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With Diagnostics Unit on the Block, Orchid s Future Rests With Genoprofiling, GeneShield

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Orchid intends to sell its diagnostics business as it continues to tighten its corporate focus and position itself in two rapidly expanding markets. The divestiture, expected to close during the second quarter, will also scale back cash burn and give Orchid additional financial leeway as it gobbles through the $14 million it has left in the bank.

The diagnostics business “[does] not offer the growth prospects we demand,” said George Poste, Orchid’s chairman. “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.”

The sale of the diagnostics unit, which comes on the heels of the sale of its genotyping business, is engineered also to provide Orchid with “an immediate cash infusion,” said Poste. The recipe for buoyancy appears to be working: The sale of the genotyping business last December combined with recent staff cuts have enabled Orchid to slash by 50 percent its quarterly cash burn to between $7 million and $8 million.

Poste said he hopes these savings, together with a minimum of $10 million in financing the firm expects to close “soon,” will nudge Orchid into the black in the fourth quarter. Leaner and newly refocused, Orchid can only wait and see how its two remaining limbs — the identity-genomics unit and the nascent GeneShield business — fare in the troubled life-sciences market.

Renaissance Plan

Orchid’s identity-genomics business, which now generates “the majority” of the company’s revenue, offers the forensics- and paternity-testing lab services for the United States and European markets. The firm has also planted itself in the rapidly growing market of prion-detection, which focuses on finding the infectious agent responsible for mad cow disease and its human counterpart, Creutzfeldt-Jakob disease.

The advantage of these markets, which Orchid claims to lead, are their “long-term contracts with predictable revenue streams,” according to Poste. “The technical accreditation requirements pose significant market entry barriers” to potential competitors, Poste told investors during a lengthy year-end conference call last week.

Jeremy Levin, president and CEO of Physiome Sciences and an Orchid board member, said the new market Orchid has staked out for itself happens to be a burgeoning segment. According to Levin, using genotyping technologies in forensics, pathology, and paternity “is well established and is being used left, right, and center,” he said. “It is generating a substantial amount of business and a substantial amount of practical day-to-day utility.”

As Poste sees it, identity genomics “is at the core of Orchid’s business strategy going forward. We expect the genoprofiling laboratory services, paternity, forensics, and public-health prionics will achieve between $50 million and $55 million in revenues in 2003” — an increase of between 20 percent and 30 percent over 2002.

In the forensics arena, Orchid’s Cellmark unit is “actively seeking and is likely to receive a significant portion” of a growing cache of federal funding designated to process what Orchid said is a “substantial backlog” of crime-related DNA testing. All told, there are between 600,000 and 700,000 unsolved cases in the United States to which Orchid’s technology can theoretically be applied.

“We also anticipate that counter-terrorism will be an area in which genoprofiling will emerge in 2003, and that we will have an opportunity to leverage … Cellmark in this arena,” said Poste. The unit, run by Mark Stolorow, owns three of eight labs that have been accredited by the American Society of Crime Laboratory Directors.

Also within the identity-genomics business, the GeneScreen arm expects “in the coming months” to replace short-tandem repeat technology with SNPs. Poste said he hopes the switch will result in greater margins in the “high growth, high margin” paternity-testing space. Orchid currently operates four labs in the United States and Europe in this field.

On the public-health and prion-research side, Orchid has been working with the United Kingdom to fight mad cow disease by genetically testing the national sheep flock for the disease and ultimately eliminating its spread from sheep to cattle and then into humans. Orchid currently has command of 70 percent of that market and anticipates substantial revenue growth. Additionally, the appearance of the problem in Europe “enables us to believe that this will also provide a further beachhead of logical expansion of this test to European nations” besides the UK, said Poste.

Payor Play

Meantime, Orchid’s pharmacogenetics play, GeneShield, may be the company’s youngest business but Poste said he expects it to “be the first business to commercialize personalized medicine … by partnering with a variety of health-care providers and payors.”

At its most basic, the program, which centers on the firm’s new RxShield platform, will have Orchid partner with HMOs, pharmacy-benefit managers, and other payors to help them save money by better matching patients with drugs. In order to determine how certain markers react against existing pharmaceutical products, customers will compare patients’ DNA with genetic data contained in the RxShield database, according to Andrew Savadelis, Orchid’s CFO.

This tack is a departure from the more traditional direction taken by competitors that attract similar pharmacogenetic collaborations with big pharma. Orchid, by comparison, “will go to the service providers who have a financial stake in making sure the drugs you get are in your best interest,” Savadelis said. He added the company intends to begin signing GeneShield customers as early as the second quarter. RxShield is currently wrapping up beta testing.

“We’re not out of the woods yet,” said Savadelis. “But we see the light shining through the trees.”

—KL

 

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