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With New CEO in Place, Orchid Moves to Trim GeneShield; Additional Restructuring Possible


We're not out of the woods yet,” Orchid Biosciences CFO Andrew Savadelis said in early March. “But we see the light shining through the trees.”

The woods must be deeper than he’d estimated.

Three months after putting its diagnostics unit on the block — and one day before new chief executive Paul Kelly was to take the helm — Orchid announced May 30 that it had restructured its GeneShield personalized medicine business unit.

The move, the latest in a series of steps taken to preserve cash, also illustrates Orchid’s peculiar place in the pharmacogenomics space: The company says it has the people and patents to stake a healthy claim in the competitive personalized medicine market, but it hasn’t quite settled on a battle plan.

Kelly described the restructuring, which cost around 25 staffers their jobs, as “a result of a strategic review of ways of entering and growing the pharmacogenetic market in slightly different ways.“ The issue is what is the best and most efficient way of entering and growing that particular market.”

In other words, if Orchid has a clue about the direction in which GeneShield is heading, it’s keeping it under wraps. Even chairman George Poste, who only two months ago told investors that GeneShield would be the “first business to commercialize personalized medicine,” said that the restructuring will help Orchid “launch and pilot test a variety of targeted programs to assess the potential of different market segments and models.“

Kelly, in an interview with SNPtech Reporter last week, defended the cryptic message by saying Orchid’s short-term strategy doesn’t differ from that of other players’ in the space. “Any company that is seeking to enter the pharmacogenomics marketplace, if they’re honest, will tell you that the precise business model that’s going to be effective in capturing and growing market share is probably unclear to most organizations,” he said. “Orchid is being open and honest about this by saying ‘Look, we’re going to explore a variety of different strategies with respect to growing that market.’”

Kelly declined to say whether Orchid has tabled any strategies, or when the company might settle on one it likes. Kelly also declined to say how much money the layoffs would save Orchid this year or on a yearly basis.

The new CEO, the first medical doctor to run Orchid (Pfost is a PhD and Poste is a veterinarian by training), said he plans further to streamline the company by prescribing additional doses of restructurings and layoffs in the coming months. He has his work cut out for him: Savadelis, the CFO, said he expects Orchid to become profitable in the fourth quarter, and the company, which reported $12.7 million in revenues for the first quarter of 2003 atop $5.2 million net losses, needs all the help it can get.

“We’ll be looking at a variety of different things going forward over the next few weeks,” and Orchid intends to announce its plans for the rest of the company sometime in August, Kelly said. He added that he will review over the next three months the strengths and weaknesses of the company and will prune or nurture accordingly.

Though he declined to disclose what moves have been tabled, Kelly stressed there are “no immediate plans” for refinancing. “We believe the financing that has been undertaken is sufficient” to engender profitability, he said.

The GeneShield business, which centers on Orchid’s new RxShield platform, approaches personalized medicine from a novel angle. Instead of approaching big pharma for partnerships, GeneShield aims at helping HMOs, pharmacy-benefit managers, and other payors save money by empowering them to better match 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, Savadelis said in March.

Orchid “will go to the service providers who have a financial stake in making sure the drugs you get are in your best interest,” he said, adding the company intends to begin signing GeneShield customers this quarter.

New CEO, Old Problems

In his first full day as CEO, Kelly, who was CEO of Gemini Genomics before it was acquired by Sequenom, is optimistic. “I think [Orchid] is in great shape strategically; it’s obviously had financial challenges in the recent past that have been overcome, and it’s on a very strong platform now for growth.”

But the 43-year-old Aussie takes charge of a firm that has been through a string of financial squalls. Kelly’s predecessor, Dale Pfost, was sacked last December and the company soon after tried to shore up its cash burn by selling its life sciences business (see SNPtech Reporter, Jan. 17, 2003). One week later, with $8.5 million in cash and equivalents in the bank, the company was thrown a lifeline in the form of $10 million in revolving bank credit.

But in early March, Orchid announced plans to sell its diagnostics division. One month later, around the time the company received a letter from the Nasdaq exchange threatening to delist its shares, Orchid caught a second lifeline when the exchange allowed it to nab $16 million in a private stock placement.

(Shares in Orchid, which were trading up at $1.46 at deadline, are scheduled to delist June 24. They are scheduled to begin trading on Nasdaq’s over-the-counter exchange thereafter.)

Orchid’s Identity Genomics unit, meantime, currently generates “the majority” of the company’s revenue and offers forensics and paternity testing services in the United States and Europe. The division is also involved 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.

Identity Genomics, which “is at the core of Orchid’s business strategy going forward,” is expected to achieve between $50 million and $55 million in revenues in 2003, an increase of between 20 percent and 30 percent over 2002, Poste said.

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.

“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,” Poste said in March.

Meantime, Identity Genomics’ GeneScreen arm expects “before the end of the year” 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, said spokeswoman Tracy Henrikson. 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 country’s sheep 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.

— KL


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