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TSG Partners Jean-Francois Gauthier on the RNAi Research Market

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At A Glance

Name: Jean-Francois Gauthier

Position: Partner, TSG Partners

Background: Bachelor degree, finance/marketing, University of Quebec — 1990; Account manager, CIBC/Royal Bank of Canada — 1990-1994; Strategy consultant, Booz Allen Hamilton — 1995; MBA, Harvard Business School — 1996; Engagement manager, Integral — 1996-2001; Principal, Blaqwell — 2001-2002

TSG Partners is a corporate advisory firm that focuses on emerging life sciences technologies. Jean-Francois Gauthier, based in the company’s San Francisco offices, helps the company’s clients define their business strategies and identify opportunities including mergers and acquisitions. With TSG, he also helps advise various undisclosed players in the RNAi sector, with a particular focus on those in the research products and services field.

Recently, Gauthier spoke with RNAi News about his work and trends in the market.

How did you get involved with RNAi?

About two years ago, my partner Arshad Ahmed heard about RNAi and thought that it seemed like a very high-growth area. That’s what TSG Partners focuses on: high-growth areas in life sciences. We don’t try to advise people in some more mature product areas — for instance, genomics. We try to identify the small niche markets that will grow very fast. We heard about the breakthroughs in RNAi a couple of years ago and thought: That’s definitely a high-growth area that’s emerging.

So we started calling users to understand if [RNAi] is just going to be a big hype or is it real. Is it being used, or are they talking about using it? I accumulated data on it and started realizing that it seems like a big deal for users — it’s meeting unmet needs, and it will create real value for pharmaceutical/biotech companies and academic researchers. It’s the best way to do target validation or study the function of a gene.

We invested a little bit more into creating a report of what we had learned from some of the players in the industry ... and from some of the users. Then we sold a strategy case to a small emerging player, trying to define their strategy in RNAi — how would they penetrate the market? What kind of offerings, what kind of products should they have? Can their capabilities lead to a value-added product for the users of RNAi. We helped them define that from A to Z. How should [their product] be priced? How should it be marketed?

That’s how we got involved in it.

Can you comment on some key findings you’ve come up with about the RNAi sector?

Some of the big questions we have been asked since the beginning is: How big is this market? How fast is it growing? Is it real? Usually people quantify the siRNA market of Dharmacon and the other ones. We went further into quantifying all the products and services that users — pharma, biotech, academic, and research institutes — could buy to perform RNAi: from … services and … consumables, to detection instruments and reagents, to transfection instruments and reagents, to siRNAs, oligos, vectors, etcetera.

We got an estimate of $90 [million] to $100 million in 2003 for the market, and we’re predicting between $350 [million] and $400 million by 2007. We think that the detection market is going to be the larger portion of it by that time.

Currently, what do you see as the largest portion of the market?

It’s siRNAs, the oligos. And we add to that the shRNAs, the plasmid vectors.

But detection technology, you think, is going to take over?

Yeah, it’s a big bottleneck. In the development of each industry the bottlenecks change. Therefore, the value migrates from one part of the value chain to another. If you look at the process of RNAi, we think that the bottlenecks pretty much follow the process: In the beginning, we’d just discovered siRNAs and the problem was how to design one. What is the best algorithm? There were validation services, etcetera.

That was the first phase of value. Then the problem was: I think we have the right sequence, and maybe the problem isn’t that it’s not specific or the right sequence, but maybe it’s not delivered well into the cell. So delivery and transfection has been the problem after that. That’s been a big problem, because if you achieve 90 percent knockdown on average, maybe you had 99 percent knockdown but only 90 percent transfection. How do you ensure that that’s not the case?

That’s been the second big problem, and it’s still a problem today. And, of course, algorithm and design is still talked about as a problem, but its not a big problem. A new user can have access to very good oligos and use them fairly easily, and they don’t need to know much about the algorithms.

The delivery, on the siRNA side, there’re good reagents, and … there’s been better and better products produced. It’s been pretty good. But then once you have that, detection becomes the problem. The first thing researchers do is use the same technologies they’ve been using for 10 years. They’ve used TaqMan and they’ve used Western blots, but they are not very well designed for RNAi. They’re not very sensitive, they’re slow, [and] they’re costly. Therefore, there’s a huge unmet need in detection and analysis … on the protein detection side especially, but also mRNA.

Once you’ve done all that, you want to measure not only the knockdowns but also the phenotypes, and that’s something that RNAi users are not familiar with — they don’t have much equipment or much of a budget to have an instrument like … and Amersham high-content imaging instrument to do measurements faster and more precisely. They don’t have the budget, but have the choice of finding someone within the university or company that has [adequate instrumentation] and sending their cells, then waiting a long time to get them back, or maybe just look at them under a microscope and being imprecise and slow. So going forward there’s more and more need for what we call high-content assays.

That’s the future. We see that happening right now.

Given this trend … what would your advice be to companies that are in the oligo business?

We think they very much need to diversify and enter other parts of the RNAi market. When you sell something to users, they are not looking for one little product, they are looking for a solution. They have an experiment and results to give to their pharmaceutical company or research report that they’re trying to create. Therefore, they look at all the products and all the services they can get from a supplier.

Up to now it’s been very fragmented. But if you look at companies like Qiagen and Invitrogen, they very much have created alliances and products so that they would develop a platform. When I say platform I don’t necessarily mean an integrated platform of one big instrument that does everything, [but] a suite of products and services so that the RNAi users can have convenience and products that work together to achieve their experiments, as opposed to having to pick and choose from different companies.

That’s what we think is the right model: having an integrated suite of products, what we call an integral solution, as opposed to modular, pinpoint solutions. If we look at the oligo suppliers in particular, we think [they were dealing with the] first bottleneck, and therefore they are more ahead of the curve in terms of solving the needs of the customers. Once you solve the needs of the customers, you attract less money — you can capture a lower rent, as we say in economics, from these users because [the offering] is becoming less of a differentiated product.

It we compare it to detection and transfection, [oligo supply] is part of the RNAi market where there is less and less of a bottleneck, and therefore we think that moving out of it to where there is still a lot of unmet need is where value can be best captured by suppliers. And so the oligo companies would really need to reinvest all the profits they’ve made in the oligo market into other parts of the value chain so that they can create more and more of a broad offering, and they become more of an RNAi supplier as opposed to just an oligo supplier.

We’ve already seen with Dharmacon and Fisher, Invitrogen and Sequitur … consolidation. Is this something that you see continuing or accelerating?

We think that the number of transctions will continue to grow, but at the same time there’re more and more emerging players. So when you talk about consolidation, you think of a reducing number of players. I don’t think we’ll see that for another year or year and a half.

We’ll see more and more transactions, but there are so many new entrants all the time, the total of players will probably [hold]. We’ll still face a fragmented industry for the next year or year and a half, then we’ll probably see fewer and fewer [companies].

You focus mainly on the research market. Is RNAi therapeutics something that you look at at all?

Yes, we’re looking at this as well. This is definitely a market that’s going to play out over more years. The IP landscape is very important on that side of the business, and there are definitely several companies that are well positioned to play a good role, to create lots of value.

Delivery is the bottleneck there, and there’re all the problems of gene therapy when you talk about vectors. Are we going to have a breakthrough that’s going to allow it to succeed or not? The question is: which [technology] is most promising? Is it synthetic oligos or vectors?

You have lots of issues to solve before [RNAi therapeutics] will become a reality.

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