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Gene Logic, Selling Preclinical Division, Puts All Eggs in Drug Repositioning Basket

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For Gene Logic, all eyes are on its drug-repositioning business.
 
Faced with a 69-percent drop in third-quarter revenues, Gene Logic has once again repositioned its business strategy by putting its preclinical division on the block, refocusing its genomics arm, and pinning its hopes on its drug repositioning activities.
 
During an earnings call last week, Gene Logic CEO Mark Gessler told investors that results of a strategic review of its operations begun in June “led to significant and concrete steps … which include … restructuring our genomics business to more closely match costs with expected revenues … [and] our decision to sell our preclinical business.”
 
The decision is a departure for Gene Logic, which said as recently as September that the preclinical business will remain a part of the company.
 
Results of the strategic review changed all that.
 
Gene Logic said that putting the preclinical business on the block is part of ongoing efforts to continue to “implement its strategic plan,” which has changed shape and scope in recent months. It has hired an investment bank to help shed the business.
 
The company has most recently assured it “is focusing its resources on those opportunities that it believes will have the greatest potential to increase long-term shareholder revenue.”
 
However, Gessler said a highlight of the quarter was “adding Eli Lilly to Pfizer, Roche, and Organon as a major pharmaceutical partner in our drug repositioning business.”
 
He said the Lilly deal provides for milestones and royalties similar to those paid for development-stage in-license deals, but which will be “discounted to account for Lilly’s contribution as the originator of the compound.”
 
A Flailing Strategy
 
Gene Logic reported its plan for the preclinical segment as it posted a 69-percent decline in revenue atop a 32-percent reduction in net loss for the third quarter.
 
Total revenue for the third quarter, consisting primarily of revenue from the genomics division, slid to $3.7 million from $11.8 million in the third quarter of 2005.
 
CFO Phil Rohr said the shortfall in revenue “reflect[s] the fact that our prior strategy, which intended to compensate for changing market conditions, did not reverse this sales trend.”
 
The company’s most recent reorganization is a stark departure from the strategic direction it laid out in September. At the time, Gene Logic disclosed that a recently completed external business review supported its decision to shift the focus from its floundering genomics business and onto drug repositioning.
 
Gene Logic also maintained then that the company expected the preclinical services business to continue improving its operating margins and to narrow losses [see PGx Reporter 08-27-06].
 
In a statement at the time Gene Logic also said its preclinical services business “continues to improve its financial performance. While the business is not yet profitable, the company expects operating margins to continue to improve and losses to narrow as the substantially increased pace of new business signings leads to growth in revenue. As a result of recent facilities expansions, sufficient capacity exists for growth in the near term.”
 
Genomics Unfocused
 
During the earnings call, Gene Logic offered sparse details regarding the direction its genomics division will take, except to say that the firm has “been evaluating strategic options … in areas such as clinical biomarker development and molecular diagnostics.”
 
According to Gessler, Gene Logic has been redirecting efforts downstream into late-stage clinical development. “So that’s where we’re redirecting our talents today … while continuing with our pharmaceutical customers because we also see really a similar opportunity around biomarker development, which may be analagous to the diagnostic development, which would help pharma companies more effectively develop their drugs through the development of diagnostic tests.”
 
The company’s genomics business has been in trouble since June when Gene Logic announced it would conduct an external review after withdrawing its financial guidelines for the second quarter and full year 2006 and 2007 [see PGx Reporter 6/28/2006]. The firm blamed lackluster sales in its genomics business.
 
Also, as part of its reorganization, Gene Logic laid off 80 employees from its genomics business in order to concentrate on its drug-repositioning business.
 
Third-quarter revenues for the genomics business, based primarily upon the company’s legacy database business, fell 68 percent to $3.7 million from $11.7 million in the comparable period of 2005, while operating losses swelled to $11.2 million compared to a profit of $27,000 in the third quarter of 2005.
 

“These results reflect the fact that our prior strategy, which intended to compensate for changing market conditions, did not reverse this sales trend.”

“Our results for the third quarter of 2006 reflect our continued investment in drug repositioning and the changing nature of the genomics business,” Gessler said during the earnings call last week. “For some time, our genomics business has been shifting from multimillion-dollar subscriptions with large pharmaceutical companies to smaller data or service agreements with a larger number of customers.”
 
Gene Logic said it expects to “begin to see the results of these efforts in the fourth quarter.”
 
Gene Logic had made similar hopeful pronouncements about the genomics business in the past. For example, in February, Qing Zeng, Gene Logic's senior marketing manager, told Pharmacogenomics Reporter sister publication BioArray News that reference data was the company’s “bread and butter” [see BAN 2/28/2006]
 
Positioning ‘Drug Repositioning’ With Genomics
 
According to Gessler, Gene Logic’s “genomics assets, capabilities, technologies, and people contribute significantly to [its] drug-repositioning efforts.”  
 
“One of the overall outcomes of the development of the assets in genomics has been to be able to pursue drug repositioning,” Gessler said. “I think it gives us a very deep view of the biology of compounds and from that, I think we stand in a position to generate what I hope will be a significant amount of value.”
 
Despite its partnerships with Pfizer, Roche, Organon, and Eli Lilly, so far the firm has seen minimal revenues from the drug-repositioning business, which aims to revive drugs that have failed in clinical trials due to efficacy reasons.
 
Still, Gessler optimistically noted that Gene Logic’s most recent deal with Eli Lilly may offer opportunities to advance its repositioning in the near future. The agreement “provides for us to have an option to receive an exclusive license to any drug candidate that Lilly chooses not to pursue, in which case Lilly would receive success-based milestones and royalties from us,” he said.
 

Gessler declined to provide a timeline for when the firm expects to rescue one of these firms’ failed compounds, but said that Gene Logic is “in discussion with our pharma partners about which [of these] drug candidates may be appropriate for further advancement.”

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