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LSBC and Celltech Dropped Theirs: Can Other Contract Service Groups Survive?

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In light of the high-profile closings of contract proteomics service businesses at Large Scale Biology and Celltech two weeks ago, it may have seemed surprising when Linden Bioscience announced this week that it was launching a contract proteomics service.

But the outlook for contract services may not be as bleak as it looks, according to executives from companies that are still braving the services waters — so long as you go about it the right way. That right way, they said, includes having the right service culture, targeting the right customers, and knowing when to spin out or throw in the towel.

“We’ve been in business two and a half years, we became profitable after our first year, and our revenues increased 50 percent this year over last year,” said Michael Pisano, president and co-founder of Proteomic Research Services, a pure services business that spun out of Ann Arbor, Mich.-based Genomic Solutions in 2001 (see PM 10-29-01). PRS now performs various proteomics discovery processes — from sample prep to drug binding studies — for 115 primarily pharma and biotech customers. The company took in about $1.2 million in revenue this year. “It can work if you do it the right way,” he said.

Based on his experience with his own company, Pisano said he disagreed with LSBC CEO Kevin Ryan’s assertion in a conference call that “the problem commercially is that there is no money in” contract proteomics services. But he added that he wasn’t surprised that Ryan’s company closed its service business. “This is the only thing we do, so we focus all our efforts in one area,” Pisano said. “LSBC I know had dedicated people to that area, but if the priority is drug development then the services part is going to take a hit, obviously.”

James Jersey, president of Charles River Proteomic Services — which spun out of Charles River Laboratories in February — agreed that a solo services business was more likely to succeed than a ser-vices branch of a larger company. Such a company is likely to get distracted by product development concerns and let the services side slide, he said. “To be a pure service organization is very different, and many aspects relative to a product in terms of timeline, near-term focus on profitability, and operations [are different],” he said. “Also, a lot of these [companies] are seeking valuations that are only supported by becoming a product company. The service business isn’t as glamorous as becoming the next Genentech.”

Richard Bungay, director for corporate communications and strategic planning at Celltech, acknowledged that maintaining the service business the company had inherited with its acquisition of Oxford Glycosciences was simply not worth the trouble. “We tend to find [service businesses are] quite intensive to run and we’re a research and development business primarily,” he told ProteoMonitor. LSBC’s Ryan also said, in reference to closing down its services business, that services don’t fit in with LSBC’s desired image as a product-focused company.

People and Products

But the services vs. product nature of a company need not be so black and white, according to Bev-erly Brown, vice president of business development at Linden Bioscience, which announced this week that it was opening a proteomics contract arm called Strategic Proteomic Services. The fledgling company opened a service for oligonucleotide design in March, which inspired the decision to do the same in proteomics. “I’m not sure it’s profitable, but at this stage we want to build credibility, we want to build people that say, ‘yeah, they do good work,’” Brown said.

In addition to being used to build the company’s reputation, a service business is also a way to gain entrée into the biopharma world, according to Brown. “I would venture to say that LSBC ended up with some of its relationships with large pharma through these types of fee-for-service activities. It gets them out there, in front of the people who need the services: They develop a relationship that shows it’s high quality, and trust that they can deliver,” she said.

Brown is hoping that Linden’s new proteomics operation, which currently consists of two Applied Biosystems mass specs and three employees, will follow this model of pulling in potential pharma collaborators and will lead to more in-house proteomics development. For now, however, the company is purposely targeting government and academic institutions instead of pharma. “Revenue generation is our near-term goal … and right now the market need is in the not-for-profit groups,” she said.

Proteomic Research Services and Charles River have also found customers among not-for-profit groups — particularly academic groups with overwhelmed or underqualified core facilities — but executives from the companies also said they saw plenty of opportunity for near-term revenue from big pharma. The main opportunities there come from overflow and specialty services that supplement the pharma’s own in-house capabilities, Pisano said. Companies without existing programs could be customers as well, he added. “You may think you want to be in proteomics, but you’re not sure … so you outsource to test it, see if it’s going to work, and then you can slowly start to bring the technology in-house.”

With all this optimism surrounding contract services, it may seem odd to observers that after “seven to eight months of marketing,” Celltech was unable to find a taker for its proteomics business. “I think the reason Celltech couldn’t find a buyer is because, ‘what is the company buying?’” Pisano suggested. “They are buying contracts to do proteomics, but it might be a fixed revenue for a certain amount of time and that’s all — it’s not buying a multimillion dollar drug.” Bungay seemed to agree with this assessment. “I guess one of the key issues with the business we inherited was the fairly short-term nature of a lot of the contracts,” he said.

Additionally, Proteomic Research Services, Charles River, and Linden have all found that the key to a successful contract service business is the people — and the ability to keep them, which Celltech couldn’t guarantee. “In the service business, the principal asset is your people,” Jersey said. “If you buy an organization that doesn’t have a robust contract pipeline, you’re going to have a lot of flight risks, and you’re going to end up with less for your investment poten-tially.” Pisano also said that even if the people were willing to stay, it didn’t necessarily make sense to buy a whole business to get them. “Why not just hire the people in-house — it would cost you less to do it, and then those people would just bring the contracts with them,” he said.

In fact, the major reason that the National Institute of Environmental Health Sciences said it dropped its contract with LSBC — an event that precipitated the closing of the company’s proteomics service business — was the loss of “key people” at the company (see PM 11-21-03). In the service business, “you have to keep ahead of the curve,” Pisano said.

— KAM