Facing possible insolvency and a potential delisting from the Nasdaq Global Market, Decode Genetics said last week that it will undergo a strategic review of its operations that will enable it to identify non-core assets and to likely divest them.
While the Reykjavik, Iceland-based biopharmaceutical company does not sell technologies or tests that compete in the microarray market, it has been a large customer of array products. Most significantly for the array space, it has forged a strategic alliance with Illumina that has given it access to the US company's proprietary content and potential biomarkers for diagnostic purposes.
It is unclear when the review will end or how it will affect these programs, though an official said that the firm rates highly its genomic-services business, which comprises its growing menu of molecular diagnostics and is the corner of the company that works with array vendors.
Decode, which has enough cash to remain in business through the end of the year at its current spending level, announced last month that would be conducting a review of its long-term business strategy with a goal of sharpening its business focus and selling non-core assets, among other aims. The company hired the Stanford Group to help it evaluate ways to meet these goals and to execute them quickly by identifying buyers or partners for its non-core business units, programs, and intellectual property.
Decode hasn't discussed what parts of its business or technologies it considers non-core. The firm has early-stage drug-development programs and a portfolio of DNA-based tests for diabetes and for cardiovascular and oncology applications, which it offers through its own CLIA-registered laboratory.
'We are in the process of creating a smaller, leaner Decode that will devote its efforts and resources to one line of business,'' CEO Kari Stefansson said in a statement at the time. During the firm's third-quarter earnings call last week, he stressed that the main challenge facing the firm is financing.
Decode had $35.5 million in cash and investments at the end of September. However, only $11.8 million of that is liquid funds available to fund operating activities. The firm said that its third-quarter burn rate was $12 million. If Decode continues that cash outflow and fails to raise additional capital, it will likely run out of cash by the end of the year.
Stefansson pinned Decode's cash shortage on the bankruptcy of Lehman Brothers in September.
"We are definitely between a rock and a hard place and we have liquid assets that will last us only until the end of the year,'' Stefansson said. 'Lehman Brothers was managing money for us and the principal guidance we gave them was that they had to have it in liquid instruments,'' he said.
'In spite of that, they took this money and put it into auction-rate securities and we wound up having an extraordinary amount of our funds in those fraudulent instruments,'' he added. 'These are bonds that are still gaining interest but they are illiquid at the moment.''
Stefansson said that the 'goal'' of the company's strategic review is to emerge as a 'well-capitalized and focused company.'' He said that the firm has begun to receive indications of interest in some of its assets from well-funded public and private entities, and that 'it is distinctly possible that the path forward is to make the company focused on one, rather than two, of our major areas of focus.''
It is unclear what business area will eventually emerge after the review. E-mails to Decode were not returned by press time.
However, Chief Financial Officer Lance Thibault said during the call that the company has 'consistently supported'' the genomic services pillar of its business, which is comprised of its growing menu of molecular diagnostics, its DecodeMe personal genetic testing service, as well as its scientific services.
In a filing with the US Securities and Exchanges Commission this week, Decode similarly noted that this year it has focused its efforts on the 'development and marketing of our molecular diagnostic products and DecodeMe. ŧ' Decode also has units focusing on drug development and government-funded research work.
"We are definitely between a rock and a hard place.''
Decode currently sells diagnostics for prostate cancer, type 2 diabetes, prostate cancer, glaucoma, and breast cancer, but none is offered on an array platform, though the company does use array platforms as a discovery tool. However, it has agreed to create tests with partners such as Illumina.
That alliance was born in May 2006 as a deal with Illumina to develop tests for type II diabetes, myocardial infarction, and breast cancer based on its digital microbead-based BeadXpress platform. As part of the agreement, Illumina installed a customized suite of its SNP-genotyping BeadStations at DeCode's labs in Iceland for use in internal drug discovery. Illumina also gained access to disease-related biomarkers identified by DeCode that the shops plan to co-validate as diagnostic panels (see BAN 5/16/2008).
