Orchid’s New Business Model

Dale Pfost’s Bio

Orchid’s IPO

Corrections or additions?

Prepared for August 23, 2000 edition of U.S. 1 Newspaper. All

rights reserved.

Probing the Genomic Frontier: Orchid BioSciences

Some call this Pharm Country, some call it Silicon

Garden. Whatever names you use for the central New Jersey research

corridor, all of them allude to the academic and corporate research

engines that power so many of the area’s small to medium-sized high

tech companies.

One of those powerful R&D engines, the Sarnoff Corporation, is


its "spin-off" strategy. Take a basic Sarnoff resource —

say, a computer chip with its roots in color television or


research — and find a new use for it. Form a company, incubate

it, spin it off, move it out, and hope it will go public and offer

a good payback. Orchid BioSciences Inc., one of Sarnoff’s initial

spinoffs, is the first to go public — and what a success it is.

Just as Sarnoff’s grandfather, RCA, explored the television frontier,

Orchid is exploring the genomic frontier. In true Silicon Valley


it is making its employees wealthy. After its IPO last May, stock

went from $8 to $57 and is riding out the Nasdaq turndown at about

$40. Of its 250 employees, 110 of them are in 44,000 square feet in

Princeton in three buildings on College Road. Orchid seems to have

the golden touch needed to acquire the genomic technologies that could

propel it into the bigtime.

Elements of Orchid’s success come from both Sarnoff and from the


that Orchid acquired. On several fronts, Orchid is ready to take


of the advances being made in genomics. Now that a rough sketch of

the human genome has been drawn, Orchid can help refine the genomic

picture. "We see the company as very valuable for providing tools

in the field of genetic diversity, drug discovery, even


says Dale R. Pfost, president and CEO. "It could literally change

the way medicine is practiced."

"Pfost (pronounced "post") will speak on "the Big

Breakthrough in Genomics — What it Means to Princeton" at

U.S. 1’s Technology Forum on Thursday, August 31, at 4 p.m. at the

Doral Forrestal. The forum is part of U.S. 1’s Technology Showcase

and the Princeton Chamber’s trade fair, which is open from 11 a.m.

to 5 p.m. Admission is free.

Top Of Page
Orchid’s New Business Model

When it was incubated at Sarnoff as Orchid BioComputer,

the firm was working on high throughput lab work for any tests, not

just for genes. Using Sarnoff’s semiconductor expertise, Orchid


developed "miniaturized" microfluidic lab processes for what

has affectionately been known as the "lab in the palm of your

hand." Orchid has not sold or licensed this technology. If fully

developed, this high-powered lab could give Orchid a stunning


advantage in several areas of high throughput screening, including

the genomic screening.

"Automation is what Orchid is all about," says Pfost,


why he is not emphasizing the miniaturizing technology. "The


why I came to Orchid is that we have the technology to industrialize

drug discovery and development, to automate in an intelligent fashion

the processes and the data collection that you find in research


Soon after he came to Orchid came the big breakthrough in genomics,

when companies and governments on two continents marshaled their


to come up with the first rough sketch of the human genome. Pfost

used Orchid’s miniaturized lab technology as a trump card to help

him acquire two leading companies in the genome typing field —

first, Molecular Tool, and then its parent, GeneScreen. "We were

very fortunate to review a few dozen different opportunities. We


at gene expression, proteomics, high throughput screening, and


SNP scoring, genomics, and pharmacogenetics were what we chose."

To Orchid’s special chips (the "hardware"), Pfost added the

proprietary SNP scoring technology of Molecular Tools called SNPware.

SNP scoring refers to single nucleotide polymorphisms, pronounced

"snips," the most common variations in genes from individual

to individual. SNP scoring uses an automated computer chip-like device

called a SNPstream that can identify the transposed digits quickly,

accurately, and cheaply (www.snps.com).

One automated SNP scoring system (made by Beckman Coulter and


to run on SNPware) can do 25,000 scoring operations in one day. After

the plates are formatted and loaded into a carousel, the system takes

over; robotic arms insert and remove the plates through the various


Orchid now has four of these systems in operation on College Road,

doing fee-for-service work for pharmaceutical and agricultural firms,

and it is installing a fifth. Two 6 to 12-person shifts produce


operations daily, and Pfost predicts this figure will double every

couple of months. "We will be doing a million by the middle of

next year," he says.

The firm also licenses an impressive assortment of its SNP technology

to the big pharmas. The pharmas like the high throughput SNP scoring

because each useful SNP combination they discover can generate a


Orchid has 230 patents allowed and pending, counting both


and United States filings.

"Licensing has been going very well," says Pfost. "We

have a strategy of licensing that we call platform propagation. We

are enabling scientists, our customers, to do SNP scoring with their

existing instruments by selling them SNPware, the trade name for our


Pfost says he has been pleasantly surprised at how flexible the


can be; it will adapt to nine technology platforms that represent

more than 100,000 instruments now doing scoring in life science


labs across the nation. Having made five platform propagation deals

over the last year, Orchid is way ahead of its predicted schedule.

Bristol-Myers Squibb bought the largest system as a turnkey operation,

as have Monsanto and SmithKline Beecham. For other companies, such

as Applied Biosystems, Amersham Pharmacia Biotech, Luminex, and


Coulter, Orchid works under various customizing and marketing


Even Orchid’s competitor, Affymetrix, bought into the system.


wanted to get the best tech for SNP scoring and came to us to get

our SNPware," says Pfost. All the companies using this system

must purchase Orchid’s SNPware kits, and this in itself is a


revenue source.

