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Feature Articles : Jan 15, 2010 (Vol. 30, No. 2)

OEMs Redefine Role in Biotech Sector

Modern-Day Original Equipment Manufacturers Do More than Provide Private-Label Instruments
  • Gail Dutton

OEMs—original equipment manufacturers—have existed in the life sciences for decades but are becoming increasingly popular with providers of microfluidics, liquid-handling, and assay systems and components that are used for drug development, as well as other biotech applications.

Drug developers are using OEMs in three ways. The most common is to buy a system, assay, or reagent that includes some OEM components. In the second approach, drug developers buy a product directly from the OEM, but in custom packaging or custom quantities. The third approach licenses intellectual property from the OEM, sometimes in partnership or consultation with the OEM. Clearly, the definition of OEM is changing.

Historically, OEM referred to the companies that make private-label products or components for products. In the biotech industry, individual OEM manufacturers have their own interpretations, sometimes blurring the distinction between OEMs, contract manufacturing, and custom work. The commonality is that they all engage in volume, business-to-business transactions and thrive on long-term relationships.

What constitutes an OEM product depends upon the OEM. Just as many of the computers that provide combinatorial libraries for developers bear the “Intel Inside” label, many other pieces of equipment bear such labels as “Caliper Driven” or “Pall Partner.” And, many others include components that work quietly, known only to the manufacturers and their OEMs. The reason for their popularity is simple. OEMs help manufacturers expand product lines without also increasing their research, development, or specialized manufacturing expenses.

At Life Technologies, potential OEM markets include “all of the companies and customers to which we could supply raw materials, technologies, and products,” according to Vicki Singer, Ph.D., global head of out-licensing.

That includes instruments, enzymes, fluorescent dyes, chemiluminescent substrates, antibodies, and magnetic particles, and the associated intellectual property, along with off-the-shelf and customized solutions that incorporate all of those tools. According to Dr. Singer “in PCR, the OEM products we supply could encompass patent rights, components used in a PCR device, software, whole instruments, fluorescent dyes, quenching pairs, oligonucleotides, enzymes, buffers, or a complete kit.”

Hamilton Robotics, in contrast, focuses more narrowly on components for liquid-handling workstations and robotics. Hamilton Robotics tends to build complete systems, which may be integrated into third-party devices, while Hamilton Dealer Products handles components, according to Scott Eaton, director of OEM diagnostics sales.

Hamilton Robotics supports reagent customers, providing a liquid-handling workstation that allows those companies to offer a complete system to their customers. “For example,” Eaton says, “in HIV testing of blood, reagents are validated on our equipment for processing the assay. That platform and assay are sold together. Sometimes, the equipment is part of a lease,” managed by Hamilton’s client.

Caliper Life Sciences sells both equipment and licenses as OEM transactions. “They account for about 10 percent of our total revenues,” CEO Kevin Hrusovsky reports. Caliper’s core application areas include biologicals, vaccines, next-generation  sequencing, and molecular diagnostics.

Tecan’s OEM business encompasses platform-based solutions, detection devices, and dedicated solutions sold under the partner’s brand, as well as components and plastic consumables. Its OEM business already accounts for more than 25% of total revenues.

Promega’s approach produces both OEM and custom products. The main difference tends to be the end user and the packaging—customers using Promega enzymes internally may want larger volumes in a single container, explains Arlene Silveira, director of marketing, sales, custom, and OEM products.

In similar fashion, BioTek Instruments segments its markets into direct-to-market and OEM—which it calls contract sales—categories. As an OEM, “We can do private label or volume sales to a business partner,” says Gary Barush, director of marketing and sales. BioTek Instruments’ OEM business is tightly focused on microplate instrumentation. “We partner with chemical companies that make reagent kits, adding the instrumentation. They then package this as a total solution.” The total solution is what drug developers are most likely to see.

