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THE PROBLEM: How does a company with many opportunities, but a limited budget to explore them, narrow its choices?

The founders of HandyLab Inc. had developed a groundbreaking device: a DNA-testing machine the size of a microchip. The technology had scores of potential applications, from pharmaceutical research to agriculture testing to bioterror defense.

But the Ann Arbor, Mich., start-up had just $2.4 million in first-round venture funding -- so it couldn't afford to go down many roads at once. HandyLab had to focus on one application that would translate into revenue and profit.

Which one? Neither the company's founders nor its main backer knew. There were many possibilities -- but no sure bets.

"Normally, a company should begin with a much more clear idea of a need, a problem that they're solving," says Tom Porter, the chairman of HandyLab's board and a general partner at EDF Ventures, the company's lead investor. "HandyLab didn't begin that way; it was kind of counter to the rules of starting a company."

HandyLab's story begins in 1995, when 23-year-old Kalyan Handique entered the University of Michigan's chemical-engineering Ph.D. program from the Indian Institute of Technology, Bombay. Mr. Handique joined a lab that was working on microfluidics, a cutting-edge field that uses microscopic machines to analyze almost mindbogglingly small fluid samples. A standard measure in microfluidics is the nanoliter; it would take five million nanoliters to fill a teaspoon.

Mr. Handique drove the development of the technology underlying microfluidics, eventually becoming team leader. A year later, Mr. Handique got a lab partner: 24-year-old chemical-engineering student Sundaresh Brahmasandra, from the Indian Institute of Technology, Madras, who developed, refined and adapted micofluidics to DNA analysis -- for example, creating systems that could search through a blood sample for the DNA of an infectious disease. A conventional DNA tester must run a sample through a number of devices, which together can take up an entire lab bench. A microfluidics-based tester, on the other hand, converts those devices to tiny valves on a chip not much bigger than a postage stamp.

In 1998, the lab reported in the journal Science that it had developed a tie-clip-size device to analyze DNA samples -- and the machine had no external components. The idea of a small-scale fluid tester wasn't new, but the Michigan team was the first to integrate all the components of such a tester onto one chip.

That breakthrough, and related developments in the field, prompted Science to name such biochips one of the 10 most promising new technologies in its year-end issue.

Mr. Porter of EDF, an Ann Arbor venture firm that specializes in information technology and health care, saw the Science article and sensed the vast commercial opportunity of lab-on-a-chip technology. "We realized it could be the solution to many existing problems, and problems that would be created by new technology in the next century," Mr. Porter says.

The firm contacted the Michigan scientists in June 1999 to begin talks on starting a company. By that time, Mr. Handique had already considered commercializing the chip. His idea: to hook up the chip to a personal digital assistant, or PDA, so people could perform biological tests in the field.

Such a gadget could be used in a broad range of endeavors. A biopharmaceutical plant, for example, has to monitor its water supply for bacteria and viruses. Using conventional technology, the plant collects samples at the end of the day and sends them off to the lab; it can take a few days to get results. If the lab finds a problem, the plant has to scrap a few days' worth of medicine that was made using the tainted water. With the new technology, plant employees could test the water every half-hour or so, and stop production at once if a problem were found.

A pig farmer could find out quickly what is ailing a sick animal, so he could treat it and prevent the rest of his livestock from getting infected. Cruise ships could test for viruses among passengers much more quickly and easily -- avoiding the fate of people on cruises in recent months who were laid low by the Norwalk virus.

But Messrs. Handique and Brahmasandra, with no real business background between them, weren't sure which way to turn. And there was no road map to success in the field. Other companies had already taken microfluidics products to market, mostly geared toward the research field, but none of them had been a huge seller.

The one thing the founders were sure of: They couldn't afford to explore many possibilities. "Off the bat, being a small company, we realized we had to focus on particular applications," says Mr. Brahmasandra. "And what we were promising had never been developed before. For us to demonstrate the value of the technology, we needed a good market."

THE SOLUTION: Messrs. Handique and Brahmasandra met each Saturday with an EDF employee and a member of the university's technology-transfer office to brainstorm ideas. Mr. Handique also attended a weekly Friday happy hour with Michigan business students, with whom he bounced around ideas.

Eventually, with the help of EDF's health-care advisory board, led by Peter Ward, the University of Michigan's chair of pathology, Messrs. Handique and Brahmasandra settled on a direction for their company: health-care diagnostics.

Hospitals, the co-founders figured, would jump at a gadget that could be used by workers with little special training and that could provide results right at a patient's bedside. But there was another, equally important reason to choose health care: The founders were passionate about it, fueling the extra drive for success that is necessary at any start-up.

Years earlier, in India, Mr. Handique had vowed to use his education to affect the world positively after he saw a close friend die after a bout with cancer -- a casualty of India's inadequate health-care system. Pondering the mission of HandyLab, he decided his ultimate goal would be a cheap, effective medical solution for poor nations.