Decode is also thought to be using Illumina's platform in its DecodeMe service, which it launched last year. During Illumina's Analyst Day last week, the company showed a slide discussing the use of its arrays in the consumer genetics market that featured both Decode Genetics and Illumina's other direct-to-consumer partner, 23andMe. Decode, for its part, has declined to comment on technology it uses in DecodeMe (see BAN 11/20/2007).
Stefansson told BioArray News in November 2007, for instance, that Decode is using 'all kinds of technology'' in its service and does not want to be 'dependent on one manufacturer because in the end when you have large volume the technology can vary.''
During the call last week, Stefansson noted that competitor 23andMe had received more media attention than the DecodeMe service. 'It is somewhat interesting that Time magazine selected the retail genetic profile as the invention of the year, and described 23andMe, which is our competitor, even though we launched our test first and 23andMe is using a substantial number of sequences that we discovered,'' Stefansson said.
'We feel flattered that our test was selected as invention of the year by Time magazine, but we are amused by the fact that Time magazine decided to ascribe that invention to 23andMe, probably because its founder is associated with the rich and famous,'' he added.
A 23andMe spokesperson told BioArray News in response that the company was 'thrilled to be named Time magazine's Invention of the Year because of all the innovations we've put into our Personal Genome Service, offered at such an accessible price.''
She also noted that the Time magazine article, found here, states that, "although 23andMe isn't the only company selling DNA tests to the public, it does the best job of making them accessible and affordable."
Carsten Rosenow, marketing manager for DNA analysis solutions at Illumina, told BioArray News last month that the company continues to enjoy a strong relationship with Decode. 'Decode is one of our biggest customers,'' Rosenow said. Illumina's technology is 'definitely core to their publications and to their research projects and they have published quite a large number of whole-genome-association papers where they have used our technology on various diseases,'' he said.
Despite this success, Rosenow said he was unaware of how the strategic review might impact that relationship. 'I think they have been very successful with this, but I don't know whether this is part of their business model or whether or not they plan on spinning this off,'' he said.
As Decode ponders its future, it has also requested a hearing before a Nasdaq Listing Qualifications Panel to present its plans for regaining compliance with a Nasdaq market rule regarding the value of its stock.
The company received a letter from Nasdaq in early October stating that for 10 consecutive trading days the firm's market capitalization -- the value of all its shares outstanding -- was below $50 million, the minimum level required for continued listing on the Nasdaq Global Market.
The firm's shares also did not comply with an alternative test set forth by a Nasdaq rule, which requires total assets and total revenue of $50 million each for the most recently completed fiscal year or two of the last three most recently completed fiscal years.
According to that letter, Decode's stock would be subject to delisting at the opening of business on Nov. 11 if it didn't regain compliance. However, Decode said last week that its shares would continue to be listed on the exchange pending conclusion of its hearing, which is expected to take place within 45 days. The firm also noted that the Nasdaq panel has the discretion to grant a listing extension for up to 180 days from the date of staff notification for the company to regain compliance with regulations.
Decode said that it may apply to transfer its securities to the Nasdaq Capital Market if it satisfies the continued inclusion requirements for that market, which include a minimum aggregate market value of listed securities of $35 million. At the end of trading on Monday, Decode's market cap was $24.1 million based on a closing price of $.40 per share.
Decode last week reported that its revenues increased 10 percent and its net loss narrowed by 26 percent in the third quarter as the firm reduced expenses to preserve its dwindling cash.
The firm generated revenues of $12 million for the three-month period ended Sept. 30, compared to revenues of $10.9 million for the third quarter of 2007. The company noted that as of the end of the quarter it had $17.7 million in deferred revenue that will be recognized over future reporting periods.
Decode's net loss shrank to $17.9 million, or $.29 per share, from $24.2 million, or $.40 per share, as the firm cut its expenses. The loss includes non-operating expense of $2.9 million related to the revaluation of non-current auction-rate security investments held by the firm.
Its R&D costs for the quarter dropped 60 percent to $5.7 million from $14.1 million, and its SG&A spending declined 6 percent to $6.7 million from $7.1 million.
Decode listed $35.5 million in cash and investments as of the end of the quarter, of which $11.8 million is liquid funds available to fund operating activities. The firm said that its third-quarter burn rate was $12 million.