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As Markets Evolve, ABI Shifts Focus to Mining New Revenues in Consumables

For Applied Biosystems, the first question typically asked when a customer signs on the dotted line after buying an expensive instrument is likely the most important one.

"Can we supply you with the chemistry, the chips, the software, and, by the way, can we have our folks take care of all of that for you?" is the molecular biology toolmaker's equivalent of fast food's "You want fries with that?" But it is much more than an upsell.

Last week, ABI, the dominant instrument maker in molecular biology for the past 10 years, made it clear: Its business now requires more consistent revenue streams than the cyclical windfalls and diminishing prospects from expensive DNA sequencer instruments. In other words, an evolving life-sciences market requires ABI to look for additional customers of consumables, services, and software around those instruments, and it is looking to several components of its business, notably in its sales organization, to accomplish that task.

"We have an incredible strength in capital equipment sales," Carl Hull, vice president and general manager for ABI's RT-PCR and gene-expression business lines, told investors visiting the company's Foster City, Calif., headquarters on an April 5 junket. "Our real opportunity is to take that core competence and build a shell around it. Consumables represent a big opportunity for us and we are focused on that."

ABI is not alone. Many companies in the BioCommerce Week Index are focused on having a broad and varied product portfolio to offset the market-cycle risks inherent in business models linked to platform technologies. Waters' recent revenue and earnings reforecast illustrates the risk of instrument dependence (see BCW 4/7/2005).

With $655 million in cash on hand, ABI has moved slowly over the past year as its DNA sequencing revenues have shrunk (see BCW 10/28/2004) and its competitors have gone on acquisition sprees (see BCW 3/24/2005).

The investor event, sponsored by UBS Warburg, provided ABI's most detailed comments to date on a business plan taking shape after a strategic reorganization and the exit of long-time leader Mike Hunkapiller and others (see BCW 9/9/2004). These changes follow a year-long strategic evaluation conducted by Boston-based Bain & Company consultancy.

To decide how it will integrate greater consumable sales into its business, ABI has retained an undisclosed consultancy to evaluate its sales force, said Cathy Burzik, president of the company.

"We haven't had an opportunity to examine sales-force effectiveness," Burzik said in the webcast. "We are now focusing within the US [and] asking fundamental questions: 'Do we have right number of feet; are the territories sized appropriately; is the compensation right?'" she said. "We are an instrument-focused company, and we have instrument people selling consumables. Is there an opportunity to have a consumables-focused sales force?"

Burzik didn't say whether this introspection will result in a sales-force reduction, or perhaps even the addition of call centers in Hyderabad, India, whose job it could be to pitch scientists to stock up on consumables like $800 whole-genome mouse, human, or rat microarrays; Taqman chemistries; or PCR enzymes — some of ABI's leading products outside DNA sequencers and mass spectrometry systems.

"In terms of business performance, when you make an investment in the sales force, there is a lag," she said. "We are making the strategic assessment now; then there will be hiring and employment. It will be a ways out in fiscal '06 before we see anything tangible."

Overall instrument sales for ABI's most recent reported quarter fell 8 percent to $217 million, compared to $235 million a year ago, while consumables grew 14 percent to $170 million, from $149 million in the year-ago quarter. Through the first two quarters of 2005, sales of consumables were 38 percent of ABI's revenues, compared to 34 percent for the same period last year, while instruments were 44 percent, compared to 48 percent for the first six months of last year.

The company, which will release its FY '05 third-quarter financials on April 25, declined further comment before publication deadline.

Changing Market for DNA Sequencers

The writing has been on the wall for ABI's flagship DNA sequencing instruments, which have been a cash cow, averaging $148 million in revenues a quarter and some $1.8 billion in total sales over the past three years. In February, the company reported that revenues for its DNA-sequencing segment during the three months ended Dec. 31, 2004, declined 17 percent year over year to $141 million.

Capillary electrophoresis, the technology at the core of ABI's DNA sequencing business, is under increasing pressure from still-on-the-drawing-board technologies that are seen as potential — and order-of-magnitude cheaper — substitutes. Commercial efforts include 454 Life Sciences, a Branford, Conn.-based subsidiary of CuraGen launched in 2000 and developing an amplified molecule technique; and single-molecule technology developers Solexa of Essex, UK; Nanofluidics of Menlo Park, Calif., a Cornell University spinoff; Helicos Biosciences of Cambridge, Mass.; and AQI Sciences of Bisbee, Ariz.,

So this shift in the marketplace has caused ABI to look for additional uses for its installed base — such as resequencing, genotyping, and methylation — that can help drive revenue growth in the consumables side of the business.

In last week's meeting, ABI said it sees an opportunity for revenues in the proposed nine-year $1.35 billion human cancer genome project, which has based its projections on estimations that the costs of sequencing will decline to 10 percent of what they are today.

"We are very focused on working with the genomic centers and partnering with them to make sure that our technology is the technology of choice for this project," said William Murray, president of ABI's new molecular biology division. (See BCW 1/27/2005).

Still, given the time frame of the project, the technology that it will initially use to resequence 12,500 tumors may not be the same that it ends with as the US government offers grants to encourage the development of sequencing technologies with the goal of processing a whole human genome for $1,000.

Capillary electrophoresis "is the best way to start [cancer genome resequencing] today," said Burzik. "We are not naïve about the other technologies, and we know that they [government labs] will want to start testing in parallel."

Burzik said ABI's current sequencing instruments can be improved to create economic efficiencies for the purposes of the project, but incrementally.

"We work with genome centers in terms of 'How do we improve productivity?'" added Murray.

The genome centers, which have bought banks of sequencers, and likely replaced them at least once during the human genome project, have long been ABI's best customers for its CE-based tools.

But, with the sequencing of the human genome completed, the sequencer-based work of these centers is shifting from 100 percent de novo sequencing to approximately 10 percent resequencing — and growing — Burzik said. Outside the government sequencing labs, the mix is toward 50 percent resequencing, she said.

"We have many sequencers out in the marketplace," she said. "There is a huge opportunity to develop applications that can rest on those sequencers — resequencing, genotyping, methylation. We have to make sure that the installed base is very effectively utilized and that drives the consumables sales for us."

While the company has announced that it will reduce its spending on research and development, it will still invest in its core CE technology, said Burzik.

"Going forward, our focus is on improvement and extension of the CE core platform technology," she said. "In long-run sequencing, we have a strong position. We believe we can tailor our software and applications for shorter runs with this technology. We think our technology has a lot of runway left in terms of applications going forward."

— Mo Krochmal ([email protected])

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