It sounds like a familiar story: A bioinformatics firm steers itself downstream by picking up a company with capabilities in drug development. But Gene Logic’s pending acquisition of clinical services firm TherImmune Research is not the same old data-provider-turned-drug-company tale, according to Gene Logic officials.
While other genomics database firms — such as Human Genome Sciences, Incyte, and Celera — have opted to morph into fully integrated drug companies, Gene Logic is hoping to get a piece of the promising drug development market while staying true to its tools and services roots.
“We are a service company,” insisted Gene Logic CEO Mark Gessler at a conference call held last week to discuss the $52 million acquisition. In response to analyst queries regarding Gene Logic’s own target discovery plans, Gessler left no room for doubt: “I think what you’re asking is whether Gene Logic is going to have its own proprietary drug development activities, and the answer is no.”
The acquisition, worth an estimated $31 million in cash and $21 million in stock and scheduled to close in the second quarter, will nearly double the size of Gene Logic, from 272 to 500 employees, and will add new capabilities in discovery, pre-clinical, and early-stage clinical trial services. The companies occupy very different corners of the biopharmaceutical services market and share no customers, but common ground does exist between them in the area of toxicogenomics: TherImmune provided clinical samples that Gene Logic used to build its ToxExpress predictive toxicology database, and toxicology studies made up approximately 70 percent of TherImmune’s $27 million in 2002 revenues. The two companies practically share common ground in the literal sense as well — their headquarters are only five miles apart in Gaithersburg, Md.
Some analysts and industry observers are skeptical that the seemingly mismatched companies have enough in common to create a successful unified entity, but according to Gessler, it is the differences between TherImmune and Gene Logic that will provide the greatest opportunity for future growth. Gene Logic’s customer base is weighted heavily toward large pharmaceutical companies, while TherImmune has focused on biotechs and smaller pharmas, providing ample post-merger cross-selling potential. “This will enable us to bring our BioExpress and ToxExpress products bundled with TherImmune pre-clinical services to this new client base,” Gessler said. “In addition, going the other way, in big pharma there is always a growing pre-clinical and outsourcing requirement. …We’re looking for the opportunity to earn a portion of this business.”
According to some market research estimates, the drug development services market is set to grow from a current level of $10 billion to $16 billion by 2005. While Gene Logic has been among the more successful genomic data providers, the company recognized that “there’s a gigantic opportunity in mainstream development that can’t, for various reasons, utilize our dataset,” said Gene Logic spokesman Robert Burrows. “So we thought, ‘We’ve got this dataset; how can we leverage this to help build our revenue stream at a faster clip than what we’re seeing, but also drive genomics deeper into development?”
Describing the acquisition as “a natural progression,” Burrows stressed that “we’re not abandoning data; we’re leveraging it and building off of it, and we’ll continue to grow our database and the products that we have launched.”
Gene Logic is projecting that the post-merger entity will bring in revenues of $90 million in 2003, nearly 10 percent growth over the two companies’ combined revenues of $82 million for 2002. The company did not, however, provide an estimated date for when it expects to reach profitability.
A New Species
Gene Logic will be entering a development services market already crowded with large, experienced, and successful players. Gessler admitted that the company would now face competition from large early development contract research firms like Covance, Inveresk, Charles River Labs, and PPD. However, he said, the combination of bioinformatics, data, and research services that Gene Logic and TherImmune will be able to offer will make the company unique among its bioinformatics competitors as well as its new CRO peers.
Edward Tenthoff, an analyst with ThinkEquity Partners, agreed with Gessler’s assessment. “It’s a very unique product and service combination. None of the CROs have that complementary database or bioinformatics infrastructure. And certainly none of the bioinformatics companies have the development service portion. So I think there will be the ability to cross-sell,” he said.
“Gene Logic has really been steadfast in [its] determination to stay a service provider, to remain focused on the database and bioinformatics business,” Tenthoff said, calling the acquisition “a smart move” because “they’ve stayed true to that focus, but also found a suitable vehicle of growth.”
Based on the acquisition, ThinkEquity has bumped up its estimate of profitability for Gene Logic from the fourth quarter of 2005 to the fourth quarter of 2004. Tenthoff said ThinkEquity expects the company to bring in $115 million in revenues in 2004.
The Cross-Sell Conundrum
But to make good on the rosy picture that Tenthoff has painted, Gene Logic will have to deliver on the cross-selling opportunities afforded by the acquisition — a task that may prove more difficult to carry out than it appears.
For one thing, discovery informatics and clinical development represent “two different entry points” from a sales perspective, Burrows said, so it will require a bit of silo-hopping on the part of Gene Logic’s sales team to convince satisfied customers to expand into development services, and vice versa.
Tenthoff noted that it appears more likely that Gene Logic will find success selling pre-packaged data to TherImmune customers than selling development services to its pharma customer base “because they already use the Covances and their traditional CRO alliances.”
Arnoud Dijkstra, vice president of genomics at Morphochem, which subscribes to several GeneExpress database products, noted via e-mail that Gene Logic’s strategy “makes sense,” but added: “In principle, every CRO can provide RNA samples from in vivo tox or efficacy studies which can be analyzed for transcriptional patterns by the customer in-house and compared with the Gene Logic database. So the added value of Gene Logic’s combined services remains to be seen.”
Dijkstra’s colleague, Stephanie Plassmann, vice president of clinical development at Morphochem, added, “We would not base the decision [for outsourcing of clinical or pre-clinical work] on the fact that someone offers other services than the ones we are using them for.” Following a laundry list of considerations including reputation, experience, quality assurance, and pricing, “then at the end, we might also consider aspects such as the location of the company or whether they already work together with somebody we have an established collaboration with,” she said.
Burrows conceded that “people may have to have their mindsets changed a little bit because of the uniqueness” of the combined offering. Whether the company is able to pull this off will determine the success of the new business model it is pioneering “and remains part of the integration challenge and the execution challenge facing Gene Logic as they go forward,” Tenthoff said.
The Deal at a Glance
Number of Employees: 272
2002 Revenues: $54.8 million
Market Capitalization: $145.5 million
Cash and Cash Equivalents: $107 million
Profitability: Projected FY 2005 (First Call)
Customers: Over 35, primarily large pharmaceutical firms
Number of Employees: 215
2002 Revenues: $27 million
Profitability: Profitable for “several years”
Customers: Approximately 130 biotech and small pharmaceutical firms