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Accelrys to 'Aggressively' Pursue M&A, Business Development as Turnaround Enters Home Stretch

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Accelrys CEO Mark Emkjer said this week that the company is nearing the end of a lengthy turnaround period and that it plans to “aggressively pursue business development and merger and acquisition activities” in order to drive growth in the mid- to long term.
 
“Our company is now at a point where the underlying business processes and fundamentals allow such activities, and we are engaged in formulating our next steps,” Emkjer said during a conference call this week to discuss the company’s second-quarter financial results.
 
As part of this goal, Accelrys officials over the next few months will meet with certain clients to help devise a longer-term strategy, which includes options “to buy, build, or partner.”
 
Emkjer joined Accelrys in late 2002 and soon afterward began implementing a “modernization” process that involved overhauling the company’s internal infrastructure and product lines.
 
Emkjer told BioInform in an interview following the conference call that the first phase of that process will be complete with the launch of a fully “componentized” life science platform next September, and that the company is now beginning to map out its direction following that milestone.
 
“The first phase was all about modernizing our infrastructure, our products — there were a lot of products we, frankly, just cut out,” he said. “Phase one was about figuring out the products — which ones we would keep and not keep. It was about upgrading that product suite dramatically, taking cost out of the business, and we’re nearing the end of that.”
 
Phase two, he said, “is all about how do we transform the company?”
 
Emkjer declined to specify which product lines were eliminated as part of the multi-year evaluation, but noted that they were “old legacy products and most of them would be in the modeling and simulation space.”
 
As expected, these discontinued products dragged down revenue in the most recent quarter. For the three months ended Sept. 30, Accelrys’ second fiscal quarter, revenues declined 7 percent to $20.2 million from $21.7 million in the second quarter of 2005.
 
The company attributed the slide to “an expected decrease in revenues from certain products that were de-emphasized in connection with the company's restructuring and product line adjustments that have occurred over the past two years.”
 
Deferred revenue rose to $45.1 million from $42.5 million in the prior-year quarter. Accelrys considers deferred revenue to be a key indicator of its performance due to the annual nature of most of its licenses, which are recognized on a ratable basis over the course of the year.  
 
Second-quarter net income fell to $900,000 from $1.2 million in the prior-year period. Excluding stock-based compensation expense, non-GAAP net income increased by 65 percent to $2.3 million from $1.4 million in the second quarter of 2005.
 
As of Sept. 30, Accelrys had total cash, cash equivalents, restricted cash, and marketable securities of $61.2 million — a 16-percent increase from Sept. 30, 2005.
 
Emkjer cited the firm’s profitability, its increasing deferred revenue, and its growing cash position as signs that Accelrys is on track financially, and said that the decline in revenues was “consistent with our expectations following the product line rationalization.”
 
In December, the company will launch “major releases” of several life science and materials sciences applications that are expected to help “drive increased organic business opportunity,” Emkjer said.
 
Over the next few months, Accelrys will also meet with a number of “select” clients to help map out its longer-term strategy, Emkjer said. “We’re showing them where we think we’re going to go next, and we’re asking them to vet that, to reprioritize it, or to give us ideas,” he said.
 
The Accelrys executive team will then perform a “gap analysis” based on the customer feedback. “We’ll look at where we are, we’ll look at where we want to go, and then we’ll figure out if we want to buy, build, or partner,” he said.
 

“[I]t’s no longer just about taking old technology and wrapping it, componentizing it, or building a new front end. Now all the discussions here are focusing on what are we going to do next? And we’re excited about that.”

In August, Emkjer said that Accelrys had identified 55 potential acquisition candidates that it was “filtering” down to a handful of prospects [BioInform 08-04-06]. While he declined to provide further details on the status of that process this week, he reiterated earlier comments that likely candidates would help the company expand its product line downstream into drug development and clinical research. 
 
“We’re looking in areas involving analytical software, things that might mine data, informatics capabilities, things that may be more downstream from early-stage discovery where we are today,” Emkjer said.
 
On the partnering front, Emkjer said that the company is considering in-licensing agreements as well as OEM deals for its SciTegic subsidiary’s Pipeline Pilot workflow product — a model that competitor InforSense is also pursuing for its KDE workflow platform [BioInform 10-13-06].
 
“Really what we’re trying to do is invest in those areas where we believe we’re going to be aligning with our customer spend,” Emkjer said.
 
He estimated that around 50 percent of Accelrys customers are in the biopharmaceutical sector, with the rest split between the academic/government and material science/industrial chemicals markets.
 

Emkjer said that Accelrys employees are “enthused” about the company’s longer-term planning, “because it’s no longer just about taking old technology and wrapping it, componentizing it, or building a new front end. Now all the discussions here are focusing on what are we going to do next? And we’re excited about that.”

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