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Gene Logic Posts 27-Percent Q4 Revenue Gain for Genomics Unit as Profits Span 4 Straight Quarters

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Gene Logic last week reported a 12-percent increase in revenues for the fourth quarter of 2005, and some of its success comes from a surprising corner of its business: genomic services, whose revenue surged 27 percent year over year.

"Our genomics business had an outstanding year," said Mark Gessler, Gene Logic CEO, during a conference call with investors. The company has experienced growing demand from the pharmaceutical industry for genomics services, Gessler said.

The company's genomics business, which includes SNP genotyping services added during the fourth quarter as well as the company's traditional database and software offerings, has been in the black for four consecutive quarters and seems to buck the conventional wisdom that the genomics services market is mature, with little potential for growth.

Gene Logic's drug-repositioning segment, meanwhile, met some success recruiting customers and moving compounds along the pipeline, but that unit, along with Gene Logic's nonclinical services business, did not fare as well as the genomics business.

Revenues for the nonclinical services group fell to $4.7 million from $6.3 million in the year-ago period, while the new drug-repositioning business posted $272,000 in revenue for the quarter.


"We believe that genomics is becoming a core specialty outsourcing for the pharmaceutical industry, and we believe that there is going to be continued demand for these types of services for groups on the outside."

The result was a narrowed net loss for the fourth quarter to $2.1 million, from $4.0 million, a year ago. Losses reflect the final purchase price allocation of $300,000 related to an R&D write-off tied to the company's purchase of Millenium Pharmaceuticals' Horizon drug-repositioning business in 2004.

Gene Logic's genomics services business offset the performance of the other business units, with a 27-percent increase in revenue, which jumped to $17.5 million from $13.8 million in the fourth quarter of 2004. The unit reported a net profit of $4.7 million for the recent quarter, compared to a net loss of $500,000 for the fourth quarter of 2004.

Gene Logic CFO Phil Rohrer said during the conference call last week that the results are "largely due to increased sales volume, and lower expenses for adding additional database content."

The genomics services unit was limited mostly to gene expression analysis software, database, and services until the fourth quarter, and company officers attributed some of its recent success to the addition in the recent quarter of SNP-genotyping services, for which the company secured two large fourth-quarter contracts, along with the practice among pharma to spend more on such services in the final quarter of the year.

For the full year of 2005, the genomics segment posted revenues of $56.6 million compared to $52.2 million in 2004, and an operating income of $7.2 million, compared to a loss of $6.9 million for 2004.

Gene Logic's overall fourth-quarter revenue rose 12 percent to $22.4 million from $20.1 million in the fourth quarter of 2004. The company's full-year revenue was $79.4 million, an increase of $3.4 million, or 4 percent, over 2004.

Annual revenues for the company's nonclinical services group fell to $22.2 million from $23.8 million in 2004, while the drug repositioning business generated $588,000 for the year.

Although Gene Logic expects earnings for the first two quarters of 2006 to fall behind those of the first half of 2005, they should improve by the end of the year, and the company should become profitable in 2007, Rohrer said.

As of Dec. 31, the company had approximately $82.1 million in combined cash, cash equivalents and marketable securities available-for-sale. Of that, $44.0 million is in the form of cash and cash equivalents.

Genomics Services

The company plans to add more customers and expand its reach by offering its genomics services for more markets and in different countries, said CEO Gessler. Gene Logic added "more than 25" new clients for its genomics business during the year, and "completed two projects for two major pharmaceutical companies," he said. "We expect [SNP genotyping] to be an important growing area of new business for us in 2006."

Another factor contributing to the genomics business' profitability is the fact that it operates as a service, and its expenses are accounted for differently. "Those expenses are contained within the line item that we call 'database production expenses,'" said Rohrer. "Over time, I would expect to see some thought to moving that out separately to a more cost-of-sales approach." He said the company would provide guidance as these expenses go up with business activity and as they are differently accounted.

In answer to a question from Piper-Jaffray analyst Ted Tenthoff about the demand for genomics services, Gessler pointed to the company's expansion into SNP genotyping using Affymetrix arrays and its two completed projects for two pharma clients.

"The fourth quarters tend to be … strong quarters in the genomics business, based on year-end spending patterns from our clients," he said. But aside from Gene Logic's efforts at selling more projects, data, and software, Gessler declined to elaborate further.

In answer to another analyst's question about whether the gross margin for the genomics segment is sustainable, Gessler said, "We believe that genomics is becoming a core specialty outsourcing for the pharmaceutical industry, and we believe that there is going to be continued demand for these types of services for groups on the outside." Although fourth-quarter spending from pharma on these types of services is typically high, "overall I think the trend is very, very positive for this business," he added.

In addition, a gambit Gene Logic made in 2005 by introducing flexible pricing for smaller players seems to be paying off. Prior to offering this pricing model, the company sold its services as multi-year subscriptions. But the new model might cause its quarter-to-quarter revenue to be volatile, said Gessler.

Gene Logic expects the genomics business to continue to grow through 2006, while the company is "working on addressing the financial performance" of its nonclinical business, and it is continuing to invest in the repositioning business, said Rohrer.

Drug Repositioning

The newly launched drug-repositioning business, which Gene Logic acquired from Millennium in 2004, posted $272,000 in revenue for the quarter. It experienced a net loss of $2.9 million in the recent quarter, a jump from a loss of $1.7 million in the fourth quarter of 2004.

While the business is not doing as well as genomics, it now has four partners, having added Pfizer and Roche in the third and fourth quarters of 2005, respectively. These partners will allow the company to reap milestone and royalty payments from drugs in its program, Gessler said.

The segment added 30 drug candidates during the year, 10 more than its 2005 target, said Gessler. "Some of these drug candidates have progressed to animal-model validation," which will allow the company to identify which compounds are most promising to put through clinical trials for a new indication, he said.

Gessler declined to be more specific about the timelines associated with the compounds under development.

Nonclinical Services

Revenues for the firm's nonclinical services group fell, to $4.7 million from $6.3 million in the year-ago period. That segment's net loss increased in the fourth quarter of 2005 by $1.7 million to $4.3 million, compared to the year-ago period. The company attributed its increase in net loss to lower revenue and higher margins brought about by charges related to unused research capacity.

For all of 2005, operating losses for nonclinical services increased to $14.5 million from $11.4 million in 2004, an increase again attributed to lower margins and sales, with charges related to unused research capacity weighing heavily.

— Chris Womack ([email protected])

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