$138 Million Quarrel in Biotech Industry

     SAN DIEGO (CN) – Azco Biotech claims in court that Dutch conglomerate Qiagen sweet-talked a business partner into a $138 million merger that left Azco with no customers and none of its licensed technology.
     Azco and its CEO J Adams sued Qiagen, its CEO Steven Gordon, Intelligent Bio-Systems Inc. (IBS), its co-founder Jingyue Jiu, and IBS vice president and chief technology officer Jerzy Olejnik, in Federal Court.
     Azco, a Nevada corporation, accused the defendants of a host of professional sins in its 18-count, 46-page complaint, including breach of contract, fraud, trade libel and defamation and unfair business practices.
     “This case arises from the decision of one man, Gordon, the CEO and largest shareholder of IBS, to sell out his friend and partner, Adams, the CEO and sole shareholder of Azco,” the complaint. Adams claims that Gordon sold “what Azco and IBS partnered to develop, promote, sell and service for the burgeoning DNA sequencing market.”
     Both the federal lawsuit and Azco’s home page give Adams’ first name only as J. The company’s web page says it provides reagents and instruments for genome sequencing and analysis, DNA and RNA synthesis, and molecular detection.
     The complaint states: “Qiagen agreed to pay Gordon as much as $138 million to abandon Adams, his friend, colleague and partner, in return for the technologies, processes, customer lists, marketing, customer relations and other work which Adams’s and Gordon’s small companies had brought together in their 15 months working together hand in hand.”
     Adams says in the complaint that Gordon founded IBS in 2005 to commercialize DNA sequencing patents it licensed from Columbia University. Adams claims IBS failed to market its technology successfully until it joined forces with Azco in 2011, and subsisted on grants from the National Institutes of Health to survive.
     Azco was formed in 2003 as PharmChem when the patent protection of reagents used for DNA and RNA synthesis expired. Adams says that before Azco’s entry into the marketplace, reagents were supplied exclusively by Chinese and other manufacturers of DNA sequencing instruments, and Azco became a “complete solutions” provider when it began offering instruments in addition to reagents.
     In 2009, Azco partnered with Dover Systems to distribute a DNA sequencer known as the Polonator, manufacturing all of its reagents and servicing the machine. Adams claims he recognized that the technology Gordon and IBS had licensed from Columbia – Sequencing by Synthesis, or SBS – would be critical to the competiveness of the Polonator in the second-generation DNA sequencing market.
     However, Adams and Gordon agreed in 2011 to kill the Polonator in favor of IBS’s software and fluidics. Azco became the original equipment manufacturer of the joint venture’s new product, MAX-Seq Genome Sequencer and in May 2011 Azco and IBS met with the first large potential customer interested in purchasing 100 MAX-Seq instruments, according to the complaint.
     “During this meeting at Azco’s offices in Oceanside, California, Gordon and IBS were introduced and held themselves out as Azco’s … partner. Gordon also was introduced to Azco’s chemistry group, and provided unrestricted access to Azco’s methods and procedures for manufacturing reagents in view of the parties’ relationship,” the complaint states.
     “Adams not only allowed disclosure of Azco’s confidential information to Gordon, he encouraged it in light of the many representations and promises by Gordon that IBS was committed to working with Azco for the long-term, to develop and sell the MAX-Seq and the reagents to be used with it, to the exclusion of any other instruments or reagents, and based on Adams’s belief in the truth of Gordon’s representations and promises that Adams and Gordon, through their respective companies, were partners, a representation that was made by Gordon many times between April 2011 and June 2012, not just to Adams, but to others at Azco, to potential customers, to purchasers of the MAX-Seq (and other jointly developed technologies), to the industry at large and to the general public.” (Parentheses in complaint.)
     Adams says the customer ordered a MAX-Seq, and IBS immediately asked Azco to manufacture reversible terminator reagents. Azco determined that IBS’s way of making the reagents was flawed and couldn’t be manufactured in large quantities or with adequate purity.
     Azco also learned for the first time that IBS had never made its reagents in production volumes, Adams claims. He says Azco fixed all of IBS’s production problems within a matter of weeks.
     “It was not Azco’s responsibility pursuant to the Term Sheet to perfect the reagents to be used with the IBS technology. Azco did so, however, because it was consistent with the relationship which had developed between the parties and their oral agreements, to work together in every respect to further their joint enterprise in which they would share the profits,” Adams says in the complaint.
     He says that through the rest of 2011, the two companies worked jointly to expand their customer base and market their products – including the MINI-20, released in March this year. According to the complaint, a May 2012 press release touted the new product as “manufactured by Azco Biotech.”
