Dako Ponders the Expanding Universe

Dako AS, has always been known for its technical acumen and has a strong following in niche laboratory segments, such as immunohistochemistry and in-situ hybridization. But as competition increases, regulations get tighter for research reagents, and customers demand integrated systems, Dako has had to change. It is becoming more focused on clinical products, necessitating major shifts in regulatory and sales and marketing functions, with an aim on achieving global coordination. HercepTest, its first clinical product, is a success, and it hopes to capitalize on a growing interest in pharmacodiagnostics. But it faces tough competition in the systems business from Ventana Medical Systems, a one-time small competitor that now dominates the IHC systems market. Dako is also gambling on a move into flow cytometry.

Academic Dako has always been known for its scientific acumen but the world is forcing it to change. Can new management make it more proactive and aggressive?

By Wendy Diller

• Dako's academic culture and technical acumen earned it a strong following in niche laboratory segments, such as IHC, ISH, and flow cytometry. But its world is changing, forcing it to move beyond its traditional reagents business to offering systems—a big step which has befuddled many diagnostics companies.

• Dako is simultaneously undergoing other changes, as well, as it becomes less research-oriented and more focused on clinical products, necessitating major shifts in regulatory and sales and marketing functions.

• New management has turned Dako upside down as it attempts to unify disparate subsidiaries and re-organize departments in order to get the company to be more proactive, more unified, and faster-moving.

• With the success of HercepTest, Dako is pinning its future on pharmacodiagnostics, and genomics and automated systems. But it faces well-capitalized, fast-moving, savvy competitors in most of its major markets.

In 1997, executives at Denmark-based Dako AS were in a quandary. Ventana Medical Systems Inc. , Dako's chief rival in the US, had just bought one of Dako's key suppliers—a company that made automated instruments for Dako's European customers. Ventana's action had caught it unprepared. Dako, one of the world's leading suppliers of monoclonal antibodies, was having a tough time transitioning into the systems business, and the news meant either that it would be left without an instrument to offer its European customers, or that it would continue selling the instruments but would be strengthening Ventana each time it closed a sale.

Ventana and Dako executives agreed to meet to discuss the complex relationship. At a mid-Western hotel not long after the acquisition, Ventana executives waited in the lobby as four top Dako executives from Europe emerged from a cramped taxi, which had just come from the airport. Moments later, a white stretch limousine pulled up to the hotel and Viggo Harboe, the head of Dako's US subsidiary, who had also just flown in from California, got out—alone. The slow-moving Danes and impatient US executive didn't travel together, indicative, Ventana officials thought, of the split between them at the time. They surmised that the company wasn't well-coordinated and exploited their adversary's weakness. Needless to say, Ventana executives were extremely satisfied with the outcome of the negotiations—Dako would continue to sell its competitor's system through year-end 1999.

That episode, perhaps, marked the nadir of Dako's shaky entrance into the systems business. Now that the Ventana contract is ended as of January 1, and new management has been at the company's helm for nearly year, Dako is off to a fresh start, fighting hard against aggressive competitors. The conservative, family-owned reagents supplier is undergoing not one, but several, unprecedented transitions. Not only is it moving from being a reagent to a systems company, a difficult proposition under the best of circumstances, it is also evolving from a research-centered to a more clinically-oriented company. The new chief executive, Jes Oestergaard, the first to come from outside the company, has cleaned house, replacing several top executives, forcing far-flung subsidiaries to act more as a group, and restructuring departments in order to reduce duplication and improve focus. One Dako senior executive likens the impact of Oestergaard's moves on the company to the impact of tearing down the Berlin Wall on Germany.

Dako needed a blast of fresh air. The company's convoluted relations between the US subsidiary and headquarters was only one misstep that allowed a much smaller competitor to blossom into a dominant player in the US histopathology market. In general, the company's subsidiaries weren't working well together, leaving it, for example, selling entirely different instruments in Europe and the US. Moreover, its R&D and sales and marketing programs weren't globally integrated, making them inefficient. And its highly technical, service-oriented approach to marketing didn't suit the changing needs of some key customers.

Yet, even as Dako is criticized for its slow pace of change and for the missteps that allowed competitors like Ventana to bloom and grab chunks of its business, the company has scored some enviable coups. Its executives are convinced that its scientific foundation will allow it to navigate the highly complex areas of diagnostics in which it has staked a claim and they have set an ambitious global agenda. It has plans to provide total automation to the histopathology laboratory through a series of alliances and internal programs. Its research business, which accounts for about half of its $110 million a year in revenues, is flourishing along with growth in the need for tissue testing. Most notably, Dako's new-found success with HercepTest, the Her2/neu test that is explicitly linked to Genentech Inc. 's breast cancer drug Herceptin[See Deal] to develop diagnostic kits for telomerase.

