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Consolidation Hits the Array Analysis Sector as Molecular Mining Closes Shop

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With the announcement last week that gene expression analysis firm Molecular Mining has ceased operations, other similar small software firms got a wake-up call.

Although microarray analysis is often cited as the quickest growth area for bioinformatics software, Molecular Mining’s closure serves as evidence that companies selling gene expression software and related services are not immune to the challenges that the rest of the commercial bioinformatics sector has struggled with over the last few years.

The Kingston, Ontario-based company raised over $10 million in funding since its launch in 1997, claimed to have over 100 customers for its GeneLinker data mining software products, and had signed research collaborations with several pharmaceutical companies. But this was not enough to keep it afloat as the economic climate grew ever more hostile. In January, the company cut its staff from 40 to 26 people and discontinued its drug discovery activities in what CEO Evan Steeg described at the time as a “proactive” move to refocus its resources in the face of worsening market conditions.

Molecular Mining’s board of directors opted to shut down the company two weeks ago rather than undergo a further round of layoffs or pursue other alternatives, but Steeg and other company officials declined to discuss the decision. The board of directors did consider selling the company, but “I wouldn’t say we actively tried to sell anything yet,” said John Molloy, a Molecular Mining board member.

“We certainly had been in discussions with a number of companies about collaborations and relationships and alliances and investigating whether there were merger or acquisition opportunities, and we’ll do all that again once we figure out how we can package things and move it forward,” said Molloy, who is president and CEO of Parteq Innovations, the technology commercialization agency for Queen’s University in Kingston.

New Wave of Consolidation

The demise of Molecular Mining — a mid-sized, fairly established firm with patented technology, sales on the books, and satisfied customers — seems to indicate that it will only be more difficult for smaller specialty players to remain in business as the market grows more crowded and the economy continues to decline.

New players not only face competition from established specialty firms, like Rosetta Biosoftware, Silicon Genetics, and Spotfire — which are all seeing growth in revenues and an expanding user base — but also from companies such as Lion and InforMax who offer gene expression analysis tools as only part of a much broader suite of tools. In addition, successful statistics companies like SAS, SPSS, and Insightful have each entered the market with microarray analysis software in the last year. And of course, there is always competition from free and open source software, such as the popular Cluster/Treeview and new packages like BASE and TIGR’s TM4 suite.

But these small firms are not giving up: Now that the gene expression analysis sector appears to be the target for a second wave of consolidation that began among sequence analysis and database firms over a year ago, they are following a number of strategies to stay alive.

For Sandip Ray, the CEO of data mining firm X-Mine, survival meant making some difficult choices. “We employed about 26 people last year. Now we’re down to exactly two,” he said. “We had to make dramatic cuts in order to survive.”

Ray said X-Mine began seeing a drop-off in capital expenditures among its customers around nine months ago, and made the decision to restructure the company around a consulting model rather than around software sales. By eliminating the costs associated with continued software development, sales, marketing, and administration, the bare-bones company now offers its own tools along with those of third-party providers in a “technology-agnostic” approach, Ray said.

X-Mine’s shareholders fully approved of the decision to drastically cut back rather than to sell off the company, Ray said. “Whether it’s in the case of Molecular Mining or X-Mine or whoever, a lot of money goes into software development, and you’re never able to recoup that cost [by liquidating the technology assets]” he said.

For newer players, the gene expression analysis market still appears promising, but caution prevails. VizX Labs — which last week reported a three-fold increase in customers since the beginning of the year for its GeneSifter.Net web-based microarray analysis system — is keeping its growth in check and relying on revenues, rather than venture capital funding, to cover its costs, said CEO Tom Ranken.

“The already bad economy has been brought to a screeching halt by conditions in the Middle East,” said Ranken. “Investors are leery and risk averse. Any entrepreneur has a big mountain to climb right now.”

Ranken remains optimistic about the future of gene expression analysis software, however, and proposed that usability issues — not lack of demand — are to blame for the lackluster performance of the sector to date. He said he expects the user base for microarray software to grow nearly ten-fold — to over 400,000 researchers — by 2006, and touted the user-friendliness of his company’s tools as a key factor in its strategy for survival. As more biologists turn to microarray technology, Ranken predicted that the company’s easy-to-use software would gain popularity among scientists who do not have computer expertise.

“I don’t talk to any scientists who like what they’re using right now,” he said. “I see over and over that labs have a few experts in a particular piece of software, and that’s their job, to run the software …but that leaves hundreds of biologists who don’t have access, so there’s a bottleneck right now.”

Ranken’s optimism may be warranted, but it’s very likely that the consolidation in the sector that began with Molecular Mining will continue, and that those 400,000 microarray researchers in 2006 will have a much smaller field of software vendors to choose from than researchers do today.

Cash Crunch

For Molecular Mining, the capital markets delivered the death knell. As of December, the company had a year of cash left, Steeg said at the time [BioInform 12-09-02], but noted that it was seeking additional financing and admitted that it was having a difficult time attracting venture capital.

“There are folks who didn’t look at us twice because they said ‘toolbox company bioinformatics’,” he told BioInform in December. “Just as the toolbox company market was irrationally hot two or three years ago, I think it is equally irrationally cold now.”

Molecular Mining had signed an agreement to be a “preferred partner” for IBM in June and was actively seeking additional OEM and co-marketing agreements to bolster the efforts of its own sales team. Any additional funds that the company would have raised would have gone toward beefing up the company’s sales staff, Steeg said.

The company also launched an effort in September to piggyback on academic grants via a collaborative research program it called the Gateway to Systems Biology program.

None of these efforts proved successful, however.

Molloy did not provide details about the company’s remaining cash, but noted, “It hasn’t been decided just what is there and what has to be paid out in terms of creditors and employee severance.”

A State of Limbo

Molecular Mining’s closure came as a surprise to its customers.

“We’re sort of left in the lurch by this news,” said Mark Cameron, a scientist at the Toronto General Research Institute at Toronto General Hospital. “The software was brilliant, and it’s quite a loss for Molecular Mining to go out of business.”

Stephan Horrigan, a senior scientist at Avalon Pharmaceuticals, noted that his company used GeneLinker along with several other types of gene expression analysis software because “it did several things that others didn’t, and it actually handled large data sets better than most.”

Molecular Mining did not notify customers that it had closed, so Cameron and Horrigan both said they were waiting to find out what happens with the company’s assets before making any decisions about their future use of the technology.

“Someone will obviously be in touch with customers going forward once we figure out how we’re going to manage the assets,” said Molloy. “Right now it’s still in a state of limbo, where we’re trying to figure out how to wind it up and we’re [also] trying to figure out how do we keep it going in another life, in another phase.”

Molecular Mining’s assets include several patented algorithms, as well as the rest of its software and database technology. Molloy said that Parteq has put in a proposal to manage the technology portfolio, but, “It has not been officially decided how the assets are going to be dealt with.”

However, he noted, “We are going to make an effort to try and keep all of the technology packaged together to be able to maintain momentum that has been built up for the product, and see if we can still develop some of the collaborations that have been worked on, whether it’s a restart or a consulting organization, or whatever kind of organization gets put together to try to move the technology forward.”

Molloy said the board of directors expects to have a better idea of its next steps in the next week or so.

— BT

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