Pfizer and proposed acquisition partner Pharmacia may be joyfully planning their honeymoon, while Bristol-Myers Squibb dreams of the day that GlaxoSmithKline (or another suitor) formally proposes tying the knot, but for microarray companies, this latest wave of pharma M&A is bound to induce more queasiness than euphoria.
After all, merged pharma companies, like newlyweds, tend to reduce capital expenditures when they bring everything under one roof. "People tend to get cautious with capital spending even before a merger is announced," said Dan Calvo, vice president of sales and service, Americas, for PerkinElmer Life Sciences. And after the merger is announced, "there tends to be a freeze on capital spending as a whole," he said.
With this slowdown in capital expenditures comes a lengthening of the sales cycle for products, said Nalini Murdter, Agilent''''s vice president of new business development, "because of the wariness of the value of any tools." In the era of more cautious R&D spending, even without a looming merger, "people want to do proof-of-principle studies before they want to set up a longer-term relationship," Murdter said. This is true more with untested tools such as a custom microarray service contract than, say, with well- proven catalog arrays.
"They are much more interested in the one right tool that has proven [itself] as opposed to ''''we''''ll buy one of each of the four different ways of doing it and then we''''ll choose later,''''" noted Calvo.
To steady themselves amid these roiling currents of pharma R&D spending, leaders in the sector have developed several strategies. Among these are diversifying the customer base beyond big pharma, reconfiguring sales teams to deal with the changed customer landscape, and flexible product and pricing strategies that can shift the focus away from large capital purchases when necessary, company executives said.
The Diversification Defense
The customer diversification trend seems to be gaining steam across the board, as microarray companies realize that pharma is not the only deep pocket. "Our customer base is much more dispersed than it used to be," said Affymetrix CFO Gregory Schiffman. While big pharma and large biopharmaceutical companies still account for the majority of Affy''''s revenue stream, among the company''''s fastest growing are the biotech-pharmas, such as Millennium and Chiron. This mix steadies chip revenues. "It helps us to have signed on all the additional pharma companies that we have," so if one company''''s orders slow down, another with increasing volume picks up the slack, Schiffman said.
Agilent also opts for a strategy of widening its customer base. "If your pharma base goes to the big 35 out there, [there''''s] plenty more than that," said Murdter. "With a sufficiently large customer base, including large academic centers...you can build a sufficient business."
Special (Sales) Forces
PerkinElmer makes a point not to ignore customers outside of big pharma, and also trains segments of its sales force to tailor their marketing and support efforts to the various niches. "Our front-end sales force we have segmented into academic and government institutions, as well as biotech and pharma," Calvo said. The company wants to ensure that it is "spending equal time, people, and marketing dollars across all three markets."
While PerkinElmer has gone through a rough patch caused by its own acquisition of Packard, the company''''s three-pronged sales strategy seems to be paying off lately, according to Calvo. "Perkin Elmer is seeing growth in academic spending, as well as strong biotech spending," he said. "Pharma is the weakest of all three, from an overall growth perspective, and for reasons that are part of the M&A process."
But despite this weakness, PerkinElmer can ill afford to ignore big pharma during this period of transition. Pfizer and Pharmacia are both among the company''''s top ten customers, "and now together they will be in our top five," according to Calvo.
One approach the company has developed over the past couple of years to deal with the multinational products of pharmaceutical mergers is to develop hands-across-the-ocean pharma sales teams. "Part of our strategy is within the pharma segment, to make sure that we have a consistent account strategy across the ocean, in the Americas and Europe teams," said Calvo. These global sales teams meet routinely on conference calls with the pharma client, and meet each other face to face when they have global sales training and their yearly worldwide sales meeting.
To loosen the taut purse strings of R&D teams in transition, these sales teams offer flexible pricing schedules that place differing weights on instruments vs. reagents.
If capital expenses are restricted, the customer can commit to buy a certain amount of consumables, and get a price break on the instrument, or if capital budgets are bigger and operating expenses are tight, the customer can pay more for the instrument and get discounts on consumables. These price scales "allow people to move money from one bucket to another and still take advantage of our total solution," Calvo said.
Affymetrix has dealt with this volatility in capital expenditures in a different way: by shifting its main revenue source to chips rather than spotting instruments. "Our consumables business is growing 50 percent year over year, our instruments business is growing slightly" Schiffman said, but the company is not "heavily embedded" in the instrument space.
Affy Answers Amersham
Other players seem to have taken note of this strategy, as instrumentation heavyweight Amersham Biosciences'''' recent entrance into the pre-arrayed chip market shows. When the company bought Motorola''''s CodeLink high density microarray business for $20 million last month, CEO Andrew Carr said it was partly because they saw the microarray market moving toward the pre-arrayed slides and away from the do-it-yourself arrayers.
Commenting on Amersham''''s recent move into its space, Schiffman said that Affymetrix "will watch closely what Amersham is doing" with the CodeLink business, but "at the same point I think we have done a very good job [of] establishing ourselves in virtually every [customer] account, and are seen as a gold standard in the industry."
On the matter of Amersham''''s distribution agreement for Affymetrix''''s arrays in Japan, Affymetrix is "working with Amersham on a proposed transition" away from this agreement, said Schiffman. For Amersham, it now makes obvious sense to stop selling Affymetrix arrays, but Schiffman said it also makes good business sense for Affy. "We do see the international regions growing faster than the US in the next several quarters," he said.