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Buffeted by Weak Sales and Restructuring, Gene Logic Weighs Future of Genomics Unit

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The future of Gene Logic’s genomics and toxicogenomics division hung in the balance last week as the company announced plans to lay off 80 of the unit’s employees and a 67-percent decline in second-quarter sales dragged down total revenue by nearly half.
 
The results couldn’t have been farther from what Gene Logic had planned for its genomics business this year when CFO Phil Rohrer said in February said that for 2006 it expected its genomics business to continue to grow.
 
Gene Logic entered 2006 after four consecutive quarters of revenue growth and planned to invest more in its gene expression reference data databases, BioExpress and ToxExpress (see BAN 2/28/2006). In February, CEO Mark Gessler said that "2005 was a big step forward for Gene Logic" with an "outstanding year" for the genomics business which he said was "profitable for the first time."
 
Fast-forward six months. In a conference call last week, Gessler said a shift in Gene Logic’s commercial strategy conspired with tepid market demand for toxicogenomics data to drive the genomics division into the red again. The performance prompted Gene Logic to hire a consulting firm to review options for the genomics business.
 
“We anticipated a slow start to sales in the first half of 2006; however, unfortunately, revenue for the genomics division was significantly below our projections,” Gessler said in the call. Revenue in the division fell 35 percent in the first quarter year over year (see BAN 4/25/2006).
 
“Our strategy in the genomics business had been to migrate from a small number of high dollar subscriptions to a smaller, more numerous number of service deals,” Gessler said. “We have seen a faster-than-anticipated drop off in subscription revenue for database products and a slower-than-anticipated ramp up to revenue from data generation services.”
 
He added that the market for toxicogenomics gene-expression data — all of it generated through a series of multi-million dollar contracts with Affymetrix — had slowed, contributing to the genomic division’s lackluster second quarter.
 
“One thing we have seen is a change in the market and the demand for information products in the earliest stages of the drug-discovery process,” Gessler said. “That’s where the vast majority of our revenues are focused.”
 
Losing money
 
Gene Logic first signaled that something was wrong with its genomics business in June when it reported that second-quarter and full-year revenue for the unit would be “significantly lower" than anticipated. The company went a step further and withdrew its financial guidance for 2006 and 2007 at a time when it was supposed to be nearing profitability.
 
Last week Gene Logic began restructuring its genomics division by announcing plans to lay off approximately 80 staffers, or half of those employed in the genomics business. The lay-offs will take effect Oct. 5 and will cost $1.8 million in severance, the company said.
 

“We have seen a faster-than-anticipated drop off in subscription revenue for database products and a slower-than-anticipated ramp up to revenue from data generation services.”

Gene Logic expects the move to save it around $8 million a year in salary and other costs. The company’s remaining genomics employees will stay on to satisfy existing accounts while the company awaits suggestions from the strategy-consulting firm, due in late September.
 
Gene Logic last week reported that total revenues for the second quarter declined nearly 44 percent due to weak performance in its genomics segment. Receipts for the three months ended June 30 declined to $11 million from $20 million year over year, and the genomics division reported revenues of $4.7 million, a 67-percent decline over the prior year period.
 
R&D costs in the second quarter rose 84 percent to $2.5 million from $1.4 million from the comparable quarter a year ago. Gene Logic said net loss quadrupled to $11.3 million from $2.6 million during the comparable period last year.
 
The firm also reported that it had around $24.8 million in cash and cash equivalents as of June 30, compared to $28 million in Q1 2006 and $43 million in Q4 2005.
 
The results come at a time when Gene Logic has made significant investments in its flagship expression databases, which were created using Affymetrix products. Loralyn Mears, Gene Logic's vice president of alliances and marketing, told BioArray News in February that the $9.5 million the company agreed to pay Affy in 2005 went to products that support the genomics half of its genomics and toxicogenomics business unit, the BioExpress database.
 
She said at the time that the $7.6 million the company planned to pay for Affymetrix products and services in 2006 would pay for upgrading the company's toxicogenomics database, ToxExpress.
 
Future in SNPs
 
During last week’s conference call, Gessler declined to speculate on what the future of Gene Logic’s genomics business would be. Instead, he said the firm would announce its plans for the business unit by September.
 
It appears likely that whatever Gene Logic’s management decides to do with ToxExpress and BioExpress, the firm will continue to invest in its Affymetrix-based SNP-genotyping services, as well as in expression services.
 
“There is strong demand for data-generation services, whether they be SNP or expression based, and those continue to grow,” Gessler said.
 

Gene Logic formally launched its SNP-genotyping services last spring using Affy's 500K mapping array set. During a conference call with investors and analysts in February, Gessler said that the company expected “SNP genotyping to be an important growth area in 2006." Mears said in February that Gene Logic began signing SNP customers in December.

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