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Jump the Fence or Not?

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With slow acceptance by big pharma, the genomics sector faces major changes and M&A this year

 

By William Langbein

 

The genomics sector, now entering adolescence, has to accept this frustrating development: pharma and biotech clientele are beginning to suspect that access to too much genomics data can be as confounding as having too little. Consequently, the plodding tempo of big pharma research will likely spur a realignment of sorts in the genomics industry this year, executives and analysts say.

Most predict that within 18 months many genomics technologies, largely the laggards in the sector, will be strategically merged or acquired. Many content and bioinformatics providers born as late as 2000 are already re-examining how well their business models will hold up in an upcoming season that, like the broader biotech sector, will likely be marked by M&A activity.

“Companies that have recently discovered they can’t make a go of it with their platform are contemplating buying another business,” notes Winton Gibbons, an analyst with William Blair & Co., adding that many companies have the cash to pursue such deals. “They expect an acquisition to turbo them to another level.”

Perhaps the biggest decision facing many genomics companies this year, says Gibbons, is whether “to jump the fence” from humble tool manufacturing to lofty — and inherently risky — drug development.

The notion is complex. For a company like Celera Genomics, which led the drive downstream with its Axys acquisition, the shift was always part of the grand plan. But for a company like Incyte — which ironically began life as a pharma shop but later morphed into a genomics powerhouse — the decision to “go drug” has been more gradual as growth of its core business first slowed and then stalled.

By comparison, companies such as Perkin Elmer, Applied Biosystems, and Waters “will never make the move,” Gibbons predicts. “Same with Invitrogen. Their businesses are fine, they won’t face the product issues like they did this year. There is no reason to shift.”

Younger companies, such as Applied Molecular Evolution, DeCode Genetics, Deltagen, Genaissance Pharmaceuticals, GeneLogic, and Variagenics, face tougher choices. For example, is a business model based on population studies sufficient for DeCode? Is there a big enough pharma base for, say, Deltagen’s functional genomics platform? If the answers turn out to be no, then a few leaders will emerge in each sub-market, while pieces of the remaining companies will be sold off or absorbed.

The consensus seems to be that while tools and tech shops are fine to start out in life sciences, the end game is all about the drug. “Agricultural work, diagnostics, outsourced research like [the kind] Millennium and Incyte did in their early days, those businesses pay the bills,” says one analyst. “Investors still need to see a drug at the end of the road.”

Yet with all the scientific risks, costs, and time pressures involved in drug development, few genomics executives will admit they’re prepared to jump the fence. Frank Gleeson, CEO of MDS Proteomics, argues that scientists and executives understand that the pieces of the puzzle — genes, SNPs, proteins — all connect at a meta-level. However, at the commercial and development level, where big pharma staked its claim long ago, the connections are not necessarily in an orderly sequence.

William Baker, an analyst with GARP Research, sees the structure of proteins and gene-expression data as so much math. Many genomics companies have been launched on the premise that they can aggregate the math differently, better, or faster than their competitors. Baker, who follows GeneLogic and its aggregation of expression data, suggests that large biotechs and pharma shops may move toward a model in which they share those data.

After all, “if it’s all just a pile of math, why not just buy it cheaper? And from fewer sources?” says Baker.

This article originally appeared on GenomeWeb.com.

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