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Roche Charges DxS of Ditching Distribution Agreement in Favor of Parent Qiagen

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By Turna Ray

This article was posted on Feb. 19.

After DxS was acquired by Qiagen last fall, the UK-based molecular diagnostics firm attempted to thwart its global distribution agreement for two pharmacogenomic tests with Roche because the agreement was competitively disadvantageous to its parent company, Roche charged in a complaint filed with a US district court last week.

"DxS is seeking to avoid its exclusive obligation with Roche because it no longer finds it advantageous to benefit from the Roche distribution network," Roche stated in its complaint filed with the New York Southern District Court on Feb. 11. "Clearly, it would rather use the distribution network of its new corporate parent Qiagen."

In June 2008, Roche and DxS signed a distribution deal that gave Roche exclusive global distribution rights for DxS' TheraScreen KRAS Mutation Test and the TheraScreen EGFR 29 Mutation Test in all markets except the US, Canada, Mexico, and Hong Kong [see PGx Reporter 06-04-2008].

According to Roche, DxS is trying to get out of it is distribution deal by asserting "unfounded allegations" that Roche did not fulfill its obligation to develop software that would allow DxS' products to run on Roche's Cobas 4800 system. Roche maintains that the contract in question is a distribution agreement and not a manufacturing deal. As such, Roche maintains it is not in breach of its distribution agreement with DxS.

"Nowhere in the distributor agreement is Roche obligated to develop products, it just needs to market and sell them," Roche stated, adding that, prior to the acquisition of DxS by Qiagen, Roche and DxS were in the process of negotiating a separate agreement to develop software that would allow DxS tests to run on multiple platforms.

Furthermore, Roche charges DxS of failing to hold up its end of the distributor agreement by falling behind on delivering TheraScreen KRAS tests and by not updating its EGFR test.

"DxS is unable to meet Roche's needs for TheraScreen KRAS products and is currently in a significant backorder situation," Roche charges. "Additionally, DxS is unable to provide TheraScreen EGFR29 product that meets specification(s?) outlined in the Distributor Agreement as the product does not currently include the T790M mutation." Currently, Roche is distributing the DxS EGFR28 assay for the Applied Biosystems PCR platform until the EGFR29 test is available.

According to Roche, DxS was planning to terminate the distribution agreement by Feb. 15 if an agreement between the two parties had not been reached. In a statement to Pharmacogenomics Reporter this week, a DxS spokesperson denied Roche's allegations.

"DxS/Qiagen was not planning to end its distribution deal with Roche and this was part of the company’s plans through to 2012," a DxS spokesperson said in an e-mail.

Roche is asking the court to rule that DxS, not Roche, breached the distribution agreement; to restrain DxS from terminating the agreement; to stop DxS from selling the two tests in question through distributor channels other than Roche; to order DxS to resume supply of the tests under the agreement; and to require DxS to pay for Roche's legal expenses.

Enter Qiagen … 'Everything Changed'

In its complaint, Roche pointed to DxS' acquisition by competitor Qiagen as the turning point in the relationship between the two business partners. "While the relationship between Roche and DxS had been working for both parties, once Qiagen entered the scene everything changed dramatically," Roche claimed in the complaint.

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In September 2009, Qiagen announced its purchase of DxS in a deal worth up to $130 million, touting plans to increase its footprint in the personalized medicine space by inking companion diagnostics partnerships with pharmaceutical companies. In addition to the two TheraScreen tests in its portfolio, one of DxS' major selling points was the fact that it had inked several drug/diagnostic partnerships with major pharmaceutical players.

Last year, DxS forged deals with Amgen and Bristol-Myers Squibb to develop KRAS mutation test kits to accompany two colorectal cancer drugs, Vectibix and Erbitux [see PGx Reporter 09-02-2009]. The company also has a partnership with AstraZeneca to develop a companion test for Iressa in non-small cell lung cancer in the European market [see PGx Reporter 08-05-2009].

Boehringer Ingelheim announced last May that it would use DxS' EGFR Mutation Kit to identify best responders in clinical trials for its investigational NSCLC drug BIBW2992. Under the terms of the agreement, DxS and Boehringer Ingelheim together could commercialize a companion diagnostic test kit globally, if BIBW2992 is approved by the FDA.