A Foundation in Science

Dako's current weaknesses, in some ways, stem from its longstanding strengths. Danish scientist Niels Harboe was a researcher at the University of Copenhagen specializing in protein electrophoresis when he founded Dako in 1966 to fill a need for inexpensive antibodies. From the start, he surrounded himself with family members and friends to help run the company, establishing excellent relationships over the years with academics at leading universities in the US and Europe. Many of Dako's most popular antibodies came from its collaborations with academic researchers, recalls Doug Sweet, VP, sales and marketing for Dako Corp. , the US subsidiary. "Dako has a fabulous reputation for the quality of its monoclonal antibodies," says Michael Samoszwk, MD, medical and scientific director of hematology and oncology labs at the Nichols Institute subsidiary of Quest Diagnostics Inc. "It was always out there, pushing the edge in the introduction of new products and its commitment to the research community."

Dako's scientific prowess and skill at marketing highly technical products to researchers helped it gain a pre-eminent position as a leading supplier of reagents to specialized labs. While many people could make the antibodies, Dako developed techniques for improving them. Although the company didn't have much intellectual property, it pioneered the development of standardized polyclonal, and later monoclonal, antibodies, allowing researchers for the first time to obtain reliable and consistent results. It developed a method, for example, of quantifying human serum proteins in gels much faster than other techniques, which took days, a feature that caught on in northern Europe. In the early 1980s, it launched its first manual immunohistochemistry (IHC) test, which contained the first ready-to-use staining system, peroxidase-anti-peroxidase (PAP). This new tool improved both the sensitivity of IHC tests and ease of use. Later, additional improvements were made to staining techniques. In the past few years, other advances such as labeled streptavidin biotin (LSAB system), the Dako EnVisionsystem, and Dako's catalyzed signal amplification system, which sets new level for sensitivity have helped Dako maintain a reputation for introducing cutting-edge technology.

Through the late 1960s and 1970s Dako remained a small, family-run company. Niels Harboe ran it, his wife, Annelise, was a managing director; and they were helped by a small coterie of loyal workers. The Harboe family would keep a small percentage of profits for themselves, plowing the rest back into the company, recalls one industry executive. As the company grew in the mid 1980s, the family gradually relinquished much of its control, filling key positions with long-time acquaintances. In 1990, Torben Joergensen, a financial executive who joined Dako in 1988 was named managing director.

In 1979, the Harboes established Dako's first subsidiary (Dako Corp.) in Santa Barbara, CA, in order to develop products that would better suit the American market and to keep an eye on technological developments here. While European scientists were willing to combine components from Dako and others to get viable assays, US customers wanted easier to use, more standardized kits. They wanted color-coding and ready-to-use reagents so that less-skilled labor could perform routine processes. Moreover, in the US, the world's largest diagnostics market, Dako needed a direct sales force. A year later, Viggo Harboe, the founder's son, went to the US to run the struggling operations there.

Sales began to pick up. In addition to its ready-to-use assays, Dako Corp. offered customers much more extensive training programs than competitors. One year, recalls Viggo Harboe, its workshops drew more than 4,500 participants, a high number for a still relatively small company. Europeans weren't as adamant about demanding the kits because they had enough skilled labor to perform the complex assays, but eventually, they too began to appreciate the quality of the kits and opportunity for standardization, says Marc Key, PhD, VP, laboratory operations, Dako Corp.

In 1991, Dako bought a small, UK-based diagnostics business from Novo Nordisk AS to expand its production capabilities and microbiology product portfolio [See Deal]; the transaction gave the Danish pharmaceutical company 29% of Dako, which it retains, and the right to a board seat, which is currently occupied by a Novo Nordisk appointee, who does not work at Novo Nordisk.

But even as Dako fortified its position as a preeminent supplier of reagents, establishing subsidiaries in 16 countries, the marketplace was changing. In the mid-1990s, US customers in particular, responding to shortages in skilled labor, began looking for ways to automate the IHC laboratory; in addition, new companies, notably BioGenex Laboratories Inc. and the better capitalized, more aggressive Ventana, were introducing automated stainers (see "Ventana Medical's Automation Gamble," IN VIVO, December 1996 [A#1996800246). Dako had faced automation issues before in its human serum protein business—and decided that rather than get into nephelometry, which automates the quantification of human serum proteins, it would become an OEM supplier to makers of these instruments, limiting its opportunities for growth.

But Dako's position in IHC was so fundamental to its business it couldn't afford to stand by as others automated the field. Dako supplies a broad line of more than 2,000 monoclonal and polyclonal antibodies to IHC, flow cytometry, microbiology, and clinical chemistry laboratories for both research and clinical use (about half its business comes from research labs). But IHC, for research and clinical purposes, accounts for roughly half its $110 million annual revenues and is one of the faster growing niches in diagnostics.

Getting involved in instrumentation would require fundamental changes at the company and entailed much more risk than depending on OEM agreements—and Dako was not only aware of the vast differences between the two businesses, but also of the track records of other companies that had tried to make the transition. In addition to producing the instrument, Dako would have to become a systems company, entailing a new level of service and educational training, as well as an entirely different approach to sales and marketing. "It was a very big decision for a company like Dako, but if it didn't do it, it would perish," says Dako Corp.'s Doug Sweet.

