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As Partnerships Pose Peril for Microarray Companies, VC Says It Pays to Be Paranoid

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To many microarray startups, collaboration is like marriage in a Victorian novel: If you choose the wrong mate, your sad fate is sealed, but if you reject all your suitors, you’ll probably end up destitute.

On the other hand, if your company has adopted a more-is-better collaboration strategy, you might feel that a more appropriate metaphor for your situation is an early ‘70s communal living-experiment where the multiple relationships between all the partners turn into hazardous, impossibly complicated entanglements.

These perils of partnership have made themselves baldly apparent in the recent annual reports and quarterly conference calls of companies in the microarray space. Genomic Solutions discussed how its exclusive distribution partnership with PerkinElmer for instrument sales outside the US and Japan ran into trouble when PerkinElmer acquired Genomic Solutions instrumentation competitor Packard; Luminex has discussed recently how it is having trouble gauging the demand and predicting revenues from its 30-plus commercialization partners for its xMap bead array platform; and even belle of the ball Affymetrix warned in its 10-K that the future of its relationship with Agilent as its sole scanner supplier is jeopardized by the fact that Agilent has become a competitor in the microarray field.

So what’s a poor array company to do? BioArray News discussed these potential partnering problems with Douglas Fambrough, a principal at Oxford Biosciences partners, one of the leading venture capital firms in the genomics field.

Fambrough, a veteran of the biotechnology collaboration scene, noted that partnerships are particularly important to businesses such as those in the microarray sector, because of the costs involved in all of the steps from manufacturing to marketing.

“Basically it just costs a lot of money to built a fully integrated company, and that kind of money is not available,” to startups, he said. “They can’t afford to take on all of the manufacturing of sometimes very specialized components. On the sales side as well, the time, and the feet on the ground and the cost make partnering look very attractive and in some cases required.”

Tempting as these partnerships may be, though, Fambrough said it is not a good idea for a company to get caught up in the potential upside of particular collaborations when that sought-after partner finally says ‘yes’.

“A small company has to go into these agreements with a very paranoid attitude,” he said. “They need to think about every possible way they can get screwed and figure out a solution to these problems.”

While this advice may seem like common sense to some business development managers, Fambrough said he’s seen situations where companies see the IPO just around the corner, and rush to conclude an agreement so they can jump into the market before the IPO window closes. Admittedly, he said this IPO pressure may have abated somewhat, but now, it has been replaced by a different kind: wary investors who want to see revenues this quarter, not next year. And this kind of pressure can make it more tempting for a company in the microarray field to seek a distribution partner for immediate sales, rather than take the time to build an internal sales force, said Fambrough. This choice to rely on an outside distributor may well make sense, as large mature companies already have well-established distribution channels in labs, as well as complementary products. “But when you partner with someone much bigger and much more powerful than you are, you get pushed into exclusivity arrangements [and the partner] takes what should rightly be under your control,” Fambrough said.

It is often impossible for the small producer of arrays or equipment to get out of the these exclusive contracts, but one thing the small player can do, said Fambrough, is to stipulate in the contract a set of sales targets and goals that the distributor must meet, and a set of remedies that will be associated with the failure of the distributor to meet these targets and goals. “You can be very creative and figure out something that’s going to work for the little company if the little company doesn’t perform,” he said. “It’s much more sophisticated than ‘I’m not going to let you have exclusivity’. It requires careful thinking about targets and the remedies and the timeline.”

Another issue — one that Genomic Solutions has admitted it wrestled with in its formerly exclusive distributorship with PerkinElmer — is how motivated the sales reps of your distribution partner are to sell your products, and how knowledgeable they are about the products. “They are going to sell what they can sell best,” said Fambrough. And this may mean not pushing as hard to sell your products as the products directly behind their paycheck.”

A common solution to this difficulty may be to develop your own field applications specialists who do not sell your product directly, but can demonstrate the product and educate potential users, so as to make sure these users are fully apprised of its features. But this approach can be costly, as it can often require the startup to build up its own parallel “shadow” sales force while giving up the right to actually sell its products.

Another collaboration hazard is an exclusive supply agreement, said Fambrough. In the case where there is a single supplier for a crucial component of the array or instrumentation, a small array company cannot exercise the kind of leverage that GM could in its relationship with a parts supplier. “You’re their hostage,” said Fambrough. “If they decide they can’t give you any [supplies] this month, you’re not going to get any [supplies] this month.” And even though the supplier may win you over with promises and flattery, “you can never be sure your supply partner is going to be as committed to the relationship as you need them to be.”

The obvious solution to this problem is to get an alternative supplier, but this may not always be feasible — for example in the case of a supply agreement for microarray scanners such as the one Affymetrix has with Agilent — and the company may simply have to work with that supplier, and focus on protecting itself in other areas.

One of these areas, which companies often fail to protect in the rush to partner, is control over the future versions of their technology, said Fambrough. As most array companies are marketing their current technology while working on generation two or three, it is important “when they set up collaboration around generation one, to make sure generation two is not included in the agreement,” he said. “Then, as they grow and time passes and generation two matures, and they are a bigger and more powerful organization, they can be independent of their suppliers and distributors.”

— MMJ

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