A third part of the business plan is to use the technology in clinical

testing through what is called the Clinical Genetics Network. Through

its latest acquisition, GeneScreen, Orchid Biosciences owns three

laboratories that are federally approved for clinical testing. These

labs are in Dallas, Sacramento, and Dayton, Ohio, and have a total

of 140 employees. They provide cash flow now and stand ready for the

time when Orchid can do its own patient testing.

One potential testing product that Pfost was enthusiastic about


GeneShield, has taken a back seat to other efforts. GeneShield would

produce drugstore gene testing kits so consumers could find out their

tendencies for various diseases. Pfost says that such "direct

to patient" testing will take a few more years to develop. "We

want to make sure that we have a strong medical basis for what we

are offering," he says. "The best thing to do is get the


base of support with the physicians first."

"For the very first applications for clinical practice, we are

doing a very targeted introduction to physicians with specializations

in a particular disease. We are using the web as a means of


to provide information about pharmacogenetics and to do


marketing for the SNP scoring."

Working with scientists in Cincinnati, Hackensack, and Philadelphia,

and with LeRoy Hood at the Institute for Systems Biology, Orchid is

testing the genetic makeup of two kinds of patients, those with heart

disease and those with childhood leukemia, to determine effective

drug therapies and predisposition to disease.

In spite of public excitement about the progress made, Pfost says

the work has just begun. William Haseltine, chairman of Human Genome

Sciences, one of the companies that did the mapping, termed the first

mapping of the human genome a non-event, and Pfost agrees.

"It is a success to have all the DNA data available," he says,

"but the job is not done, and not done on many, many levels. It

is not the case that we have a contiguous sequence of the human


and we do not understand the diversity of the individual. That is

the area that Orchid is working on — how genetic variability and

variations from individual to individual form the genetic basis of

life." Pfost compares the task to climbing Mt. Everest. "You

may reach a particular summit, but you haven’t reached the top."

Top Of Page
Dale Pfost’s Bio

Still, the May IPO fulfilled a lifelong dream for Pfost. "I have

been around high technology and start-up companies all my life,"

says Pfost. Taking a company public, "is a personal goal that

I had for my entire career."

Pfost grew up in the Silicon Valley, where his father (a prolific

inventor who now holds 60 patents) worked on the early video tape

recorders with a five-man team at Ampex that included R.M. Dolby


known for improving fidelity by reducing background noise).

His father’s inventions were often part of the dinner table talk,

and he and his brother and sister were often brought down to the lab

and given technological problems to solve. His brother now has a


sales business in the Pacific Northwest and his sister is a validation

manager for VeriSign, which went public last year.

After majoring in physics at the University of California at Santa

Barbara (Class of 1980), Pfost went to graduate school at Brown, where

he started his first company with a product that, like Orchid’s, does

robotics for the laboratory — biological mechanization to perform

many experiments quickly. He sold that company, Biomek, to SmithKline

and moved to Great Britain to be CEO of Oxford Glyco Sciences, where

he repositioned the company as an emerging pharmaceutical.

Top Of Page
Orchid’s IPO

But he did not have a chance to take Oxford public.

Before it was ready for the IPO, Pfost was tapped by Sarnoff in


1996, to take the Orchid CEO’s post. Now 43, he lives in Pennington

with his wife, Gertrude, and their 10-year-old son and tries to


his 80-hour weeks with a commitment to jogging.

The Orchid BioSciences offering was, indeed, good for the company,

he says. "It allowed us to focus on operations and keep us


says Pfost. "We’re building value for the long run. In my opinion,

there is no company better positioned to prosper in the post genomics


The stock has a paper value of more than $60 million for Sarnoff,

which owns about four percent of Orchid, or about 1.6 million shares,

selling at about $40 now. Nobody at Sarnoff would confirm these

figures, but Sarnoff generally offers 20 percent of its holdings to

those who worked directly for a spin-off firm, or about $15,000, and

the remainder of the 800 employees generally get five percent, which

would amount to about $3,750. ** (this paragraph has been changed from

the print version, which uses a different example).

Among Pfost’s management challenges: to rally teams in a coordinated

fashion. "We have gotten much better at adding key people to have

teams aligned and well-focused," he says.

"One of the management adages I like, is that you celebrate that

which you want to see more of, so we recognize employee achievement

at the individual as well as the team level. We have a recognition

award every month. The employee may get a bonus check or a plaque

with an Orchid on it, plus the recognition of their peers."

He does not deny that some of his Orchid employees are probably paper

millionaires. "It is an element our employees are well aware of,

but we like them to take a more relaxed view. We have a package that

is a fantastic environment for our employees and among the things

in it are the share options."

The personal financial rewards, he says, are not as important as the

overall picture. "In Silicon Valley where I come from, people

talk about MOPs — millionaires on paper. We want to focus our

employees on the fact that they shouldn’t worry so much about the

share price and feeling good or down when the stock is up or down.

We are building this for the long haul, and that it is the stuff that

a career is built around."

— Barbara Fox

Orchid BioSciences Inc. (ORCH), 303A College Road

East, Box 2197, Princeton 08540-2197. Dale R. Pfost Ph.D, chairman,

president and CEO. 609-750-2200; fax, 609-750-2250. Home page:


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