     Unfortunately for Adams and Azco, neither party made amendments to their term sheet or their oral agreements. Adams says he and Gordon spoke of an Azco-IBS merger – until June 25 this year, when QIAGEN announced it was acquiring IBS for $138 million.
     “This news shocked plaintiffs. … Gordon even acknowledged to Adams after the sale of IBS to Qiagen that had it not been for that opportunity arising when it did, he would have been in favor of merging the two companies. Not only had plaintiffs not been informed by the IBS defendants that it was in discussions with Qiagen, right up to the day before the announcement, the IBS defendants were speaking, writing and meeting with plaintiffs as if nothing had changed, and thereby acquiring as much information as possible before plaintiffs learned that, in fact, its partner was now its competition to whom it was unknowingly revealing its most confidential information,” Adams says in the complaint.
     According to Adams, in the weeks before the Qiagen takeover, IBS co-founder Dr. Jingyue Jiu made “numerous calls to Azco asking for very detailed information about the technologies Azco had developed to enhance the IBS technology.” And Adams says IBS’s VP and Chief Technology Officer Jerzy Olejnik continued to participate in planning meetings at Azco up to the day before the Qiagen acquisition was announced, never disclosing that IBS would be sold.
     “The day before the announcement the following confidential information, among others, was discussed openly with Olejnik, IBS’s vice president of business development: engineering status, status of pending orders, pending large opportunities, timing for running customer samples, software, promotional plans for the MAX-Seq and the MINI-20, and chemistry issues that arose with the MAX-Seq in Korea and the solution Azco was developing to solve the problems. Olejnik also requested, and was given, Azco’s current customer list. Additionally, IBS placed a very large order for reagents just the day before disclosing the IBS/Qiagen transaction. Plaintiffs are informed and believe, and thereon allege, defendants hoped to stockpile Azco reagents because they knew Azco would not provide the reagents once the acquisition was revealed and neither IBS nor Qiagen had the ability to produce them themselves,” the complaint states.
     Adams claims that Qiagen acknowledged to Gordon that Azco was entitled to be compensated for its contributions to IBS’s success, and planned to negotiate a settlement separately. He says that in addition to providing IBS with solutions to exploit its license for SBS technology, Azco spent more than $2 million of its own money to build the partnership and develop their products – “considerably more than IBS spent,” according to the complaint.
     Instead, Adams claims, Gordon handed Azco a written termination of the sub-license to exploit SBS technology, leaving Azco and its customers in the lurch.
     Fearing a lawsuit from Qiagen if it continued to manufacture reagents or service existing machines, Adams says Azco attempted to direct all existing and pending customers to Qiagen – which doesn’t plan to relaunch the MAX-Seq or MINI-20 until 2013 – and their complaints have not been addressed, according to the complaint.
     “As a result of the conduct alleged herein, defendants have: (1) taken virtually all of plaintiff’s available capital, which plaintiffs spent [sic] during the previous 15 months to make the IBS/Azco partnership successful, leaving plaintiffs with marginal ability to rebuild their business; (2) have destroyed plaintiffs’ ability to freely, and without fear of legal action (until such time as the court can grant appropriate relief), to continue to sell and service the instruments and reagents with which they replaced their prior inventory in order to devote all their time, attention and resources to the development, marketing and sale of the IBS/Azco partnership’s products and services; (3) received the benefit of plaintiffs’ knowledge, experience, hard work and creativity, which was devoted to such things as developing reagents to be used with the SBS technology and marketing and sales plans used to create the market visibility and customer base defendants now enjoy; (4) put the further development and sale of the Polonator a year and half behind where it would have been had plaintiff not diverted all of its resources as alleged herein; (5) have left plaintiffs to attempt to resurrect their prior business without capital, and with a product line and sales program that, by the biotech industry’s standards is now outdated; (6) have forced the plaintiffs to divert much of their time and attention to this litigation in order to obtain what is rightfully theirs; (7) have used plaintiffs’ contributions to the MAX-Seq and MINI-20 to create competition plaintiffs otherwise would not have had; and (8) have severely damaged plaintiffs’ relationships with their existing and prospective customers and their reputation in the industry,” Adams says in the complaint.
     Adams and Azco seek compensatory and punitive damages, disgorgement, an injunction against the use of proprietary information and the impugning of Azco’s name in the biotech industry. They also seek a judicial declaration that Azco’s term sheet with IBS has not been lawfully terminated, leaving the sub-license for SBS technology in effect.
     Adams and Azco are represented by Mark Mazzarella, with Mazzarella & Lorenzana, in San Diego.

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