Outside San Diego, Illumina Looks to Wisconsin for Key R&D
When an acquisition occurs, the worst-case scenario for the community of the purchased company usually occurs when the buyer gobbles up the pieces it wants and shutters the local operations.
But this situation doesn’t always play out, and Nick Caruccio is glad that’s not what happened to his company, Madison, WI-based Epicentre, after San Diego-based Illumina (NASDAQ: ILMN) bought it in 2011 for an undisclosed price. (SEC documents later showed it was $71.4 million.)
“I’ve seen some acquisitions where they would just come in and take the technology and shut you down,” says Caruccio, Epicentre’s general manager.
Illumina certainly could have done that, and skeptics who are unfamiliar with Madison’s biotech scene might wonder why the global leader in genomic sequencing continues to operate the small Midwest outpost. As things turned out, however, Illumina had some good reasons to keep Epicentre’s lights on in Madtown.
Epicentre, founded in 1987, was a privately held company that had built a solid but unsexy business, primarily selling specialty enzymes and reagents to molecular biology researchers. About five years ago, it started developing prep kits that convert DNA or RNA samples into “libraries” ready to be sequenced by machines made by Illumina and its competitors. Then came Epicentre’s big breakthrough—Nextera, a technology that simplified and shortened this front-end process from a couple days to less than 90 minutes. A year after Nextera hit the market, Illumina came knocking.
Nextera “took off like wildfire,” Caruccio says. “I think that was the hook [for Illumina].”
But instead of assimilating the technology and bailing, Illumina is now pouring “significant” but undisclosed dollars into its Madison operations, according to Kirk Malloy, senior vice president and general manager of Illumina’s San Diego-based life sciences division. Epicentre expects to add at least five employees this year to its staff of 57, Caruccio says. The company is also expanding its facilities in Madison’s University Research Park by nearly 50 percent to accommodate more enzyme manufacturing equipment.
Caruccio, who helped develop Nextera, says Illumina quickly realized after the acquisition that Epicentre had additional technologies and expertise that could help Illumina’s business in other areas, such as protein production.
“When they looked at everything we had, it was a great fit,” says Caruccio, who was promoted by Illumina to general manager of the Madison site last year.
Epicentre still sells research tools under its own name, which makes it one of only a handful of Illumina subsidiaries to continue selling their own branded products. Malloy says that’s a testament to Epicentre’s reputation and brand recognition among its customers.
But Epicentre’s expanded focus now will be on developing library prep kits for genomic sequencing, which spell a “much larger market opportunity,” Malloy says.
The list of substances being funneled into sequencing machines is growing longer and more complex, including DNA, RNA, viruses, bacteria, and more. Caruccio says that means the number of prep kits needed to support the diversity of experiments is also expanding.
“As the cost of sequencing goes down, more of the value is sitting here” in library prep kits, Caruccio says. “That’s driving a lot of that strategy to capture all the library prep that we can.”
As part of a recent corporate restructuring, Illumina recently moved Epicentre under its life sciences business, which is its largest division and generates more than $1 billion in annual revenue.
The Madison site now serves as the dedicated R&D base for the division, which enables each Illumina business unit to have its own smaller, focused “tiger teams” that complement the work of the core R&D group based in San Diego, Malloy says.
Epicentre now has about 14 staffers focused on R&D, primarily in sequencing and informatics, Caruccio says.
“We’re looking at ways that we can take on things that will really impact Illumina’s position in sample prep, which is an increasingly competitive area,” Caruccio says. “Rather than looking at Madison as a site where maybe we can do these little niche things to fill gaps, it’s how can we really do things that are going to make a huge difference. We’re right now going through the planning processes to say what are those things, how can this development team be most effective.”
When Illumina scouted Epicentre, Malloy says, officials saw a skilled biotech workforce in Madison fostered in part by the talent coming out of University of Wisconsin-Madison and a critical mass of life sciences companies in University Research Park. The lower cost of doing business in Wisconsin compared with California certainly didn’t hurt Illumina’s decision, he adds.
“I think there’s a lot of good reasons to do business in Madison if you’re a biotech company,” Malloy says.
Illumina certainly isn’t the first life sciences giant to take notice. Madison’s biotech community has proven ripe for the picking over the years, with some acquirers maintaining operations there, often using the Madison location as a key R&D site.
Luminex (NASDAQ: LMNX) and Arrowhead Research (NASDAQ: ARWR) are two other examples. Luminex, an Austin, TX-based diagnostics company, acquired Madison-based EraGen Biosciences in 2011 for $34 million in order to own the company’s molecular testing kits. It intends to grow its Madison staff of 40, Xconomy reported in January. Pasadena, CA-based Arrowhead set up its main R&D team in Madison a couple years ago, out of the ashes of the former Mirus Bio, which Roche bought in 2008 for $125 million but divested in 2011 after it decided to get out of the RNAi game.
“These industries certainly are changing rapidly all the time, but again, we seem to be able to have some talent that’s been able to adapt and have relevance for the larger company,” says Greg Hyer, interim director of Madison’s University Research Park.
Madison has a “proven track record” of companies developing desirable technologies that lead to business partnerships or M&A activity involving big players in life sciences, Hyer says, rattling off additional examples like Roche’s $272.5 million acquisition of NimbleGen Systems in 2007 and Takeda’s $35 million purchase last year of Fort Collins, CO-based Inviragen, which has a Madison facility.
“There’s been a pattern, particularly over the last several years,” of high-profile acquisitions, Hyer says. “It gives credibility to early-stage biotech companies that are being created here in the community. That reputation gets out into the industry. It makes it easier for these newer companies to attract talent, attract money, or attract partnerships with larger companies.”
But some Madison acquisition targets haven’t been as fortunate as Epicentre, instead finding themselves downsized or shut down. Five years after the NimbleGen acquisition, Roche said it would cut nearly half of its 100 staffers in Madison, the Wisconsin State Journal reported. (Hyer says Roche NimbleGen still leases about 30,000 square feet of office space in the research park.) More recently, Bedford, MA-based Hologic (NASDAQ: HOLX) said it would transfer its molecular diagnostics operations in Madison to San Diego, home of its subsidiary Gen-Probe, which would mean the loss of about 130 Madison jobs, according to various media reports. Hologic acquired Madison-based Third Wave Technologies in 2008 for $580 million.
Those situations are “painful” for the affected employees, Hyer says, not to mention the blow to the local economy. But there are silver linings, Hyer says: an exit creates wealth for company founders and executives who often go on to invest in other Wisconsin startups (or start new companies of their own), and the laid-off employees frequently land new jobs with other Madison biotech firms.
On balance, Hyer says most of Madison’s biotech buyouts have been positive for the community, as operations usually continue for another 10 years or so—a long time in the industry, he says.
“We need some patience in continuing to work on supporting the new startups and not get too discouraged,” Hyer says. “I think we have a higher probability than other places in the U.S. at succeeding at some level.”