Different paths to one goal
The past year has seen a wave of mergers and acquisitions around the world and across all sectors of industry. 'M&A' has got itself a bad name in the past, but this time financial pundits have emphasised the targeted and strategic nature of much the activity. It is a conclusion that seems justified if parallel, less headline-grabbing activity in the scientific software sector offers any guide.
In July this year, instrument-maker Agilent Technologies completed its purchase of Scientific Software (SSI), which it had first announced in May. By buying the company, Agilent was able to combine its own popular analytical instrumentation, data systems, and services with SSI's chromatographic data systems and informatics software.
SSI was just the latest firm to be snapped up in a series of mergers that has seen instrument manufacturers jockeying to provide the most comprehensive software packages they can. Agilent's stated aim was to provide customers with a single software application, handling diverse data, applications and instruments. Much the same reasons have been given by both Thermo Electron and Waters for buying InnaPhase and NuGenesis respectively.
Thermo Electron completed its acquisition of InnaPhase, a supplier of Laboratory Information Management Systems (LIMS) for the pharmaceutical and biotechnology markets, for approximately $65 million in 2004. By adding InnPhase's Watson LIMS software - a popular product in drug development laboratories - Thermo consolidated its strong position in analytical laboratories with SampleManager. Like Agilent, Thermo sees this as a strategic move. As the company's head of informatics, Dave Champagne, told Scientific Computing World in the August issue: 'We want them to be more of an integrated platform for the lab - a suite of applications rather than a selection of point applications.'
Something similar has been happening at Waters, which acquired NuGenesis for $43 million in January last year, completing the deal in March 2004. This had followed the purchase of Creon Lab Control in mid-2003.
The instrument companies are involved in what could be considered a chess game, says Rohit Khanna, vice president of worldwide marketing at Waters. 'If one vendor makes a major move, the others are going to say: how does that impact on me; let me understand why they're going to do that; or, there's a risk if I don't do something,' says Khanna, But there are underlying causes that are symptomatic of a change in marketplace, one that Waters - and probably its rivals - identified three, four, or more years ago.
The late 1990s had seen the rise of highly specific software solutions to customers' problems, as managers of laboratories fought to control the huge volume of data being generated by their instruments. The result: 'A lab today may have a Chromatography Data System (CDS), perhaps even a couple, mass spectrometry software, statistical software, a Documentum-type [content management] package, maybe a LIMS system, and even SAP now encroaching ... and its a hodgepodge,' says Khanna. All this is held together by the sticking plaster of middleware. This means that upgrading one package leads to broken links with other software. It may involve rewriting interfaces. Validating the whole thing can be very complex. In many cases, managers avoid the problem altogether and choose to stick with older versions of software, with all the restrictions in functionality that may entail.
Companies want to get out of this trap. Ideally, they want a single infrastructure, common to the different types of instrument, which can manage and archive data while controlling access and security. On top of that will sit different specific applications, says Khanna. 'That gives you the best solution and that's what we envisage is occurring.' In the end, software vendors have to offer a solution that is fully integrated and one that interfaces cleanly with the enterprise resource planning (ERP) systems and databases companies have.
In Waters' case, the strategy goes back some years. Having started off with a strong position in chromatography data management with Empower and with MassLynx mass spectrometry software, the company sought to make strategic acquisitions that could achieve its aim. It first acquired Creon Lab Control, which didn't have many customers but did have 'some very good infrastructure software for workflow management'. Creon also had LIMS software, which Waters didn't and some of its customers wanted. It now only lacked data management software, says Khanna. The possibility of buying Nugenesis had originally cropped up in the late 1990s, but had been rejected because it was then too small. After another couple of looks a few years later Waters decided to move, at which point Nugenesis had around 70 percent of its chosen market.
With these pieces, Waters could build the infrastructure for its suite of software applications, with an electronic laboratory notebook as a point of entry into the system.
There are factors other than controlling volume of data and the difficulties of sharing information between software that are driving customers towards this integrated approach. Both Thermo and Waters have highlighted training costs as one contributory factor. '[Labs] can't afford to train everyone on different packages,' says Khanna. It echoes a point made by Dave Champagne at Thermo in his August interview.
Regulatory issues and intellectual property protection are at the top of companies' concerns too, particularly in one sector that all three firms, Waters, Agilent and Thermo, cite as a key determinant of their strategy - the pharmaceutical industry. Thermo was looking to pick up pharmaceutical industry customers as a result of its acquisition of InnaPhase. Watson LIMS would 'broaden and strengthen' its offerings to customers in the sector, especially in proteomics and toxicology, it said. Agilent's acquisitions have included software firm Silicon Genetics. Its genomics and other informatics software is widely used in the pharmaceutical industry.
'Often we take our lead from the pharmaceutical industry,' says Khanna, because other sectors watch it closely and follow its choices, although environmental and food safety testing are other big areas of business. The issues can be sharper for pharmaceutical companies - failures can prove to be a lot more costly. Regulatory oversight is strong, and the need to protect intellectual property is paramount - and well understood. Two big thoughts in a laboratory manager's mind are: 'how do I find this information, if I have a legal situation, [or] if I have a safety situation, if the FDA walks in and wants to find this or see this,' says Khanna. This sense of fear has changed priorities in the sector, and has even intensified following Merck's recent experience with its arthritis drug Vioxx. 'It used to be always “we need to get the product to market quicker”. In the last few years, it's changed to time and quality to market,' he says.
More integrated laboratory informatics software could broaden its appeal outside traditional circles. It has even gained the attention of the academic world, which is increasingly interested in controlling and making money from its intellectual property. The change has caught software companies off-guard. 'I wouldn't necessarily have targeted them, [but] we're seeing a lot of interest from universities,' he says. Senior university staff are now acutely aware of the commercial value of the research carried out in the labs, and are keen to capture the data before it is lost along with the highly mobile graduate students who conduct much of the research.
Data ownership is moving up the ladder in industry too. Senior managers, outside the R&D sphere, want to keep in touch with what is going on in the labs. 'These [integrating] technologies allow them to better stay on top of it and make sure that those activities are under control,' says Khanna.
If tighter integration of instrument software is the shared goal, the companies are not necessarily taking the same approach to achieving it. For example, for Thermo it means increasing the functionality of LIMS and consolidating a fragmented market. Whereas Waters' is sceptical about LIMS' overall usefulness ('we find many customers don't really have a desire or need for a LIMS system', Khanna says) and hopes to integrate data in a different way. These probably reflect the differences in the three companies' existing customer base, with Agilent and Waters particularly strong in chromatography data systems.
This all takes place within the wider corporate business strategy. Agilent has just divested itself of semiconductor and LED manufacturing businesses, freeing itself from the unpredictable cycles of the chip industry and settling on steadily growing sectors. The company now sees itself as a 'pure play measurement company' as it focuses on telecommunications test equipment and analytical instruments - a process described by some as a return to its Hewlett-Packard roots.
What is certain is that the chess game continues. That will mean further acquisitions of mid-sized software companies. Waters' Khanna says that for the moment he is happy 'I don't see any gaping holes today. If I did, I couldn't tell you anyway!' But Agilent, and Thermo, have hinted at further purchases with Agilent interested in adding an electronic laboratory notebook to its portfolio.