deCODE Declares. Now What?

BankruptcyIf you’re a regular reader of the Genomics Law Report – or the Wall Street Journal for that matter – by now you have probably heard the news: deCODE genetics, Inc. has filed for Chapter 11 Bankruptcy protection.

Given deCODE’s recent financial struggles, this latest development is hardly a surprise. Indeed, two months ago, we anticipated this very event when we asked a hypothetical question: “What Happens if a DTC Genomics Company Goes Belly Up?” That’s precisely the question that deCODE’s customers and creditors are asking today.

In our original article, which was initially published in three parts on September 14, 15 and 16 at Genetic Future, we looked at the interplay between the privacy policies of DTC genomics companies and the relevant bankruptcy law statutes, and offered some educated guesses as to how courts and companies would handle the sale of a bankrupt company’s sale of its customers’ genetic information.

The coming weeks will see that analysis tested in Delaware bankruptcy court. In the meantime, there is a lot to unpack in this morning’s deCODE announcement.

deCODE’s New Owners. deCODE’s proposal is to sell one of its key operating subsidiaries, Islensk Erfdagreining (IE), as part of its plan of liquidation. According to the announcement, “IE conducts deCODE’s human genetics research, manages its population genetics resources and provides its personal genome scans, DNA-based risk assessment tests, and genomics services for contract customers.”

What this means is that, when the dust finally settles, there will be a new management team running a majority of deCODE’s current operations, including the DTC genomics service deCODEme. It’s likely that the new ownership will be the “stalking horse” buyer Saga Investments LLC, an investment company whose owners include Polaris Venture PartnersARCH Venture Partners and genomic sequencing giant (and DTC genomics dabbler) Illumina. However, under Section 363 of the Bankruptcy Code, other interested acquirers, if there are any, have a chance to see what Saga is offering and swoop in with a higher bid. And, as we discussed in our original article, even if there are no higher bidders the bankruptcy court still must approve the sale to Saga. (For those that are interested, here are the Stalking Horse Agreement and Schedules.)

Whether Saga or another group of investors winds up in control of the company, today’s announcement is likely to herald a changing of the guard at deCODE. Co-founded in 1996 by Kari Stefansson and Jeffrey Gulcher, both accomplished scientific researchers, deCODE genetics’ roots stretch back to a time long before “DTC genomics” was crowned TIME’s invention of the year in 2008 and the consumer-focused genetic testing field filled up with competitors such as 23andMe, Navigenics and Pathway Genomics.

It’s to be expected that an industry as new and unproven as DTC genomics will see its fair share of upheaval, and the last four months have seen plenty: the arrival of Pathway Genomics, turnover and a recent and unexpected product restructuring at 23andMe, and now deCODE’s bankruptcy and sale. Yet to be determined is whether these are the signs of a healthy industry reacting to the combination of increased competition and a struggling broader economy, or an indication that existing DTC business models need to be thoroughly revamped.

deCODE’s Old Customers. It remains to be seen what a new set of owners will bring for deCODE’s existing customers, especially those of its deCODEme DTC service. Genetic Future posted a letter this morning sent by deCODE to its deCODEme customers. The company assures its customers that, as part of its bankruptcy filing, it has secured funding that it will allow it to maintain its operations and that “we do not expect [the bankruptcy] to have any impact on your deCODEme account.” (emphasis added)

To some extent that’s true. The arrangement with Saga provides bridge financing of up to $16.5M for deCODE. That funding should allow deCODE to keep the lights on and otherwise maintain its operations as it proceeds through the bankruptcy process. Clearly, changing owners doesn’t change the science that will continue to drive the deCODEme analysis.

But behind the scenes, changes are certainly possible. Any bankruptcy filing is a final admission that the current business model is broken, although it’s often very difficult to tell from the outside just which pieces of the business model aren’t working. The deCODEme portion of the business might be operating satisfactorily. However, if deCODE’s new ownership determines that one of the necessary changes is an overhaul of its deCODEme business model, including whether and how the company uses its customers’ genetic information, it won’t be free to do so with unfettered discretion.

As we discussed at length in our earlier article, deCODE’s existing data access restrictions, as well as other restrictions imposed by law, will limit the available uses of customers’ genetic information by the new management. Those restrictions will define a range of permissible uses for genetic information that is transferred as part of the bankruptcy sale. Within that range of allowable uses, however, deCODE’s new owner may choose to change or even expand its use of that information.

deCODE’s Current Investors. deCODE genetics, Inc. is a publicly traded company (NASDAQ: DCGN) and the analysis for deCODE’s current owners is simple and unappealing. From the press release: “In the event of a liquidation, any recovery for stockholders of deCODE would be highly unlikely.”

Expect more commentary and analysis from the GLR in the days and weeks to come as the deCODE bankruptcy proceedings continue to unfold.