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As Genaissance Continues Belt Tightening, Its Luck Starts to Turn

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At A Glance

Name: Ben Kaplan

Title: CFO, Genaissance Pharmaceuticals

Education: BS, MSPA in accounting, from the University of Hartford

Background: Stints at Arthur Andersen and Packard Bioscience

Age: 46

 

Wrapping up his first full quarter as chief financial officer of Genaissance Pharmaceuticals, Ben Kaplan has quickly grasped the company’s current mantra: save money, at any costs.

To be fair, this predicament is shared by nearly all pharmacogenomics-technology providers. But it’s particularly noteworthy that Genaissance, which became the go-to partner for haplotyping research during the biotech salad days, has had to tighten its belt so much.

For example, this time last year the company was in the process of shedding 20 percent of its workforce, and one month later it would come perilously close to receiving a Nadsaq delisting warning (shares in the company were up at $1.35 in mid-afternoon trading on Wednesday).

More recently, Genaissance has had to slash its R&D budget during the first two quarters of this year to keep tabs on its cash burn, which may reach $18 million by the end of the year. This is also noteworthy because, with $23.3 million cash on hand as of June 30, the company admitted it has enough money to last 10 months.

But this doesn’t mean that customers, collaborators, or investors should count the company out. Its revenue stream from big pharma continues to grow — receipts for the first half of 2003 swelled by 39 percent year over year — and the firm recently closed its acquisition of DNA Sciences, which will lend a strong customer base and a steady revenue stream. As a result, CEO Kevin Rakin expects Genaissance to generate more than $10 million in revenue this year, and be cash-flow even by the middle of 2005.

SNPtech Reporter caught up with Kaplan recently and talked dollars and cents with the company’s new money man.

Genaissance appointed you CFO during the second quarter this year. Going into the job, what was your biggest challenge?

I guess I would start off with the fact that I was a long-term believer in the technology, and the biggest concern I had was when it would be commonly accepted, both in industry and in day-to-day life.

What could a CFO do to ensure that that happens?

I’m not sure I can make pharma or biotech accept the technology, or the [US Food and Drug Administration] create rules [that affect its adoption]. But what I can do is to help ensure the financial viability of the company until we can get to that point.

Kevin Rakin, your CEO, said during the company’s second-quarter earnings conference that Genaissance has met the goals that were put into effect following last year’s restructuring. At that time 20 percent of the company was laid off, and Kevin was appointed chief executive. What were the goals he was talking about?

There were two main parts to it: One was to reduce our operating rate, and two was to create a services business. We have reduced the operating run rate to a much more comfortable level, and we have now created a business to do some where in excess of $10 million this year. ...

The company’s burn rate in the first quarter of the year was around $4 million. What was the rate in the second quarter, and where do you expect it to be over the remaining two quarters of this year?

There are two pieces to our burn: our operating burn, and what we have to pay for our debt service, which is also significant. Our operating burn will be somewhere in the $8 million to $10 million range for the year, and the debt service will be around $8 million also. The debt service will decrease dramatically in about August next year, going down to a very nominal amount. And the operating burn will also be decreasing as we increase our revenues in the coming quarters.

Why will the debt-services burn decrease through this time next year?

Because we are growing our revenues, and we will not add substantial marginal cost. As revenue grows, more money will flow to the bottom line.

At the end of 2002, Genaissance had around $32 million, which was some $10 million below the average of the nine publicly traded genotyping and haplotyping companies that are covered in an annual SNPtech Reporter financial report. As of June 30, the company had $23.3 million in cash and equivalents. With this in mind, would you say that Genaissance is on an even keel balance-sheet wise, or is there work that needs to be done to shore up its cash position?

There’s a couple parts to it. One is that we … feel comfortable that we have enough cash to get us through at least the third quarter of next year. We can have that extended in various ways — we can either raise additional equity or raise additional debt, or reduce our burn rate. Right now I think we’re being very intelligent where we are spending our money. We probably prefer not doing that, but if we had to, obviously it’s possible. I think the other two alternatives [raising debt or equity] are much more likely.

The final point is that we do believe we will be cash-flow even somewhere in the middle of 2005. So it would not take a substantial amount of additional capital to get us to cash-flow break even.

One of the biggest developments for Genaissance was its acquisition in April of DNA Sciences, which you bought for the bargain-basement price of $1.3 million. The acquisition makes Genaissance the only pharmacogenomics company that can sell haplotyping services as well as a modest suite of CLIA- and GLP-rated diagnostics. With this in mind, how has the acquisition affected Genaissance’s top line, and, more importantly, what do you think the potential is for top-line growth for the second half of 2003?

Through June we reported $400,000 revenue for them, but that only covers half of May and June. They’re at about a $2.5 million annual run rate for revenues; we’ve stated that we believe that that can grow by about 25 percent.

But there are also synergistic opportunities … in that we do now offer a whole suite of services in both clinical genotyping and research genotyping, DNA banking, etcetera, that we can go to pharmaceutical customers and help grow our top line.

Also last year, Genaissance spent just under 300 percent of its total revenue on R&D, which was considerably less that the 870 percent of revenue the company spent on R&D in 2001. R&D has also fallen each of the first two quarters of this year, year over year, and consecutively. Will total R&D spending for 2003 be trimmed even farther, or, considering that you now have DNA Sciences on hand, will Genaissance loosen the R&D purse strings for the remainder of the year, or even any time in the short term?

There are several factors in there. One of them is that revenue is growing, so that automatically increases your multiples. The second part is that we did undergo the restructuring in the latter part of 2002, and we did reduce our spending at that point. We have no intention of reducing our R&D spending any further; I mentioned earlier that I think we’re spending intelligently now.

We have several … programs that we believe can create significant value, and that is where we’re spending the R&D dollars.

What programs would those be? Genaissance programs or DNA Sciences programs, or both?

Both. There were two programs that came along with the DNA Sciences acquisition — the long-QT (syndrome diagnostic product), which we may or may not partner with someone; and the TPMT test, which we had immediately licensed additional rights to Promethius around that test.

In mid-May, Kevin said the TPMT test serves what he called a small market, but one that has ‘major growth potential.’ What is that potential, and what does it mean to Genaissance?

We have a royalty-bearing agreement with Prometheus, and we also sublicense the technology, so as it grows our royalties will grow as will the efforts we put into out existing collaboration. It’s a very nice transaction. I think we’re all very pleased with it; I don’t think it will be a driver of our top line in the future, but it will be a nice little add-on.

Can you define what ‘add-on’ means, as a percentage of revenue?

It’s very small.

Another product is the long-QT diagnostic, which you’d just mentioned. You had said a that Genaissance may or may not partner it out; I know Kevin had said that was an option, along with waiting for a ‘different economic period.’ Because you said Genaissance is considering partnering it out, does that, therefore, mean that no different — and by that I mean better — economic period has materialized?

Not at all. We’ve seen substantial interest from a large number of parties about that program. The question is whether we want to raise the additional capital — especially with our share price at this level right now — to fully develop it in-house, or whether we partner it out with someone else, and bring that to market. We will, probably, bring our own familial long-QT test to market early next year, but that’s a small portion of what the true [economic] benefit of that test is.

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