Enroachment of Systems

Perhaps the biggest impetus for embracing systems has been Ventana's growing strength. Since its inception in 1987, Ventana's goal has been to automate all aspects of the IHC laboratory, beginning with staining. After several false starts, it made headway in the mid-1990s, particularly in small to mid-sized hospital labs. With a group of ex-Abbott Laboratories Inc. executives at the helm, Ventana has succeeded in bringing a commercial mentality to the field. Ventana's systems are closed—its instrument has to be used with its reagents, a practice that Abbott pioneered with its immunoassay systems in the 1980s. At first, Ventana didn't have much in the way of reagent capabilities, but figured that would be the easier part—it could either use outside sources or build its own product line. On the other hand, once it had the box in place, it had a captive user. The largest and more esoteric laboratories, such as Quest Diagnostics, Dianon Systems Inc. , and ImPath Inc. preferred to make their own analytes, and weren't responsive to Ventana's tactics. But the smaller hospital laboratories, which make up a large majority of labs, liked its easier-to-use systems—these labs didn't have the labor or budget to tinker with analyte production, particularly as use grew of IHC tests.

Ventana also hired business-minded reps experienced at selling capital goods. They knew how to move large-ticket items but weren't necessarily scientifically trained. The strategy has paid off—in the US, according to industry research, Ventana has an 80% share of that portion of the hospital market which has already converted to automated IHC (roughly 50%-80% of the total hospital market). Its 1999 sales were $69.4 million, up 40% from $47.7 million in 1998.

The entrepreneurial interest in IHC was not coincidental. IHC in clinical diagnostics is primarily used to diagnose and monitor cancer, allowing scientists to recognize and characterize abnormal structures in individual cells and body tissues. More than 20 million IHC tests are performed annually worldwide; in the US, it is performed in more than 2,000 research and clinical labs and the numbers are growing substantially faster than the overall diagnostics market, according to a recent SBC Warburg Dillon Read report. IHC provides much more accurate and definitive information than routine histochemistry (hematoxylin and eosin staining).

The field, along with cellular and tissue analysis in general, is growing rapidly for a myriad of reasons. Limited for many years by its sample type—getting a tissue sample requires a biopsy, which is cumbersome—applications are expanding both within cancer and beyond, as the need grows for information about whole cells and structures within cells. It is an alternative to molecular amplification, in some cases, because molecular tests, while sensitive and blood-based, break up cells, so that they can't provide much information about whole cell structures or site of origin. New kinds of highly targeted therapies are likely to require cellular analysis or protein functional analysis—Herceptinis the first example of this kind of therapy, but more are expected to come to market shortly.

In addition, ISH, which is the application of molecular probes to detection of genetic material in tissue samples, is breaking out into clinical use. ISH has a higher degree of specificity and sensitivity compared to other tests, including IHC, and allows pathologists to look at the genetic makeup of a cell in the intact cell.

Yet the IHC/ ISH analytical processes are highly manual and cumbersome. In IHC, monoclonal antibodies or molecular probes, and sometimes stains, are applied to a tissue sample taken from a patient. The antibodies or probes then bind to targeted tissue structures. Pathologists can detect these bindings using labels in order to obtain information on the source of a malignancy, its stage, and other characteristics of the tumor, particularly the features on the cell surface. IHC reagents are composed of primary antibodies, which are specific to certain antigens and detection chemistries. The latter consist of secondary antibodies, enzymes, and other reagents, which give off signals if the antigen is detected. Current automation capabilities can eliminate some of the manual staining procedures, and companies are working on automating sample preparation, as well. At least one company, ChromaVision Medical Systems Inc. , has recently introduced image analyzers, which is in essence an automated microscope that can aid pathologists in reading tissue samples. ChromaVision and Dako have a marketing alliance [See Deal], which involves sharing information on placements, although the sales reps aren't selling each others' products, says Patricia Sisson, SVP, sales, marketing, and strategic planning for ChromaVision. The ChromaVision analyzer should help pathologists to establish more accurate diagnoses when they read HercepTestslides, for example.

The IHC companies are also looking to automate both ISH and special stains, but this goal is more elusive because it requires incorporating several different complicated technologies. Ventana, BioGenex, CytoLogix Corp. , and Dako are all working on this area.

For Dako the challenges to building a systems business were daunting—particularly in light of others' experiences. Its scientist-executives had to change their attitudes rapidly; until recently, they adamantly believed that companies couldn't successfully integrate reagent and instruments businesses. Dako's scientists were chemists, not engineers or software experts; likewise, its sales reps were highly trained technicians, a fair number holding master's degrees and PhDs, and not used to the rough-and-tumble world of capital goods sales.

Other diagnostic reagents companies making similar transitions had mixed results at best. Perhaps the most notable example is Diagnostic Products Corp. (see "Diagnostic Product Corp.'s Contrarian Bet," IN VIVO, April 1999 [A#1999800090), which converted from making high-end radioimmunoassays to providing immunoassay systems, including reagents, instruments, and services, in early 1990s. DPC bought its way into the instrument business by acquiring Cirrus Diagnostics Inc. in 1992 [See Deal], but it still had to grapple with enormous changes and conflicting cultures, says Jerry McLaughlin, a former VP, sales and marketing at DPC and currently a consultant with Great Circle Consulting Group. R&D people had to realize that customers don't care about technology beyond a point, as long as the job gets done. Systems companies need different research skills, cost structures, marketing and sales strategies, and, ultimately, relationships with customers, he explains. But the company, which had a reputation for being paternalistic, let go its reagent sales people and replaced them with more commercially-oriented, aggressive systems sales reps—the two skill sets were so different the former had great difficulty making the transition, he adds.

