Correlogic filed for Chapter 11 to shed contracts

Germantown-based Correlogic Systems filed for Chapter 11 bankruptcy earlier this month so that the diagnostic testing company can shed contracts with two major laboratory test suppliers that it says deter investors.
Mon, 07/26/2010

Though the circumstances of Correlogic's filing are unique, its struggle points to a larger issue for many biotech companies: securing enough money to work their way through the development process in hopes of bringing a product to market.

That can take years, even decades, as companies juggle scientific tests and clinical trials with government regulation. In an anemic economy, in which investments are only beginning to pick up after falling to their lowest level in more than a decade, long-term financing can be hard to come by.

John Korpela, who directs Montgomery County's five business incubators, including the facility where Correlogic has offices, declined to speak about the company's specific situation, but said a lack of investor funding is common in a down economy.

"A year ago, even six months ago, it was difficult for companies to raise money because investors were basically doing triage with their portfolios," he said.

Correlogic chief executive Peter Levine said the reason his company ran out of money wasn't a lack of interest from venture capitalists. Instead, the company's contracts with two suppliers, Quest Diagnostics and LabCorp, narrowed the potential payoff for investors.

"That business model has changed, and the idea of having distribution through [channels like] Quest or LabCorp isn't viewed with the same enthusiasm as it was years ago," Levine said. "There is real emphasis today on companies like Correlogic being able to offer the assays [tests] themselves."

Levine said the issue stems from a blood test it developed to detect ovarian cancer. After conducting a successful trial, Levine said, the Food and Drug Administration determined in 2008 that the subject pool used for the tests was insufficient.

Faced with a longer, more expensive road to market, Levine said he turned to Quest and LabCorp for financial support. Neither offered, he said, because an investment by one of them could wind up helping the other company.

Neither Quest nor LabCorp responded in time to comment for this story.

Potential investors have said that if the test makes it to market, the contracts mean they would not earn enough to justify their injection of funds, Levine said.

"Clearing the decks of those older agreements will make it easier to reorganize, get additional funds and emerge from Chapter 11 without those agreements holding us back," he said.

The July 16 court filing shows that Correlogic owes hundreds of thousands of dollars in rent, legal and other professional fees, and deferred salaries to employees. Levine himself is the largest unsecured creditor, having deferred $414,663 of his own earnings.

By Steven Overly
The Washington Post