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Shares in Orchid Surge on News of Renewed UK Scrapie Deal. Will Other Nations Follow?

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Shares in Orchid Biosciences continued to climb for the fifth straight day as investors remained hopeful that the company’s recently renewed scrapie genotyping contract with the UK government signals Orchid’s ability to take the lead in the increasingly competitive market.

The renewed alliance, announced last week after a “very competitive” bidding process, also puts Orchid in a “very strong position” to win coveted scrapie genotyping deals with governments in continental Europe and elsewhere in the world. Financially, the renewal may buttress a business that amounted to 10 percent of Orchid’s annual revenue in 2003.

On Wednesday afternoon, shares in Orchid were trading at $6.78 on the Nasdaq exchange, up almost 15 percent from its closing price of $5.92 June 16. Orchid announced the renewal June 17.

The deal with the UK’s National Scrapie Plan, extended by two years, calls for Orchid to continue using its Cellmark technology to genotype sheep in order to identify animals that may be less susceptible to the prion disease, which is believed to be similar to bovine spongiform encephalopathy in cattle, and by extension Creutzfeldt-Jakob disease in humans. The NSP’s goal is to help British farmers breed sheep with this characteristic.

The eradication of scrapie in sheep is big business in Europe, and Orchid has taken the lead among competitors in cementing its brand among these governments.

The UK has been a pioneer in scrapie genotyping. Beside the NSP contract, in which Orchid is responsible for genotyping roughly 70 percent of samples, Northern Ireland is racing ahead with a program. There, Orchid began spearheading a plan last year to genotype sheep for mutations linked with prion susceptibility. The company is the sole genotyping service provider in Northern Ireland, according to CEO Paul Kelly.

European Union law “now requires use of genotype-based controls in scrapie- affected flocks,” according to Orchid, and by April 2005, EU flock owners “will be required to begin breeding out the most scrapie-susceptible sheep in flocks of high genetic merit.”

Scrapie is also getting noticed in Canada, especially after an outbreak hit Alberta and Saskatchewan sheep flocks last spring. Also, last May, Canadian officials disclosed that a single cow in Alberta was infected with BSE. That single case has caused Canada to cull more than 2,700 cattle from its herds, and has cost the country’s cattle industry around $414 million in lost revenue in the first month after the discovery was announced.

According to Jacqueline Waterman, an analyst for Jesup & Lamont Securities, the renewed NSP contract will likely give Orchid an edge in nabbing these bids.

“The fact that Orchid won the renewal puts them in a very strong position to win additional contracts in continental Europe for scrapie contracts,” she told Pharmacogenomics Reporter this week.

Though it is difficult to say how much money the EU or Canadian governments intend to spend to counter scrapie, a deal being hammered out between German genotyping technology company GAG Bioscience and the Canadian government may be worth between €500,000 and €1 million ($1.1 million).

“The market for animal genetic susceptibility and meat traceability DNA testing is increasingly significant for Orchid, and we are working to build on the strong base and solid reputation we have developed through our work for the NSP to expand our business in this growing area,” Kelly said in a statement last week.

In an interview with Pharmacogenomics Reporter this week, Kelly said Orchid is trying to market its Cellmark brand for scrapie-genotyping services. “We’re in dialogue with other countries for this service,” he said.

“We see this as a real opportunity for us, and how we are [to] enter into that market is something that we are actively analyzing now,” Kelly added.

Kelly said Orchid may expand its efforts in the scrapie-genotyping market “in a variety of ways.” For example, the company may sell assays outright or offer customers the capability to perform assays on their own.

Though Orchid did not disclose the financial details of the arrangement, the renewed contract represents an important component of the company’s top line. According to Waterman, scrapie genotyping will comprise 10 percent of Orchid’s total revenues in 2004, which the company had said will be a 20-percent increase over 2003 receipts of $50.6 million. Based on this information, Orchid’s scrapie genotyping program may contribute $6 million in revenue.

To date, Orchid has helped the NSP genotype around 900,000 sheep. Of these, 27 percent were found to be “highly resistant” to scrapie, while another 40 percent were “generally resistant.” “Going forward,” Orchid said in a statement, “sheep from these two groups are expected to represent most breeding stock.”

—KL

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