Regulatory changes were also shaking up Dako's research-oriented business, forcing it towards automation and the clinic. Dako and others had been able to sell antibodies to laboratories, which would then use them to make home brew tests for clinical use only by that laboratory, thereby eliminating the need to get FDA approval. But after 10 years of discussion, the FDA, a year and a half ago, began requiring antibody manufacturers to register their products and make them according to certain specifications; moreover, it forbid manufacturers from claiming clinical benefits of their antibodies or instructing laboratories on how to use them.

For Dako, the new regulations forced great changes. The company, in effect, has opted to put its antibodies into kits and seek FDA approval for them rather than market them as components without labeling information. It has therefore had to fortify its regulatory department, change its packaging and manufacturing practices and look at the business in light of a new cost structure. The kits are more expensive, but people seem willing to pay for them, and ultimately, the reagent suppliers can obtain better margins on them. As kits, the tests are more amenable to automation.

The Atlantic Ocean Divide

Certainly Dako's entry into the systems business would have been rocky under any circumstances. But a split between European and US executives exacerbated the tensions. Dako planned to obtain its first IHC instrument through an alliance, while laying the groundwork to eventually bring development in-house for greater control. Dako's strong global distribution network and stellar reputation for reagents would be a key attraction for potential partners.

But Dako's European and American executives couldn't agree on a partner. The US management pushed for a system in development at Lab Vision Corp. , a small, young, employee-owned company in the Bay area. Not only did they like the technology, but they could have extensive control over the product design, facilitating plans to transfer future instrument development to internal programs. European management, on the other hand, didn't want to wait for an untested product to get to market. It advocated an alliance with BioTek Solutions Inc. , a California-based company that sold a semi-automated IHC staining system for large, higher volume laboratories. BioTek Solutions, which had hopes of going public, however, didn't want to give up its right to sell its products direct in the US. Moreover, the Dako management team in California felt that the instrument was outdated for local markets.

As a result, Dako Europe and Dako Corp. signed separate contracts. In the US, Dako began selling Autostainer, the Lab Vision system, in mid-1996, as soon as it was ready for launch. In Europe, Dako reps had already been pushing BioTek Solution's TechMatesystem. When Dako's biggest competitor, Ventana, bought BioTek in February 1996 [See Deal] for $20 million, the long-term plan unraveled. Under the contract, Dako would continue to sell TechMates with Dako reagents, but now, each time it placed a TechMate, it strengthened Ventana. Subsequently, Ventana and Dako agreed that the contract would expire in December 1999, allowing Dako enough time to find a replacement and Ventana the opportunity to build up a stronger presence overseas.

But Dako has a way to go before it is comfortable in the systems world, not surprising for a company that once, in the words of an industry observer, viewed instruments as "a necessary evil." Reaction to the Autostainerseems mixed, with some industry experts noting that it is not comparable to Ventana's popular system, the NexES stainer, introduced in late 1997, or to more recent entrants into the market, such as CytoLogix' Artisan, which does both IHC staining and more complex special staining for the same price as Autostainer. Dako currently doesn't have a special stainer offering, while its major competitors do. Autostainer lacks fundamental features such as bar-coding, competitors point out. Moreover, competition is increasing: BioGenex is about to launch a new stainer and is well along in the process of developing five new systems that will completely automate the IHC lab, including tissue cutting and sample processing, says founder and CEO Kris Kalra, PhD.

Dako's foray into systems has been successful for a first effort, insists Oestergaard, noting that the company has extremely strong reagents and service and its hardware is catching up. He acknowledges that the current instrument is competent but not state-of-the-art, noting that the company, nevertheless, has placed 600 systems worldwide and established a coterie of loyal users among major reference and esoteric labs—an assertion supported by laboratorians. Moreover, now that the Ventana contract is terminated, the company can roll out a global system strategy for the first time, which will allow it to take advantage of economies of scale and synergies in different markets, he continues. Dako recently expanded sales of Autostainerto Europe and other countries and is reviewing its relationship with Lab Vision, whose main client is Dako. Longer term, Dako has an internal program to build a next generation stainer, and ultimately, other instruments that will completely automate the histopathology lab. To this end, the US headquarters has been established as a center of excellence in instrumentation.

Moreover, Dako, unlike Ventana, is likely to maintain its policy of open systems, in large part because it doesn't want to force customers to use its products and in part because it is so confident of its reagents' appeal. In effect, it is offering customers a more flexible system—buy our instrument but don't tie yourselves to any one company's reagents—betting that they will chose Dako's kits. Of course, Dako thereby opens the doors to lower-priced or higher quality new entrants.