"There's no infrastructure for such kind of tests, it's too expensive for them to afford," he says. "In a few years, [our technology] will impact the way things are done in poor nations."

Mr. Brahmasandra, too, sees the biggest long-term market for the technology in developing nations. He draws an analogy with wireless phones, which have added a measure of convenience to daily life in wealthy nations but have had a far greater impact in poorer regions with limited land-line infrastructure. People in villages that had been too remote to get a phone infrastructure installed suddenly could communicate instantaneously with distant relatives, friends and business partners.

"Every time we talk about the technology," Mr. Brahmasandra says, "we say when the first device is used to test somebody to lead a healthy life, that's when we would really feel like we achieved something. Even though food testing or animal testing could motivate a lot of employees, health care motivated us to do something sooner than later."

With an idea in hand, HandyLab secured a first round of venture funding in September 2000. The university took a low single-digit percentage of equity -- the school won't be more specific -- which was then diluted in the second round. The school currently has a single-digit royalty of HandyLab sales.

But HandyLab faced a new question: What type of diagnostic tool to develop? There are lots of diseases out there. Which one would HandyLab's product be designed to spot?

Mr. Handique, as chief technology officer, and Mr. Brahmasandra, as vice president of product development, began extensive market research among their target clients: doctors. The founders and EDF representatives met frequently with doctors at the University of Michigan Medical School, and hired consultants to interview others.

HandyLab settled on a test for group B streptococcal disease in pregnant women. The bacterium usually causes no adverse symptoms in the mother, but it is one of the leading causes of sepsis, a blood infection, in newborns. Every year there are about six cases for every 10,000 live births in the U.S., resulting in 80 deaths nationwide.

Because the current test involves culturing a vaginal sample, which can take 24 to 48 hours to show results, it's not practical to test women when they arrive at the emergency room in labor. Currently, some doctors simply decide whether to administer antibiotics based on clinical evidence in the delivery room.

HandyLab's team saw an opportunity: They aimed to create a bedside test that would return results before the baby was born -- thus giving doctors a chance to treat the disease before postnatal problems set in.

Even as HandyLab was finding its focus, the founders made sure to keep an eye on future products. A group B test, they reasoned, would catch the attention of the broader medical community and make it easier to sell other types of tests. And the testing device they were designing could be easily modified for those new uses.

"It's very easy for us to adapt to new applications," Mr. Handique says. "The hard part is done, now we'll just need to change the reagent," the molecule that binds to, and identifies, a particular substance, in this case a gene.

That adaptability has already paid off for the company, which branched out into biodefense research after Sept. 11, 2001. Adapting the technology for this area required "just a software change, we don't have to change the hardware and chip," Mr. Handique says. More adjustments are necessary to test different kinds of samples, like nasal fog as compared to blood, or to test for viruses as opposed to bacteria.

Last June, investors pledged $5.5 million in series B venture funding. Among the new backers was Hewlett-Packard Co., which said at the time it plans to create a special-purpose PDA to drive and control the HandyLab diagnostic cartridge. Mr. Handique says H-P has since shared technology with HandyLab about its iPaq hand-held device, and HandyLab has agreed to use H-P exclusively among PDA vendors. HandyLab is also developing devices internally to work with its microfluidics chips.

Then, last December, HandyLab got a lucky break. The American College of Obstetricians and Gynecologists issued new recommendations advising the screening of all pregnant women at 35 to 37 weeks for group B strep. Though the college's recommendation has no binding power, doctors are likely to heed it because doing otherwise might open the door to lawsuits. That means a potential explosion in strep testing among doctors who haven't been doing the test -- or doctors who are looking for a cheaper, quicker more efficient way to handle the procedure. Enter HandyLab.

"We're talking about doctors and hospitals, so it won't be an overnight process, and we recognize that," says Mr. Brahmasandra. But "PDAs will be more widespread, and a lot of testing is moving to point of care. Doctors will be comfortable with using such a format. It's going to take three to five years, I think."

Clinical trials on the technology are expected to begin at the University of Michigan in this year's fourth quarter. And while HandyLab is far off from its goal of making applications for poor nations, the plan is no pipe dream: Researchers at the 10th Conference on Retroviruses and Opportunistic Infections in Boston last month announced the development of a postage-stamp-size device that could test for AIDS in under 10 minutes for under $1. Field tests are scheduled to begin this spring.

THE LESSON: Do lots of research on potential markets -- but follow your passion as well as the money. And position yourself to capitalize quickly on other opportunities.

-- Mr. Bialik is a reporter at The Wall Street Journal Online in New York.

Write to Carl Bialik at carl.bialik[!]wsj.com1.

URL for this article: http://online.wsj.com/article/0,,SB104749959790502600,00.html

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