A month after becoming a Qiagen subsidiary, on Oct. 12, 2009, DxS notified Roche that it had breached its distributor agreement. But before the acquisition, Roche and DxS' business relationship was much more amicable, according to Roche.

"During the first approximately year-and-a-half of the distributor agreement, both sides substantially performed their respective obligations under the distributor agreement, with Roche laying the foundation for DxS to establish a strong distribution network for the products and assisting DxS in bringing these products to market," Roche stated in the complaint.

Furthermore, when the two companies encountered a hiccup in the distributor agreement, "they negotiated a separate agreement to address the issue." In this way, Roche and DxS negotiated an agreement that would allow Roche to license software to DxS, and an amendment to the distributor agreement for Roche to help DxS meet regulatory obligations.

"As a part of this amendment, Roche helped to refine the products' labeling and package inserts, lent regulatory support, and aided DxS when it faced quality issues, and provided registration assistance to foreign countries," Roche said. In doing so, Roche, too, "expanded its profile" in the field of oncological molecular diagnostics.

"Overall, this mutually beneficial relationship provided both companies with positive results in the marketplace," Roche said.

In the spring of 2009, the two firms had begun talking of developing software that would automate the use of DxS' tests on Roche's Cobas 4800 platform. As such, the two firms began negotiating "a master software development and license agreement," and although Roche provided "numerous drafts" of the agreement to DxS during this time, no final agreement was reached. Eventually, upon learning in August 2009 that DxS was entertaining an acquisition offer, the two firms decided to hold off on this software development agreement until the acquisition was complete.

On Sept. 4, having been notified that DxS had been acquired by a third party, Roche attempted to reinitiate negotiations on the software development agreement. On Sept. 22, Roche learned that DxS was purchased by Qiagen, "one of Roche's main competitors," the complaint states.

Following the acquisition announcement, "no meeting of the minds was ever reached on the draft master software development agreement and no agreement was ever signed," Roche said.

'Irreparable Harm' to Roche

Roche entered into the distribution deal with DxS for the same reasons as Qiagen: to be first to market with the KRAS and EGFR tests and be a leader in personalized medicine. If its distribution agreement with DxS is terminated, Roche stands to be the biggest loser.

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Since Roche has no competing KRAS and EGFR products to launch in the near term, invalidation of its agreement with DxS would essentially shut Roche out from a major oncology personalized medicine market. "Currently, Roche is the exclusive distributor of DxS' KRAS and EGFR tests, which are pioneer products in this relatively new market," Roche acknowledged in the complaint. "There are no other comparable substitutes in the marketplace for the KRAS and EGFR test kits."

To be pushed out of the EGFR and KRAS testing markets would be a great loss for Roche at this point, just when pharmacogenomics applications are beginning to be broadly adopted in oncology practices.

The future market for KRAS testing alone is estimated by Qiagen to be as much as $100 million. According to Roche, the global market for the overall molecular diagnostics market has doubled in the last six years, from $1.8 billion in 2004 to $3.6 billion in 2009, and is projected to be around $7 billion by 2015.

"If DxS is allowed to terminate its distributor agreement, Roche will be unable to supply KRAS and EGFR test kits, paving the way for DxS and Qiagen to take over the customer relationships that Roche has developed since May 2008 by way of its performance under the distributor agreement," Roche said.

Furthermore, terminating the distributor agreement will "irreparably harm Roche through a loss of goodwill and damage to its reputation," as it will no longer be able to deliver KRAS and EGFR test kits to its customers," Roche said.

Under the distributor agreement, Roche agreed not to develop competing products to DxS' tests, with the understanding that DxS would provide Roche the intellectual property rights to its tests for a fixed time period. Even if Roche obtains the necessary IP rights, it would take the company between 18 and 24 months to develop competing tests and bring them to market.

Roche also points out that the current momentum behind personalized medicine makes this a critical time for companies to establish themselves, before new players enter the space and competing products come on market.

"Losing that unique opportunity puts Roche at a significant competitive disadvantage, while maintaining that offering allows Roche to gain momentum during this critical market period," Roche said. "It is for these reasons that Qiagen paid a premium price to acquire DxS."

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