The HercepTestPhenomenon:

In addition to a strong following in larger laboratories, placement of Dako systems is being driven by another factor, at least in the US: the success of HercepTest. HercepTestmeasures the level of expression of a growth factor known as Her2. It is the first test to get FDA approval for use in selecting appropriate candidates for a particular therapy. It determines which breast cancer patients have tumor cells that show an abnormally large amount of Her2. Patients who overexpress Her2 and suffer from metastatic breast disease are candidates for treatment with Genentech's monoclonal antibody therapy Herceptin.

HercepTesthas been a coup for Dako on several fronts, both as a business and a regulatory model. It was the company's first PMA, a huge step given that Dako's focus has been almost entirely on the research market. Even more impressive was its labeling: the FDA labeling for Herceptin says that all potential candidates for the drug must first be screened specifically with the Dako test. Several other Her2 tests have FDA approval, but none has FDA labeling that allows them to be used to determine eligibility for Herceptin.

HercepTesthas changed Dako strategically and also from a regulatory and marketing perspective, says Oestergaard. Approved in September 1998, at the same time as Herceptin, it garnered sales of more than $10 million in its first year on the market, and another $10 million for mandatory controls, according to Boston Biomedical Inc. And that's before it gets approval in most European countries, or gets approval for expanded indications, allowing it to be used to stratify patients with other kinds of cancers. The company has had to establish new kinds of service departments, new marketing programs, and a regulatory infrastructure that it didn't previously have. For the first time, Dako has had to be closely involved with a pharmaceutical company working on clinical trials.

Genentech evaluated numerous suppliers before selecting Dako based on its reputation for consistent, high-quality antibodies, executives say; the FDA made Genentech find a good test after initial clinical trials for Herceptinfloundered. Dako's skill at marketing complex tests also helped in the selection process—the exacting nature of the test requires it to be performed precisely according to labeling or results are inconsistent, laboratory directors say.

Dako now sees a key part of its future strategy as working in pharmacodiagnostics, using its monoclonal antibodies to select appropriate patients for other kinds of immunotherapies. Pharmaceutical companies need diagnostics to determine the most appropriate candidates for these highly specific, very expensive treatments. The preselection process is critical to the success of clinical trials and subsequent medical and payer acceptance.

Dako is working with at least half a dozen pharmaceutical companies, and although it won't discuss specifics, it is in the middle of a second PMA for EG/FR protein (epidermal growth factor receptor) antigen that could be useful in selecting suitable patients for EG/FR-based monoclonal antibody therapies. "Companies like the model they saw with Genentech and contacted us,' says Marc Key. Several signal transduction compounds, which target overexpression of growth factor receptors, are also likely to benefit from close links to a diagnostic, says Ronald Martell, VP, sales and marketing at ImClone Systems Inc. ImClone has a monoclonal antibody, C225, that could benefit from association with a diagnostic for some indications because it works on patients who overexpress a certain protein. C225 is in phase three clinical trials, however, for treatment of head and neck cancer, which isn't likely to require a test to select appropriate candidates for therapy because all patients with the disease are EG/FR positive.

Dako's experiences with HercepTesthas taught it how to reach out to various groups, including pathologists, oncologists, patient advocacy groups, and payers, and develop critical educational materials. For the first time, it has had to work with outside consultants to seek appropriate HCFA reimbursement. Current reimbursement is fair, says Sweet, who notes that many payers will reimburse for Herceptin only if it is preceded by use of HercepTest specifically and not other Her2 tests. Moreover, the company has had to view clinical laboratories like Quest and Laboratory Corporation of America, not just as customers but as partners, training them on appropriate methodology for doing the testing and appropriate utilization, he adds.

HercepTest's success has not gone unnoticed. Several companies have FDA approval for DNA-based Her2 tests, like BP Amoco PLC subsidiary Vysis Inc. 's PathVysion Her-2 DNA probe kit, but these don't have labeling for use in determining appropriate Herceptin candidates. Ventana has filed a PMA for an IHC Her2 test, but it may not get FDA approval linking it to Herceptin. Without such labeling, competitors are going to have a tough time getting labs to use their tests in place of HercepTest, even if they are less costly. HercepTest's requirements are too precise for laboratories to risk deviating from FDA labeling—it must be done exactly according to instructions, notes Samoszwk of Nichols Institute, which uses Dako's HercepTest and automated IHC systems. Even reputable labs can get misleading results, and thus, no one wants to tamper with the FDA's policy, on the assumption that changing the test may cause even more variation in results, he and others say. Several months ago, researchers at the Mayo Clinic caused a stir in the histopathology world when they claimed the Dako test was producing a positive result in 70-80% of cases, a big jump from the typically 20-30% positive rate experience by most laboratories. But subsequent investigation found the clinic, with one of the top labs in the country, wasn't performing the test according to package insert instructions. If Mayo, one of the leading esoteric labs in the US, has trouble producing consistent results, smaller labs are at even greater risk—and therefore are more likely to need Dako's training, pathologists say.

