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Enduring Lay-offs and Restructuring, Transgenomic Leans on Services Unit. Will Investors Stick Around?

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With the lay-off of 60 employees and the sale of its money-losing oligonucleotide-manufacturing facility announced Nov. 15, Transgenomic aims to save between $10 million and $12 million annually (see Pharmacogenomics Reporter, 11/18/2004).

Investors sent Transgenomic’s stock into a prolonged slide that brought it from $1.52 on the business day before the announcement to $1.22 on Nov. 30, a drop of about 20 percent. Prior to the announcement, the company’s stock had risen about 26 percent from Sept. 17 to its Nov. 12 high.

“We really see the transformation of our revenues from more of a hardware provider to more of a services and maintenance provider as you look out into the future,” Transgenomic CFO Mike Summers told Pharmacogenomics Reporter.

“Certainly what is positive is that we’re getting rid of a business unit that has dragged us down over the last 12 months,” added Stan Lilleberg, director of Transgenomic’s translational and clinical research. “Basically, that frees us up to do other things.”

The company “grew up” in the systems business, and it has remained Transgenomics’ core competency, said Summers. The company consists of the Wave platform and its derivatives, a consumables division (which sells oligonucleotides), and a services division.

Before last month’s lay-offs, Transgenomic last reduced staff in late 2002, when about 80 jobs were eliminated in a bid to cut costs and balance lackluster sales of the Wave platform.

Summers was not willing to disclose the sales performance of the Wave platform.

What followed was a disappointing 2003, but it was capped by one bright spot for the company’s services unit: an open-ended mutation-discovery deal with Novartis, which is ongoing.

Novartis did not respond to requests for an interview by press time.

Although details of the deal were never announced, it was believed to be potentially one of the more lucrative agreements Transgenomic had entered into in some time (see Pharmacogenomics Reporter, 12/4/2003). The services division has not announced any agreements since then that are of comparable potential magnitude.

Indeed, the company reached its current situation through an unfortunate series of quarterly revenue drops or slight gains, culminating in third-quarter revenues of $8.2 million, up from $7.5 million year over year, and the sale of its Boulder oligo facility and 60 lay-offs.

Net losses increased to $8.4 million in the third quarter, from $6.1 million year over year. Spending on R&D was slashed to $1.7 million from $2.4 million in the third quarter of 2003.

Good news for 2004 included distribution agreements with San Diego-based Nanogen and State College, Pa.-based SpecuMedix; a manufacturing support deal with Morrisville, NC-based Regado Biosciences; and a continuation of its supply contract with Menlo Park, Calif.-based Geron.

Transgenomic continues to run the remainder of its synthetic nucleic acids division, which is based in Glasgow, Scotland, said Summers.

Although investors seem unimpressed by the strategy, removing dead wood from the firm may give it an opportunity to regenerate from its most reliable business.

“We see a larger proportion of our revenue growth coming from the services side of the business,” Summers said.

The company has plans for the biosystems business and its services component, but details will remain secret, said Lilleberg.

The company will retain its focus on mutations, and the services unit will continue to work primarily on biomarker analysis and oncology, Lilleberg said.

The pharmaceutical industry has increased its outsourcing for “five or six years,” while additional funding at the US National Institutes of Health and changes in policy should lead to further outsourcing, said Lilleberg.

The firm’s services unit stands to gain from this trend, Lilleberg said.

The voluntary pharmacogenomics submission guidelines — due to be released by the FDA before 2005 — also has the potential to boost the level of biomarker analysis performed by contract services companies like Transgenomic, said Lilleberg.

In terms of why Transgenomic’s stock “is performing relative to any index or any competitor or this, that or the other, we don’t necessarily have a theory that makes any sense there,” said Summers.

— CW

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