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With $30M in the Bank, Genaissance Acquires DNA Sciences in Nick of Time


Talk about timing. Another year or so and Genaissance might have run out of cash. Luckily for Genaissance, DNA Sciences beat it to the punch.

By the time you read this, Genaissance will have put the final touches on its acquisition of DNA Sciences, and, by so doing, it will have laid the first stones of a bridge it hopes will lead it to clinical genotyping, diagnostics, big pharma, and big bucks. Genaissance CEO Kevin Rakin, in a telling presentation to investors during his company’s first-quarter conference call earlier this week, called the acquisition “a seminal transaction” with a “compelling strategic logic.”

He was being modest. Acquiring DNA Sciences’ assets and customer base also endows Genaissance with a life insurance policy and a market-proven growth engine. In short, it means that Genaissance can hope to survive a little more than the nine months some investors expected it to. On the other hand, Rakin, in an interview with SNPtech Reporter following the call, said that Genaissance remains relatively healthy and pointed to a 16-percent increase in first-quarter revenue and four new R&D collaborations as testaments to continued market interest in its haplotyping technology.

Right Place, Right Time

By all accounts, Genaissance lucked out in April when it successfully bargained to buy substantially all of DNA Sciences’ assets for just $1.3 million (see SNPtech Reporter, April 4, 2003). Beside giving Genaissance a guest pass to the genotyping and diagnostics soirée, the deal makes the struggling pharmacogenomics-technology provider the first company of its kind to offer high-throughput haplotyping services along with a modest suite of commercialized CLIA- and GLP-rated tests.

For starters, the $2.5 million in revenue that DNA Sciences’ GLP genotyping business will be crucial for the bigger company to remain solvent. According to Rakin, DNA Sciences, with its strong R&D ties to Eli Lilly, Pfizer, and Roche, can be a better foot in the big pharma door than its own HAP technology has been. “This business is poised for growth as more pharmaceutical companies include genetic variation markers in their clinical trials and FDA submissions,” he said in the conference call.

Rakin also promised to retain DNA Sciences’ GLP labs in Morrisville, NC “with substantially all of the employees based there.”

DNA Sciences also has a rich patent estate centered on familial and drug-induced long-QT, a cardiac syndrome that increases an individual’s risk of developing fatal arrhythmias. Today, many drugs are responsible for this syndrome and have either been rejected by regulators, withdrawn from the marketplace, or forced to run a black-box warning in their package inserts. “We believe this will be a major area of opportunity for drug-response pharmacogenomics,” said Rakin. To that end, Rakin said Genaissance intends to seek partners to develop this program.

Lastly, Genaissance will get what is believed to be the first commercially available drug response test, which uncovers TPMT mutations that might influence the use of thiopurine drugs. “While this test currently addresses a small market, it has major growth potential,” Rakin said.

Financially, Genaissance appears to have rounded a corner, but at a price: A restructuring last August cut headcount by 20 percent and an uptick in revenues helped the New Haven, Conn.-based company halve its fourth-quarter net loss.

Still, DNA Sciences will be a welcome addition, and Rakin made no secret of one of the company’s most hoped-for potential contributions: DNA Sciences will “add near-term revenues for services [that] our current customers” — Millennium Pharmaceuticals, Bayer, Becton Dickinson, and Wayne State University — “are requesting.” In other words, without DNA Sciences’ assets in hand, Genaissance would have struggled to finance the cost of its business.

As it is, Genaissance had roughly $30 million in cash, cash equivalents, and marketable securities as of March 31, according to first-quarter earnings released this week. And the rate at which the company burns cash — around $4 million during the first three months of 2003 — caused one analyst to say during the conference call that Genaissance may have only enough cash on hand to survive nine more months. Rakin disagreed and said the company’s bank balance together with the expected receipts from DNA Sciences will expand the lifespan beyond one year.

Elsewhere in earnings, Genaissance reported that first-quarter revenue increased 11 percent to $2.1 million from $1.9 million during the same period one year ago. Rakin, in the call, attributed the jump to a pair of new deals with Pharmacia and Millennium struck in December and January, respectively. Genaissance said it expects full-year revenue to be between $12.5 million and $14.5 million.

First-quarter R&D, meantime, shrank to $4.7 million from $8.3 million during the same period one year earlier, and net losses narrowed to $4.7 million, or $.21 per share, from $9 million, or $.40 per share, year over year.

By most accounts, the $1.3 million price tag for DNA Sciences was a bargain. As of early April, the company employed 55 people at its facilities in Morrisville, NC, and California, according to Steven Lehrer, acting president and CEO. The firm earlier this year shuttered a newly opened space in Cambridge, UK, where five people conducted gene-based candidate discovery. Research once performed in Cambridge is now carried out in Morrisville, which has won a thumbs-up from Rakin and company. DNA Sciences’ facility in California, however, likely will be shuttered this month, Rakin told SNPtech Reporter.

DNA Sciences appears to have survived bankruptcy none the worse for wear. In fact, during the call, Rakin marveled that despite being bogged down in the bankruptcy process for the past five weeks, DNA Sciences managed to secure “some” new agreements. He wouldn’t disclose who those deals were with.

“We were concerned … that it was hard for a company that was in bankruptcy to be out there marketing,” he said. “I think the short answer is that [we’re] being conservative about the run rate and about how long it will take us to build it [the assets], but behind the scenes we are cautiously optimistic that it has not been impaired at all during the relatively brief period.”

— KL


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