Nevertheless, competitors have a window. As successful as HercepTesthas been, it is cumbersome to use and, even more important, it produces ambiguous results in about 20% of patients. This group, whose results are greater than negative but less than fully positive, is the focus of much controversy in the IHC world—no one knows quite what to do with them. The DNA probe tests—and other new methodologies eventually may be useful as adjuncts or replacements if they clear up the confusion.

Teaming Up in Flow Cytometry

Even as Dako's IHC customers demanded automation, so too were users of its flow cytometry reagents. Dako has a broad line of high-quality antibodies for flow cytometry, and has a strong franchise in immunophenotyping for lymphoma and leukemia analysis. While flow doesn't represent as big a portion of Dako's revenues as IHC, it is a growing field. Moreover some customer overlap exists between flow and IHC.

In flow, too, Dako has chosen to partner, although in this case with a company well established in the field, Partec GMBH , a well-established German maker of flow cytometry instruments. Partec needed reagents as much as Dako needs instrumentation, for similar reasons—its customers were demanding complete automated systems and more extensive service. Moreover, competition was getting ever fiercer, as the field's two dominant players, Becton Dickinson & Co. and Beckman Coulter Inc. , squeezed would-be challengers out of the market. Both BD and Beckman Coulter had, in recent years, become increasingly vertically integrated and successful at cutting outside suppliers; while they once obtained antibodies and even some instrument components from outside suppliers like Dako, they have significantly stepped up internal production (BD bought PharMingen three years ago [See Deal]). In this field, too, says Doug Sweet, "We had to decide whether we want to be a small reagent supplier to big companies or take the responsibility for providing the market with what it wants."

Partec had opportunities to partner with other companies but chose Dako in part because of its reputation in antibodies, says Wolfgang Goehde, PhD, professor of radiobiologics at the University of Muenster and a co-founder and scientific advisor to Partec. Dako's limited experience in systems means the partners have no conflicts of interest, he says. The deal, signed a year and a half ago, covers all human health applications. Partec's market share worldwide for all flow applications is 25%, but its strengths have been in research and non-human applications, such as providing analyzers for China's huge shrimp industry. Dako's reputation will help it place more instruments in clinically-oriented laboratories, where it has not been aggressive, says Goehde. The system will remain open, sold under the name Dako Galaxy Flow Cytometry Systems, but the partners expect most users to buy Dako reagents based on reputation and deal terms.

Even as the Partec deal was reactive, reflecting Dako's caution, it also is indicative of the company's ambitions—Dako is now, after all, pitting itself directly against two solidly entrenched competitors who dominate the market and who have a history of stomping out would-be competitors, such as Ortho Diagnostics, which tried to market a system based on Partec technology.

Partec and Dako believe their strengths will allow them to flourish despite its two competitors' global presence. The Partec instruments have several technological advances not found on competing systems, including front end automation and absolute cell counts, which allow users to count cells directly, and thus precisely, rather than indirectly, which provides only estimates, as is the case with most flow instruments. Moreover, they have a unique way of sourcing light involving a combination of a laser and an argon lamp. This so-called "double excitement technique" allows for a wider variety of labels to be used, which results in greater analytical power than that provided by standard instruments with only one light source. The Partec systems, for example, can decipher subsets of lymphocytes, which results in more accurate diagnosis and more targeted treatment of leukemia patients. BD launched a dual light source instrument last year but it is more expensive and harder to use on a routine basis than Partec's, says Goehde.

Oestergaard argues that flow has room for a third competitor. "We have assessed the market in major countries and the strengths of our competitors, as well as our own strengths," he says. "We can react to changes in the market and technology faster than competitors." Nevertheless, it doesn't plan to make a frontal assault. Instead, it is targeting selected niches of flow, leveraging its strength in anatomic pathology—it can package together multiple kinds of IHC and flow reagents, for example, providing a differentiated message to customers.

The partners have been selling together in Europe for slightly more than a year, but are only now beginning a more aggressive joint effort—they won't be specific about their progress except to say the effort is proceeding well. Partec sells into research labs in the US and the partners plan to file for FDA approval there so they can sell into the clinical market.

The Arrival of Jes Oestergaard

Perhaps more than with any one technology, Dako's prospects rest with Oestergaard, who was appointed president last May, replacing Torben Joergensen, whose track record, industry executives say, was mixed. Oestergaard, a former senior executive at Novo Nordisk, is the first executive with global professional managerial experience to lead Dako. Novo Nordisk, which is a passive investor in Dako, wasn't instrumental in his hiring, say executives, noting that the company's representative on Dako's board isn't a Novo employee. Oestergaard has spent a lot of time building up businesses and selling them—at Novo Nordisk, he ran the diagnostics, then the biochemicals businesses, in both cases making them profitable and then selling them off. When he left the company two years ago, he was head of corporate licensing, responsible for selling off peripheral assets so that Novo Nordisk could concentrate on core businesses. Most recently, he was managing director of Medicon Valley Academy, a quasi-government group of Danish and Swedish universities and businesses, which aims to help the local medical industry flourish.

Oestergaard has set up to revamp the organization, which he says, had become too diffuse. Each had its own sales and marketing departments and was more concerned about its own profitability than the company's overall prosperity, he explains. The consequences of this were seen most glaringly when the European parent and the US subsidiary signed separate contracts for IHC stainers, he notes. This behavior isn't acceptable in the systems business today, where products have to be developed and sold worldwide in order to achieve maximum profitability, he adds.

