IBM KNOWS HOW to cozy up to life sciences companies: Give them money and technology.
In 2000, IBM kicked off an aggressive campaign to lure life sciences companies into its fold. Armed with $100 million, IBM
took on the role of a venture capitalist, making investments in life sciences companies and giving some of them discounted
servers and storage systems. In cases where IBM did not take an equity stake, it formed tight partnerships with more than
a dozen other companies that often included friendly hardware deals.
IBM's willingness to part with hardware profits in exchange for tight links with the life sciences community has helped
it fend off competition from the likes of Sun Microsystems and Hewlett-Packard. In addition, IBM has tried to use the partnerships
to push Oracle out of the way to create a place for its DB2 database and DiscoveryLink data integration software.
"As much as we like to think of them as the model, most companies can't afford to do business the way IBM does," says Mark
Hall, research director of life sciences practice at Framingham, Mass.-based IDC. "IBM has said, 'We will write off the hardware
profit.' They want to put the hardware in place, hopefully to lock customers into different types of sales."
Executives at Dell, Sun, and SGI all say they selectively offer generous discounts to life sciences customers, but none
say any deals approach the scope of an equity investment. "It's certainly a buyer's market, and it can be difficult to compete
with big players that literally give things away," grumbles Howard Asher, director of global life sciences at Santa Clara,
Calif.-based Sun.
While IBM's strategy is one that competitors cannot afford to match, there are questions about how effective it has been
- so much so that Armonk, N.Y.-based IBM is re-evaluating the strategy.
"Our thinking on that has changed a lot in the last two years," says general manager of IBM life sciences Caroline Kovac,
who has led the equity investments program. "It's been a while since we directly put equity in an individual partner. We can
get more leverage and broader coverage in the industry if we work with the venture capitalists and investment community. While
we don't like to lose money on these things, we don't expect a return on capital."
Even IBM's own partners say that DB2 and DiscoveryLink have failed to gain much ground in the life sciences despite IBM's
giveaways. According to Hall, Oracle, the "de facto standard," still holds a commanding 75 percent to 80 percent market share
in this vertical.
IBM's hardware bargains are usually the most pronounced among those companies where it has taken an equity stake. In some
cases, IBM will match a company's hardware purchase with an investment of equal size, says Lloyd Segal, president and CEO
at drug discovery company Caprion Pharmaceuticals, in Montreal.
"IBM has used ten-thousand-pound-gorilla tactics to try and own an industry," Segal says. "They are pretty good at it, and
IBM is probably not the worst company to be tied to. But how much sense [does] it make if a company is willing to give you
$10 million in equity if you buy $10 million in servers? It raises questions in a lot of people's minds about the quality
and nature of the sale."
While Caprion turned to Sun on technical grounds instead of IBM for hardware, a number of companies have bought IBM's pitch.
Structural Bioinformatics (SBI), GeneFormatics, LabBook, and MDS Proteomics have all received equity investments from IBM.
SBI, for example, has created protein structure databases to help other companies speed their drug discovery work. While
this technology used to run on Oracle's database, it has since been ported to DB2 as well, following IBM's investment for
an undisclosed amount, says Kal Ramnarayan, vice president and chief scientific officer at SBI, in San Diego. For porting
its technology to DB2, SBI received several perks from IBM, including favorable hardware prices and access to other IBM software
technology.
"We get a very good discount," Ramnarayan says. "IBM helps us in multiple ways."
Still, SBI has not yet seen much payoff from at least one IBM technology: DiscoveryLink, middleware that allows users to
query heterogeneous databases. "It just hasn't been adopted as well as some people thought," Ramnarayan acknowledges. And
not only money and technology change hands.
On Oct. 1, TurboWorx (which changed its name from TurboGenomics five days earlier) announced that an IBM life sciences director
of strategy would be leaving his post there to become its president. This was preceded by two partnership deals struck between
the two companies in April and September, the latter calling for inclusion of TurboWorx informatics tools in the IBM Life
Sciences Framework, of which DiscoveryLink is a big part.
Accelrys has also been blessed by IBM's server discounts. The two companies partnered earlier this year to create tighter
bonds between DiscoveryLink and Accelrys' Discovery Studio platform for managing drug discovery applications and data, and
to tune Discovery Studio for IBM's hardware. "IBM is investing a lot in their engineering side that is helpful to us," says
Steven Levine, senior director of strategic partnerships at Accelrys. "They have helped improve the performance of our products."
Despite close ties, IBM has not been able to nudge Accelrys toward moving its applications onto DB2 instead of Oracle. "Right
now DB2 is not a supported technology," Levine says. "It's a bit of a sticky point from IBM's perspective. [DB2] is not a
good pull in the marketplace for us."
The Accelrys deal points to a larger problem with IBM's strategy, according to IDC's Hall. "The move to bring on Accelrys
and a host of other partners was partly to try and bring interest to DiscoveryLink because IBM felt it would be a strong play
for them," Hall says. "There would be a data integration platform and an IBM portal that would be your launch pad into all
of your drug discovery [and] clinical trials."
"That hasn't played out, in part, because DB2 is a core component of that vision," Hall says. "You can't run DiscoveryLink
without DB2, and IBM has been unwilling to put Oracle at the center of [DiscoveryLink]."
IBM faces internal pressure to keep DB2 at the center of its life sciences strategy, which has caused some tension within
the company, Hall says. In addition, IBM partners have occasionally seen the company encroaching on their turf. These factors
have hurt the adoption of DiscoveryLink and, in turn, IBM's place in the life sciences market.
"I don't think they have made a single dollar on DiscoveryLink sales," Hall says.
Still, the strategy has given IBM great entrance into the life sciences, according to Kovac, who credits IBM's partners
with giving it insight into what kinds of technology may be important in the years ahead.
"Frankly, it has been a great strategy," Kovac says, adding that many partners use both IBM hardware and DiscoveryLink.
"We have many dozens of alliances and hundreds of business partners in IBM's life sciences ecosystem."
Life sciences companies receive the same hardware discounts as other companies that make large hardware buys, she adds.
"We don't give away hardware to get business," she says. "The answer is that we have a hell of a business in the life sciences."
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