Trends

Drug developers are likely to see more OEMs involved more collaboratively in the equipment and assays they use. For example, Pall Life Sciences’ OEM customers are increasingly interested in working in partnerships with OEMs to tap into the OEM’s knowledge base to actively develop solutions. “They want extra value,” Kara Cannon, vp of diagnostics and biotechnology, points out. “We do a lot of customization work,” and also offer consulting services at the OEM level.

Drug developers are also seeing increasing levels of standardization around open platforms, which enhances flexibility and competitiveness of applications. Total solutions are also becoming more popular as manufacturers tap into best-of-breed technologies that are already matched and tested, helping their drug development clients minimize the testing and analyses that typically accompany platform and application purchases.

Why OEMs?

Companies are turning to OEMs rather than developing projects themselves, partially in response to the belt-tightening that is afflicting nearly all industries. “A number of companies have come to us to evaluate the cost effectiveness of outsourcing (through Promega’s OEM) versus manufacturing themselves,” Silveira says. “Drug developers purchase a number of our assay systems for drug screening. Rather than open hundreds of small tubes/bottles, they purchase the products in larger custom sizes, making it more convenient and economical for them.”

As Jason March, director of marketing for small instruments at Hamilton, points out, “most companies don’t make all their subcomponents.” Their expertise lies elsewhere. Working with OEMs helps manufacturers redeploy staff to focus on their core competencies.

The OEM approach also can dramatically reduce time to market. Tecan’s Brändle reports time to market for a dedicated instrument is typically three to four years, while customizing a platform-based instrument can be accomplished in only 12 months. “A platform approach,” he says, “is best for companies wanting rapid prototypes, flexibility, and fast time to market.” However, he continues, “that approach is not cost optimized and specific applications typically need only about 30 percent of the functionality that is available.”

Other benefits include accessing intellectual property, expanding product lines, adding value to existing lines, and freeing staff to concentrate on more sophisticated, technical products rather than commodities. The result increases profits, and sometimes, locks in customers.

From the OEM’s perspective, this is a channel strategy that results in long-term business-to-business relationships. As such, it is somewhat more stable than direct sales and supports the goal of increasing profits. Although OEM gross margins typically are lower than for direct sales, they are offset by lower sales expenses, Hrusovsky says. OEM work also provides manufacturers with the opportunity to better leverage their IP and product portfolios.

“For our own business,” Barush says, “it allows us to maximize incremental revenue, lowers the cost of doing business, and helps us smooth manufacturing forecasts. It also helps lower component costs, increases market penetrations, and exposes us to new technologies or chemistries. It also lowers costs to users.”

“For us, it makes sense to stay focused on our expertise and to look for companies that complement that expertise rather than trying to be all things to all people,” adds Pall’s Cannon. One of Pall’s areas of expertise is separations, so it ports that expertise into developing separation solutions and devices. But, rather than take the next step toward packaging a full assay kit, Pall often prefers to partner with experts in that competency, thereby providing a better solution to drug developers.

That model is repeated throughout the industry, as companies seek others with complementary strengths to add value to their own offerings. Last July, Tecan took the unusual step of highlighting two of its still-developmental technologies to potential OEM clients at the AACC meeting.

“This generates a pull effect,” Brändle explains. Now, rather than merely designing concepts in response to requests for bids, Tecan can choose companies with which it wishes to partner for more robust, mutually beneficial alliances. Other OEM options include customizing its existing platforms, developing specific instruments to specification, and supplying components.

BioTek also thrives on customization work. “We pretty much sell our off-the-shelf products as OEM, from software through complete automation packages,” Barush says, but the OEM instruments that are destined for specific kits are optimized for the assays they will run.

OEM arrangements have opened many niche markets these manufacturers otherwise could not have entered. BioTek components, for example, are now used in endotoxin testing, food testing, animal testing, agricultural testing, and blood screening. This exposure increases the value of the brand, but also expands its own consumables markets.

OEMs in the biotech sector today are exceeding the original parameters of providing private-label instruments and internal components. In the process, distinctions are blurring so that an OEM may just be your next partner.