7 million in FY ‘03, and brought in $572.5 million for FY ‘04 — a drop of 9 percent.

So, will a move to embrace integrated biology nudge ABI’s revenue meter?

“It spreads the peanut butter more broadly in terms of where people are spending their money,” Kerlavage told BioCommerce Week.

Integrating for Future Growth

New instrumentation causes a bubble in revenues, which ABI enjoyed with the release of its 3700 sequencer, and then again with its 3730, Kerlavage said. But the next wave of growth will likely come, he said, from combining instruments and reagents, biological products, and information to enable researchers to investigate systems approaches to biological research.

“No one company can offer all of the pieces of the solutions — there is nobody big enough to do that, nobody who has the domain knowledge, nor [is] specialized, or globalized to do it,” he said, qualifying that by adding that this didn’t represent official ABI thinking, but his own personal philosophy.

For the integrated future, he said, he believes that the company’s 20-year history of building instruments and reagents, and its wide range of customers, big and small, give it a competitive advantage.

While molecular imaging and other types of dense data are on the horizon, he said, that’s not where the company is pointed.

“You are going to see more and more integration of traditional molecular biology with traditional imaging technology and somebody will have to figure out how to merge all those things together,” he said. “That is not something that AB does today. You do see companies like GE, which has been in that business, and has been making forays into that area, but they are coming from the other end of the spectrum.”

General Electric and ABI’s sister company, Celera Genomics, in July announced a long-term collaboration aimed at developing imaging agents that would help physicians identify certain cancers sooner and more accurately.

Kerlavage said Cathy Burzik, ABI’s new president, brings “a career” in imaging as a marketing executive at Kodak to the table — if that’s how the market moves.

“A lot of that type of data will be dovetailed with the more traditional molecular biology data as AB grows closer and closer to medicine,” he said. “I think that is the vision that everybody has been aiming toward.”

More immediately, ABI is rejiggering its business to address customer needs, he said.

In addition to its reorganization, in August, the company accepted $8.5 million to settle a 5-year-old lawsuit with Illumina stemming from a joint development agreement.

Later in the month, ABI announced an agreement to expand the scope of a mass spectrometry joint venture with Toronto-based MDS. MDS will pay $40 million for a 50 percent interest in intellectual property assets related to current Applied Biosystems MALDI time-of-flight mass spectrometry systems and next-generation products that are currently under development.

— Mo Krochmal ([email protected])