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Genaissance Vows End to Bumpy Road Despite Layoffs, Subpar 04 Revenue

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Although it reported a 115-percent surge in third-quarter revenue, Genaissance has laid off about 10 percent of its workforce this week in a cost-cutting move aimed at helping the company to break even in operations by the end of next year.

The staff reductions, which accounts for 21 people, were announced as the company reported that total revenue for the three months ended Sept. 30 grew to $5.6 million from $2.6 million year over year. Still, the revenue growth was lower than anticipated due to “delays in the receipt of new contracts, as well as the timing of receipt of samples,” Kevin Rakin, Genaissance president and CEO, told investors during a conference call this week..

The lay-offs will save the company around $2 million per year beginning in 2005, according to a company spokesperson. Genaissance expects to book a $400,000 one-time charge for the downsizing in the fourth quarter, the company said in the statement. According to Genaissance, “a majority” of the lay-offs will be made in R&D.

The revenue increase was “primarily” the result of Genaissance’s acquisition of Lark Technologies, which closed in April (see PGx Reporter, 1/1/2004). Without the acquisition, third-quarter revenue would have increased 37 percent to $3.2 million, according to Genaissance.

Receipts from licenses and research in the quarter ended Sept. 30 increased 47 percent to $2.8 million from $1.9 million, while lab-service revenue jumped 345 percent to $2.8 million from $625,000, the company said.

Genaissance said it spent around $4.7 million on R&D, a 13-percent decline from its R&D outlays during the same period one year ago. As a result, net loss remained flat at $5.9 million, or $.20 per share.

The company said it had around $6.9 million in cash, equivalents, and marketable securities, and an additional $5 million in working capital as of Sept. 30.

The news comes three weeks after Genaissance said contract delays forced it to lower by around 20 percent its year-end revenue expectations, to between $20 million and $21 million from $25 million.

Genaissance had previously announced that year-end revenues would reach $25 million, but said on Oct. 21 that revenues would fall to between $20 million and $21 million. The revision punctuated a 40-percent stock-price decline that began on Oct. 20, when the shares closed at $2.78, and wound up at $1.99 on Nov. 9 (see PGx Reporter, 10/28/2004).

The company’s stock was trading at $1.85 mid-day on Nov. 10.

Typically, investors react positively to news that a company facing a revenue or earnings shortfall has taken aggressive steps to remedy its financial outlook. However, Wall Street has punished the company since late October.

Positive investor reaction was something that would have helped Genaissance at this point in the company’s evolution. Though the firm has been making significant strides as a pharmacogenomics player — it recently licensed a drug from Merck, it branched further into animal genotyping, and is advancing a cardiac diagnostic — investors reacted harshly to the announcement in late October that year-end revenues would be nearly 20 percent lower than expected.

“It’s one of those bumps in the road that you hit,” Rakin told Pharmacogenomics Reporter last week. “But it’s more of a time problem than it is the market disappearing on us, and that’s why we put in the press release that we expect to grow in excess of 20 percent next year.”

Although Rakin said he couldn’t guarantee that Genaissance would regain the 20-percent year-end revenue decline, he said “a substantial part of [it] should reappear” sometime during 2005. Rakin declined to project which quarter of 2005 would contribute the most to revenue growth.

Turn of Fortune

The revenue guidance followed what had been a run of good news for Genaissance. On the same day as the restatement was made, Oct. 21, Genaissance announced it would provide a high-throughput genotyping platform to Chicago-based animal health-services company Pyxis Genomics in exchange for a fee for each animal-genotyping test Pyxis performs. “We expect to be receiving samples during Q4, and to begin to book revenues in the first quarter of 2005,” said Rakin during the conference call.

In early October, the company announced two agreements with the US Department of Agriculture related to animal genotyping. And in September, Genaissance announced it had licensed a selective serotonin-reuptake inhibitor from Germany-based Merck in hopes of using its haplotyping technology to resuscitate the drug and achieve US Food and Drug Administration approval.

Then, the company’s luck started to change. “There was a delay in some of our contracts closing; even the Pyxis contract we would have liked to close a few weeks earlier,” Rakin said last week. The change in revenue guidance was also necessary because of delays in the receipt of samples under “some contracts” and delays in FDA-compliance work, he said.

When and how much of that projected revenue will reappear might depend on the success of some of the ventures Genaissance started this year. “Some of that should show up in 2005. The agricultural genotyping stuff is just starting to grow.” The Familion test for cardiac channelopathy-related mutations is “just starting to grow and should be a good contributor” to next year’s revenue, he said (see PGx Reporter, 5/27/2004).

The company launched its Familion test in May, which met with “solid adoption” during the third quarter, Rakin said during this week’s conference call. “Over 16 insurance companies have now approved out-of-network reimbursement for the test, and we also received our first Medicare payment,” said Rakin. The company is now pursuing in-network payment from major providers, he added.

Additionally, Genaissance licensed its HAP technology to nutritional biotech firm Sciona in an agreement that includes minimum annual revenue commitments that amount to “a low seven-figure amount” for 2005, Rakin said during the call. Sciona had “recently” completed its second round of financing, said Rakin, but it was unclear exactly what progress had been made on that front during the third quarter (see PGx Reporter, 11/20/2003).

During last week’s interview, Rakin did not spell out a plan to set investors’ minds at ease, but said that “the reassurance will come in the form of showing them that we can meet this revised guidance, and then get a couple of good quarters in 2005, and I think the problem will just take care of itself.”

In addition to the deal with Pyxis, Genaissance moved further into animal genotyping with two agreements with the US Department of Agriculture, the financial terms of which Genaissance did not disclose (see PGx Reporter, 10/14/2004). Under the terms of one agreement with the USDA Agricultural Research Service, Genaissance will help develop a cattle-genotyping assay in exchange for $100,000, according to Steven Kappes of the US Meat Animal Research Center. Rakin estimated the size of the bovine genotyping market as in the “double-digit millions” of dollars in the United States.

In an agreement with the USDA Animal Plant Health and Inspection Service, Genaissance will test sheep for scrapie susceptibility, which has a US market “in the millions of dollars,” said Rakin.

In its project to revive Merck’s SSRI, vilazodone, which had previously failed five Phase II trials, Genaissance is still working on the same time schedule as it set up in September, said Rakin. “We’re exploring how best we should finance that,” said Rakin. “There are some different innovative financial structures that we extend for that.” Financing of the drug should allow Genaissance to begin Phase II clinical trials by June, said Rakin.

“We recognize that our current market capitalization and business base makes it impractical to take on [vilazodone’s] clinical development, expense, and risk on our own,” said Rakin to investors. The company’s goal is to obtain project-based financing, “with our shareholders having the ability to participate in its upside,” said Rakin.

In a September conference call, Rakin said Genaissance should begin enrollment for Phase II clinical trials — including pharmacogenomic stratification of patients — in the first half of 2005. Two trials will identify drug response markers and confirm the validity of these markers, he added (see PGx Reporter, 9/30/2004).

— CW

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