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With New CFO -- and New CEO -- Orchid Still Sharpens the Pencil

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At A Glance

Name: Michael Spicer

Title: CFO, Orchid Biosciences

Education: BA, accounting, University of Virginia; MBA, Harvard

Background: Vice president of finance, LifeCodes; CFO at White River Corporation

Age: 50

 

In October 2001, when Orchid Biosciences announced plans to buy LifeCodes for $13 million in stock, Orchid was starting to build its forensics and paternity businesses.

When the transaction closed two months later, Orchid decided to hold onto LifeCodes’ finance VP, Michael Spicer. Today, Orchid’s forensics and paternity business comprise the core of the company — the life sciences unit was sold to Beckman Coulter last December, and the diagnostics arm has been on the block since February 2003 — and Spicer is CFO.

SNPtech Reporter this week caught up with Spicer, who took over the CFO slot in July after Andrew Savadelis resigned.

In early March, your predecessor, Andrew Savadelis said that Orchid “is not out of the woods yet, but I see the light at the end of the tunnel.” How close are you to the light right now, and what has the company done financially over the past two quarters to get there?

We maintain that we’re targeting to achieve profitability in the fourth quarter of this year, through the combination of cost-cutting efforts we’ve undertaken — and continue to undertake — and the growth in our core business.

You brought up the cost-saving steps that Orchid has taken, mostly recently the layoffs in the GeneShield unit. How much money will these steps save Orchid this year, and annually?

We expect in the third and fourth quarter this year to show the evidence of the cost reductions in the GeneShield group. Unfortunately, we don’t provide detailed segment information.

Paul Kelly, your CEO, was confident that GeneShield will end up playing an important role in the company, though he hasn’t yet decided what direction the group will take. George Poste, your chairman, also said that the unit will be “the first business to commercialize personalized medicine” at Orchid. Just how important is GeneShield compared with the forensic and paternity units, which have been doing relatively well?

The personalized medicine market that GeneShield has been participating in, we still believe, is going to offer long-term potential for Orchid, and obviously for others. But we also believe that the level of expenditures that Orchid [had] been making in that business unit through the middle of 2002 were really excessive for the current climate.

We continue to hold the technology and the development that came out of that group, but we think that it has great long-term potential. The short-term potential [for revenue] is just not there yet.

When do you expect that potential to materialize?

We are still assessing various business models and programs to best leverage our assets in the personalized medicine market, and we haven’t yet provided guidance on specific future plans.

[Spicer provided this answer in an e-mail message shortly after this interview. — Ed.]

Over the past year or so, Orchid has taken several steps to shore up cash burn — a round of modest layoffs and an important divestiture, to name two. Kelly had said in the spring that the company intends to further trim costs, including divesting the diagnostics unit. He also did not rule out additional staff cuts, or even additional technology divestitures.

Currently, the only thing we have on tap is the divestiture of diagnostics, which we expect is something we’ll be able to announce in the very near future. With respect to cost-reduction efforts, we’ve obviously been through enough already, and it’s obviously provided a lot of improvement in cash burn. I don’t think you’re ever really done looking at the overall efficiency of an organization.

And now we’re really focused on three business areas — paternity, forensics, and public health — we continue to sharpen the pencil, and make sure we are doing things as efficiently as possible. For example, the recently announced implementation of SNPs in paternity is something where we’ll have several points of improvement in gross margin. And obviously that’s a place that’s going to provide us [revenue] in the future.

Orchid has gone through some dramatic changes over the past year; the company looks little like it did one year ago — “a definitive migration” is how Poste put it last year. Considering the volatile markets that Orchid now occupies, will the company emerge in the fall of 2004 looking like it does today?

That’s a fairly short horizon, and I’d say that would largely be true. The core businesses we’re in … we’re going to stay in, and we see growth opportunities in each of them. I don’t want to discount the possibilities that we get into adjoining market opportunities. We’ve [announced], for example, the immigration testing for Norway [see SNPtech Reporter, 7-24-01], and this is just an example of something that is still DNA genomics, and it’s something that we do, but it could be a fairly significant factor in Europe or worldwide.

Has Orchid been looking to set up similar collaborations like the recent deal with Norway elsewhere in the world?

Both through our North American operation, and through the European operation in the UK, we pursue international opportunities that [are] outside those specific boundaries, so we continue to look at those opportunities, and they will come up from time to time.

Orchid had also said it intends to change its existing STR technology to SNP technology in the paternity group by the end of the year. Is this still accurate?

We do use that SNP technology specifically for forensics work on World Trade Center samples, and in the UK for public health testing. We expect to have this fully implemented in paternity at the end of this year, and it should have a favorable impact on profit margins of several percentage points.

Will the SNP technology have broader applications within Orchid?

It goes without saying that if that technology offers significant [applications] in any of our core business[es], we would use it.

What is the status of the diagnostics divestiture?

We certainly expect that by the time we announce earnings for the third quarter, that we’ll have a transaction. We feel a deal is imminent.

Orchid’s revenues during the first two quarters of this year have either increased or stayed flat, and R&D spending has stayed flat, but the overall spending on R&D has been around $4 million less compared with the first two quarters of 2003. Will the company eventually reverse this trend on R&D spending, or have Orchid’s business units gotten all that they need from R&D investments, and the trend will continue to spend $1 million every quarter?

Some of the R&D spending in the first half of the year was associated with our GeneShield business. In the process of drastically reducing the expenditures in that division, we believe we’ll see a further decline in R&D expenditure in the second half of the year, and currently we feel that that level of spending will [be] sufficient for the businesses we’re in. I don’t think you can ever say you’re finished doing R&D in any business, but we definitely feel that in the core businesses that we’re in, and with the technologies that are already deployed or developed, that the level of spending that we’ll have post-GeneShield [restructuring] will be sufficient for these core business.

What is Orchid’s quarterly burn rate?

In the first half of the year, the operating cash burn was around $4 million.

As of June 30, Orchid had around $16 million in cash. Kelly said he doesn’t plan to seek additional bank loans or lines of credit. Is this still accurate, considering that Orchid has around two years in cash left?

I think with the plans to get to operating profitability during the fourth quarter — but not for the entire fourth quarter — and certainly between now and then to reduce outflow, our expectation is that we’ll see a continuing improvement in operating cash burn.

We don’t feel that there’s a need to raise money. Of course, our guidance on that took us through the end of 2003, and we don’t currently have plans to go off and raise any [additional] money.

Editor’s note: In April, SNPtech Reporter published a financial snapshot of nine SNP-genotyping companies [See SNPtech Reporter, 4-04-03]. That report tracked and compared revenue, R&D spending, cash on hand, as well as R&D spending as a percentage of revenue and cash on hand in these nine shops for fiscal year 2002.

Today’s interview is the sixth of nine sessions with chief financial officers for each of these companies — Lynx Therapeutics, Orchid Biosciences, Genaissance Pharmaceuticals, DeCode Genetics, Sequenom, Illumina, Pyrosequencing, Third Wave Technology, and Transgenomic. Additional interviews will follow.

The goal of these interviews, which are conducted soon after each firm releases its mid-year earnings report, is to shed light on the financial health of the companies mid-year, and to gauge projections for the second half.

 

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