One of his chief priorities is to instill more unity among the subsidiaries. To this end, he has changed the methods for measuring subsidiary performance, including the US, emphasizing overall corporate profitability rather than local profits. Each subsidiary is now evaluated as to how well they perform as part of whole group. As part of the same program, he replaced three top executives, including the VP sales and marketing, the VP, R&D and the VP, production, and, at least temporarily, assumed responsibility for sales and marketing himself; he still hasn't filled the other positions. Under his direction, the company is in the process of establishing centers of excellence in research, so that it doesn't duplicate efforts in the US and Europe, and standardizing the product portfolio so that it sells the same stuff in Europe and the US. It is centralizing some departments, like service, that previously were completely decentralized.

Dako's Genomics Play

As Dako strives to become more forward-thinking, it is taking a position in technologies that gives it entrée into genomics, without direct participation. HercepTestis one example. Another is its ongoing research in in-situ hybridization and probes. ISH allows genetic analysis on tissue samples without busting up cells, so scientists can continue to characterize cells in greater detail than ever and learn about its origins. Dako has a research program to develop new ISH tests and automated systems for ISH, both of which show great potential, says Sweet.

Perhaps its most interesting genomics play, however, is Boston Probes, which makes a probe technology based on a synthetic DNA mimic called peptide nucleic acid (PNA). Traditional probe-based diagnostic tests use small strands of DNA or RNA to seek out and identify complementary DNA or RNA in a patient. PNA is a synthetic DNA probe, which binds better to its targets, allowing greater specificity and stability. Dako claims PNA makes the testing process faster, more specific, and more sensitive.

Dako obtained rights to PNA in 1994 from PNA Diagnostics A/S, a small Danish company founded by the inventors of PNA. Boston Probes was founded in 1996, and Dako subsequently licensed rights to PNA to it, taking 80% ownership in exchange. Dako is hoping that Boston Probes behaves more like a biotech than a diagnostics company, with strong intellectual property and high-margin products. Early last year, it also bought PNA Diagnostics and transferred the technology to Boston Probes, thereby locking up all of the intellectual property related to PNA, says Jack Johansen, PhD, CEO and Boston Probes' founder. That's important because not only does PNA help Dako avoid patent disputes over other DNA methods, but it won't be subject to controversies over its own technologies.

PNA probes are useful not only for mutation analysis and infectious disease testing, but also for industrial microbiology, which is a growing subsegment of nucleic acid testing. The company, with its partner for industrial markets, Millipore Corp. is getting ready to launch its first product, a test for microorganisms in water, which, unlike traditional microbiology tests, takes hours instead of days; it has developed 30 probes for microorganism for industrial uses. The company is cross licensing some applications of PNA to Dako. Dako, in turn, is researching the technology's use with FISH and flow cytometry. Ultimately, Boston Probes is likely to make the PNA reagents, which Dako will incorporate into kits. Both companies are putting together an instrument strategy. The company hopes to license out other applications to other large diagnostics companies.

Scientists are just sorting out the value of the technology, which is expensive but useful in niche areas of nucleic acid testing. The field is embryonic, with several hundred published scientific papers, rather than thousands, says Johansen. "PNA sticks like chewing gum," says Steve Kingsmore, ChB, head of R&D at Molecular Staging Inc. , which is about to launch a new DNA amplification technology that can be used with traditional DNA probes as well as PNA. "It buys added specificity, but is it worth the expense for most applications? It's too early to tell its full potential, but it certainly is useful in niches," he adds.

Separately, Dako also has sublicenses from Roche and Geron allowing it to develop telomerase based diagnostic tests for certain indications like bladder cancer; telomerase is a protein active in controlling growth of cells in certain kinds of cancer and angina.

Content or Distribution

Dako's strengths in antibody reagents and research capabilities, and its efficient worldwide distribution network should aid it as it exploits opportunities in genomics. In doing so, it has an impressive track record. It has been masterful at developing sources of new reagent products—academics from all over the world turn to it to license antibodies they have discovered and with the success of HercepTest, it has shown that it can pull together a PMA and commercialize a clinical product. But it has much changing to do if it is to fulfill its vast ambitions and a large measure of its success will depend on new management's ability to convert its slow-moving, academic culture into one that is more responsive to a changing, vastly more complex marketplace.

As the antibody business gets more complex, and Dako faces new kinds of competitors, different from the fragmented, small, focused companies it was used to, its faster pace, greater flexibility, and global efficiency will be critical. But dangling before Dako are the vast opportunities in which it already has a head-start, namely pharmacodiagnostics, notably in the areas of immunotherapy and gene therapy. These fields are garnering much attention; the question for Dako is can it repeatedly come up with other HercepTest-like tests? Or was that breakthrough a one-shot slam dunk?

