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Armed With Orchid s Diagnostics Unit, Tepnel Life Sciences Plans US Invasion

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The decision by Tepnel Life Sciences to buy Orchid Biosciences’ diagnostics division will give Orchid a much-needed cash infusion and may close the final chapter in the company’s transition from a SNP-genotyping and molecular-diagnostics firm into a forensics and paternity-testing shop.

The $4.3 million deal will also thrust Tepnel into a new marketplace — the fourth for the British tool company — and carve out a coveted foothold in the US market. It also means that Tepnel’s dominant business, DNA purification, will be more fit to compete with market leader Qiagen.

“We have that marketplace firmly in our sights,” Gron Ffoulkes-Davies, finance director of Tepnel, told SNPtech Reporter this week. “We expect that Orchid’s well-established [human leukocyte antigen] typing and Elucigene businesses will provide the expansion and international presence we are aiming for in this key sector,” Ben Matzilevich, Tepnel’s CEO, added in a statement.

Short term, the divestiture, announced late last month — but delayed one year due to resistance from within Orchid — will give Orchid “an immediate cash infusion,” chairman George Poste said in March after putting the diagnostics unit on the block [see 3/7/03 SNPtech Reporter].

Indeed, following the sale last December of the life sciences business, the diagnostics move is part of Orchid’s desperate plan to remain solvent. The strategy, not counting the $4.3 million in cash Orchid stands to gain from the diagnostics sale, appears to be working: The severe cost-cutting measures enacted over the past year have enabled the company to slash by 50 percent its quarterly cash burn in the first half of 2003 to around $4 million, according to Michael Spicer, Orchid’s new CFO [see 9/11/03 SNPtech Reporter]. (However, the company burned through $4.9 million in cash during the third quarter, and had around $10.8 million in cash and equivalents as of Sept. 30. Total revenue in the quarter fell to $11.8 million from $13.3 million year over year. See complete earnings report story on page 9.)

Poste said he hopes these savings, together with $10 million in revolving bank credit secured in December, will nudge Orchid into the black in the fourth quarter.

Longer term, the diagnostics sale is meant to free Orchid to concentrate on its two core businesses: identity-genomics and the nascent GeneShield unit. “The diagnostics business “[does] not offer the growth prospects we demand,” Poste said in March. “We … believe [the unit] will face significant competition in the rapidly changing instrumentation base for genotyping and the ongoing relegation of genotyping research reagents to a mere commodity business.”

Significant competition does not appear to worry Tepnel. To it, the acquisition is designed as an on-ramp into clinical diagnostics, according to Ffoulkes-Davies. “We will provide new opportunities — new products and services — to diagnostics customers,” he said.

In addition, “one of the principle interests” of the deal was also to try to pick up existing Orchid customers that have DNA purification requirements.

Ffoulkes-Davies said the company’s goal will be to replicate its UK business in the US market by using Orchid’s existing facilities as springboards. This move, which takes advantage of existing infrastructure and employees, will give Tepnel “a demonstration capability for our instruments that we don’t have at the moment,” said Ffoulkes-Davies. He said Tepnel would look to create a DNA purification-service lab in the United States to service customers in that country. These days US-based customers are required to ship samples to the UK.

Additionally, Orchid’s manufacturing facilities will enable Tepnel to make its manual DNA purification kits stateside. The products are currently made in the United Kingdom. Ffoulkes-Davies said he hopes to have this part of the transition up and running between six and 12 months.

For the time being, a certain number of Tepnel staffers will move into Orchid’s existing facility in Abbingdon, UK, until Tepnel decides where to move it, Ffoulkes-Davies said. He added that the facility will either move to one of Tepnel’s existing buildings or to a new one in Livingston that may soon be under construction. He stressed that no decision on the move has been made, and added that all of Orchid’s employees will remain at Tepnel. However, he hinted: “Clearly we’ve got some [employee-related] decisions to make on the UK side of things.”

Ffoulkes-Davies said Tepnel officials were impressed with the division’s management as well as its top line — which at $10.5 million was not enough to convince Poste to keep it, but is more than enough to double Tepnel’s total revenues. Tepnel is still posting losses, but Ffoulkes-Davies said the acquisition will move up its profitability target by around six months, to the end of 2005.

To be sure, the two companies have crossed paths before. Almost exactly two years ago, Orchid sold to Tepnel one of its SNPstream SNP-scoring units, and made an equity investment worth around $270,000 in the British company. At that time, Orchid and Tepnel agreed to co-market SNP-genotyping services in the pharmacogenomics markets for clinical trials in the United Kingdom and Ireland. Additionally, Don Marvin, who resigned as Orchid’s CFO and COO in the third quarter 2003, and in February left as senior vice president and general manager of Orchid Diagnostics, has been a Tepnel director since May 2001.

Still, the acquisition nearly fell through, having been delayed for almost a year after Tepnel encountered resistance from Andrew Savadelis, who was Orchid’s CFO at the time, according to a person familiar with the deal. Savadelis’ resistance is believed to be one reason why Orchid sacked him in July [see 7/17/03 SNPtech Reporter]. Tracy Henrikson, a spokeswoman for Orchid, said she considered this a rumor, and that her company does not respond to market rumors.

Today, Orchid’s diagnostics unit, which employs 70 people, sells the Elucigene line of consumable products for genetic screening for cystic fibrosis, which has been on the market for several years in Europe, and was launched in the United States in 2001. The diagnostics unit’s largest product line includes systems, kits, and consumables for genotyping HLA that are used to match organ donors and recipients. Also, last year, the diagnostics division launched LifeMatch, an automated system deigned for hospitals and independent labs that perform HLA typing and antibody screening.

Ffoulkes-Davies said Tepnel will begin looking at other disease areas soon for the genetic-screening component, but declined to say which ones will likely be pursued. “There is a very well-defined R&D program [in Orchid’s diagnostics unit] in line with our R&D program, and either improvements to existing assays or completely new assays will be launched and marketed,” he said.

Tepnel, which employs 110 people, is made up of three units: Life Sciences, Scientific Services, and Bio Systems. The former comprises the DNA purification business, which includes the Nucleoplex BAC and Nucleopure automated systems, and a manual nucleon DNA extraction and purification kit.

The second unit offers GLP-compliant chemical- and microbiological-analysis services, and the latter arm sells DNA and ELISA-based kits for food testing for fungal toxins, and protein allergens, species, and GM content.

The company is based in Manchester, and has an office in Wales and two in Scotland, which Tepnel is considering combining into one facility in Livingston in the next 12 months. Ffoulkes-Davies said this new space might also be used to hold some of Orchid’s diagnostics assets.

“We would need to discuss that with local personnel and management before any decision was made on where the Orchid diagnostic business would end up,” he said.

— KL

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