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Molecular Devices' Q2 Revenues Fall Short as Poor Imaging Sales Temper Overall '06 Outlook

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Molecular Devices this week said that total second-quarter revenues fell short of its earlier stated guidance while sales of drug-discovery products declined due primarily to lackluster business in imaging products. The company also said a profit turned to loss in the quarter.
 
The company blamed the imaging decline on a longer-than-anticipated sales cycle and conceded that the business is still a “learning curve.” And despite assurances that its remaining drug-discovery tool segments met internal expectations and remain stable, Molecular Devices said that the poor performance of the imaging products has forced it to become more cautious in its outlook for its overall drug-discovery businesses in 2006.
 
“This result was especially surprising given the strong performance of these products in the past two quarters,” CEO Joe Keegan said in a conference call with investors. “We believe that the main reason for lower-than-expected results in this segment was delays in purchasing decisions.”
 
He said to overcome the learning curve the company plans to hire additional sales and scientific leadership. “That market continues to be attractive and, having just met with our sales force, we would say [we have] a good funnel of opportunity and prospect,” he said. “We’re learning that this market is very competitive.”
 
Total receipts for the three months ended June 30 rose about 6.5 percent to $47.4 million from $44.5 million in the year-ago period, Molecular Devices said.
 
The company posted a $460,000 net loss in the second quarter compared with a $3.7 million profit year over year. Molecular Devices attributed the loss in part to a non-cash charge related to its recent acquisition of Arcturus’ Laser Capture Microdissection business and a $1.3-million non-cash stock compensation expense.
 
Breaking its revenues down by segment in the conference call, Molecular Devices said that its overall life sciences business, including the Arcturus LCM business, grew 15 percent in Q2, while organic life sciences, excluding the LCM business, grew 3 percent. Molecular Devices said that its plate reader business continues to be its strongest, posting a 13-percent gain in the quarter.
 
The decline in the company’s imaging business dragged down its entire drug-discovery tools segment 6 percent for the quarter, Molecular Devices said. Later in the conference call, company executives said that the Transfluor assay technology the company acquired last year, which is imaging-based, also fell “well below expectations.”
 
R&D spending for the quarter fell to $5.9 million from $6.3 million in Q2 2005. As of June 30, Molecular Devices had approximately $17.7 million in cash and cash equivalents on hand.
 
“We saw solid growth in our SpectraMax and Meta life sciences imaging product lines during the quarter,” Keegan said in a statement. “Unfortunately, this growth was offset by declines in our drug-discovery imaging and genomics product lines.
 
“Results from our recently acquired laser capture microdissection business met our expectations during the quarter,” Keegan added. “We continue to believe that our worldwide life sciences market remains stable, but we have become more cautious on the outlook for drug discovery as a result of the weakness in imaging.”
 

The imaging market “continues to be attractive and, having just met with our sales force, we would say [we have] a good funnel of opportunity and prospect. We’re learning that this market is very competitive.”

The company revised its guidance downward for the full year 2006, anticipating revenues of $190 million to $198 million. Last quarter, the guidance was between $198 million and $206 million for the full year.
 
Molecular Devices has overhauled its drug-discovery imaging products over the past two years by upgrading its image-analysis software, adding key cell-based assay reagents such as Transfluor, and developing new imaging instruments ImageXpress Ultra and ImageXpress Micro to integrate technology it acquired with Axon Instruments in 2004.
 
But the company is still in a learning curve, and Keegan said he plans to pull the company out of it and into better revenue growth.
 
“There we will be adding resources both in terms of leadership and capability at the point of sale in terms of applications and scientific expertise,” Keegan said. “We believe we have the best products. However, it takes more than having the best products to successfully complete the sale.
 
“We’ve [recently] introduced a couple of new … complicated products, and I think we are still in the process of establishing ourselves in the imaging marketplace,” he added. “The complexity in terms of number of competitors at the point of sale and the amount of work that needs to be done in terms of proof of performance add up to a longer selling cycle.”
 
Loss of Talent?
 
One analyst asked in the call whether the recent departure of a key employee — presumably former director of imaging Mike Sjaastad — may have played a hand in the poor imaging sales. Sjaastad left the company in the early second quarter to take a position with the Bio-X Program at Stanford University (see CBA News, 6/9/2006).
 
CFO Tim Harkness stressed that “we are not saying that the underperformance in imaging was related to the departure of an employee. That is not the case. We don’t believe that.”
 
Despite this, the company surely has large shoes to fill in this area. Sjaastad joined the company in 2002 when Molecular Devices acquired his former employer, Universal Imaging. That company’s image-analysis software package, MetaMorph, drove the development of Molecular Devices’ imaging products, and a next-generation version continues to serve as the backbone for the ImageXpress product lines.
 
Sjaastad is one of several inventors of the program and its application to automated microscopy as outlined in US Patent No. 6,724,419, “System and method for acquiring images at maximum acquisition rate while asynchronously sequencing microscope devices.”
 
Molecular Devices has yet to name a replacement for Sjaastad. Jan Hughes, vice president of marketing for Molecular Devices, is temporarily serving as Sjaastad's replacement.
 

“In terms of resource, we do have substantial resources supporting imaging, and I think the realization is that we need more. There are some open positions within the leadership area of imaging that we will be replacing.”

Keegan said that “in terms of resource, we do have substantial resources supporting imaging, and I think the realization is that we need more. There are some open positions within the leadership area of imaging that we will be replacing.

 
“I would say that the strategy and execution of sales of that product have high visibility at the executive level of Molecular Devices,” Keegan added.
 
FLIPR, Transfluor, and Pricing
 
In other developments, the company said that it has “some additional flavors” in the pipeline for its FLIPR product line, which is widely considered the leading platform on the market for ion channel screening based on cellular calcium flux.
 
In addition, responding to an analyst’s question regarding rumors of a change in the pricing structure of the Transfluor fluorescent protein translocation assay, Keegan said, “we have used multiple pricing structures for Transfluor,” and that the company would “continue to experiment with the pricing.”
 
Transfluor’s pricing has been a hot-button issue for the company since it acquired the widely used assay technology from Xsira Pharmaceuticals in March 2005. After revealing an “experimental” pricing structure a few months later that drew some complaints from smaller drug-discovery operations, the company revealed another pricing structure to address two specific groups of customers: those conducting assay development and basic research, and those performing larger scale drug discovery (see CBA News, 9/5/2005).
 
Imaging Outlook
 
With drug-discovery imaging product rivals BD Biosciences, Fisher unit Cellomics, and Evotec Technologies still to report earnings for the quarter, industry observers will likely be eager to see if those firms report similar drops in imaging product sales.
 
GE Healthcare, which sells the competing IN Cell Analyzer 1000 and 3000 instruments, reported its earnings for the second quarter late last week but does not break out revenues for its various product lines.
 
“We do not believe that there has been any fundamental change in this market,” Keegan said during the conference call. “It remains a competitive, emerging market with challenging applications and long sales cycles.
 

“Domestically, we did get some input about some weakness in pharma, but we do not think that was the macro event,” he added. “The macro event was our own execution in selling the imaging product portfolio to drive growth in drug discovery.”

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