To some extent, Dako is caught up in a traditional tension in the diagnostics industry: whether its value is as a content provider or as a distributor of content (systems). Clearly, it needs both. But does its background in providing superior content give it an edge as the diagnostics industry pursues a hunt for high-value, patented new assays? The big diagnostics companies are typically distributors—they don't have a lot of basic biological research or intellectual property on new assays. But as their traditional systems businesses get harder to differentiate from one another, they are in a bind. One solution is to find proprietary diagnostics, which can be linked closely to a pharmaceutical—i.e., along the lines of HercepTest.Perhaps the first large-scale example of this is BD's investment in Millennium Pharmaceutical Inc.'s subsidiary Millennium Predictive Medicine Inc. [See Deal]

But Dako's internal tensions and lack of strategic focus hurt it just as its arch-rival systems provider Ventana has resolved many of its weaknesses and is gathering steam. Ventana too had struggled for nearly a decade, but now it is flourishing, with the introduction last year of a popular new staining instrument. Being public has helped it garner consumer awareness and obtain a market cap that gives it financing flexibility.

Dako, in part because it is family-owned, doesn't have the high profile on Wall Street or enormous resources of a public company. But, it has a healthy balance sheet and high margins, according to some industry consultants and has until now expanded its business entirely with its own resources. Oestergaard isn't ruling out other options—going public or finding a partner—if the company needs to speed up the pace of change and the force with which it attacks a market. For now, immunohistochemistry is a cumbersome niche, albeit a growing one, but Oestergaard and many others expect that it won't always be that way and that the field will attract the attention of big diagnostics companies. And Dako will be at the center of it all.

The Potential of Flow Cytometry and IHC

Cytometry (cellular analysis), and flow cytometry in particular, is a field of growing interest, which will be involved not only in prognosis but in diagnosis and predictive medicine, experts say. For example, Becton Dickinson's flow cytometry business grew 30% in the research market and 15% in clinical labs, according to Boston Biomedical Consultants.

Like immunohistochemistry (IHC), flow cytometry can detect and characterize cells in dynamic settings, using light to excite cells. This enables the user to analyze cell populations in real-time, as well as the cells' internal activities. Flow cytometry differs from IHC, which looks at static samples, and which is most appropriate for studying individual cells and tissue analysis. Flow results in a quantitative measurement of a number of cells or cell structures. Moreover, flow isn't static; it permits observation of cellular dynamics, as well as characteristics. Until recently, its chief clinical applications, aside from CD4 and CD 8 analysis of AIDs patients, has been for assessment of leukemias and lymphomas, liquid tumors that circulate in blood. Other clinical applications include immunophenotyping for transplant patients and non-AIDs-related immunodeficiencies.

Flow is also being used to study residual disease in cancer patients. It wasn't, until recently, suitable for solid tumors, because these are hard to break up while leaving cells intact; moreover, solid tumors tend to be composed of many kinds of cells, so that scientists, in trying to read the signals coming from labeled cells, can't distinguish which cells the labels are coming from.

Several groups are studying the potential of flow cytometry to do predictive medicine. One limitation has been the lack of knowledge about the biochemistry of the cell. However, under the direction of Guenter Valet, MD, professor of medicine at the Max Plank Institute for Biochemistry, a group of German scientists have developed a data analysis tool that can be incorporated into a flow cytometry instrument to do predictive medicine relatively quickly. It is being sold through Partec, although it is not yet incorporated into instruments, with the first application being sepsis—i.e. the ability to determine that a patient is on the cusp of getting sepsis before he or she actually comes down with the condition, which is exceedingly hard to treat and potentially fatal. If physicians know in advance that sepsis is likely to occur, they can put people on antibiotics prior to the onslaught without being concerned about encouraging antibiotic resistance.

Another group at Roswell Park Cancer Institute is studying the use of flow cytometry to detect residual cancer cells in stem cell transplants, says Carlton Stewart, PhD, an immunologist, at Roswell Park. Currently flow cytometry is used to examine the autologous material that will be used in the transplant. But it may not be picking up all residual cancer cells, which may be responsible in part for results from the major, new controversial studies showing that bone marrow transplants in breast cancer patients don't work well, says Stewart

IHC is also growing, though perhaps not as quickly as flow—although it is currently a bigger business. One reason is the growing excitement over gene therapy, which is likely to require periodic IHC-based testing for the presence of expressed genes or proteins. Biopharmaceutical companies, also, are increasingly interested in tissue testing for many of their new drugs and are eager to partner with IHC companies like Dako, which work on tissue samples, rather than with blood samples. They prefer IHC to DNA amplification techniques for genetic analysis because DNA amplification busts up the cells.

Still, even with automation, IHC technology currently is too cumbersome and expensive for routine clinical use; moreover, scientists are having trouble selecting the most realistic clinical applications for it, which are likely to be in oncology and infectious diseases. In addition, the ISH portion of tissue testing has taken longer to get off the ground than anyone expected—partly because its most useful clinical applications still aren't clear and partly because Enzo Biochem Inc. holds patents on some key labeling technologies for ISH. These patents expire next year; some say Enzo's tight-fisted licensing policies regarding its patents has slowed development. SBC Warburg Dillon Read predicts the ISH field could grow from $100 million to $500 million in the next few years.