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Accelrys Will Be Easier to Do Business With as Standalone Entity, Says Emkjer

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With the spin-off of parent company Pharmacopeia’s drug discovery business slated to take place at the end of the quarter, Accelrys faces an entirely different future as a standalone software shop — one that will ultimately benefit the company’s customers, employees, partners, and investors, according to Mark Emkjer.

Emkjer, who is currently president of Accelrys, will become president and CEO of the company following the spin-off of Pharmacopeia Drug Discovery (PPD). The parent company will take the name “Accelrys” and will trade under a new, undisclosed, ticker symbol after the spin-off. According to Emkjer, standalone status will only help reinforce initiatives that he began putting in place upon taking the reins at Accelrys just over a year ago. These moves have all been directed toward a single goal, he said: “We want to become easier to do business with.”

Following the spin-off of PPD, “our clients will be able to view us as a pure software and services play,” Emkjer said — an advantage over Pharmaceopiea’s current mixed business model, which has led some potential biotech and pharmaceutical customers to question the wisdom of buying software from a potential competitor, he noted.

The spin-off will also bring much-needed “focus and clarity” to employees of both Accelrys and PPD, Emkjer added, “because there was some confusion relative to having a corporate holding company, and then having each of the divisions report up to that corporate holding company.” The company’s current board, which Emkjer described as drawing more “from the drug discovery side of the house,” will be split between the two entities, and the Accelrys board will be rebuilt to include “primarily software professionals, who I think will understand better the challenges we face and can advise and counsel,” he said.

The split will also benefit the investment community, Emkjer said, where “some people bought for drug discovery … and some people bought for software, and I think there has been confusion over the two.”

Finally, he noted, life as a standalone entity will enable Accelrys to put its “hoard of cash” — expected to be between $90 million and $100 million at the completion of the spin-off — to better use in terms of acquisitions and new business development. “What I like about it is I know exactly how much Accelrys has to invest, and the uncertainty goes away as to where the cash lies,” he said. Accelrys pursued an aggressive acquisition strategy in the late 1990s in order to build its current business out of several software companies, including Molecular Simulations, Synopsys Scientific Systems, Oxford Molecular, and the Genetics Computer Group. More recently, Accelrys “really took a hiatus for a number of years away from acquisitions,” but the company plans to pick up that strategy once again following the completion of the spin-off, and has already “identified some acquisition candidates,”Emkjer said.

Sewing Up the Loose Ends

When Emkjer joined Accelrys in December 2002, the software unit was still struggling to integrate the various companies that comprised it into a seamless entity. On the product side, some of the integration issues were addressed through the launch of the company’s integrated Discovery Studio product suite, but when it came to cultural and business process issues, there was still a lot of work to be done, Emkjer said. “We had all these different companies amalgamated — there were multiple practices, and it was somewhat confusing and overly complex. And what we’ve done is put a lot of processes in place to clean this up,” he said.

Working with business consulting firm BearingPoint, Accelrys streamlined its order-entry and billing procedures in order to have “a single view of the customer,” he said. The company has also initiated a customer survey program in order to better meet client needs. Emjker cited the Linux ports that Accelrys released for its Insight II and Catalyst applications in December as an immediate result of that effort.

In addition, Emkjer said, Accelrys is focused on improving its R&D pipeline, and has instituted a product life-cycle management process, standardized its technical publications and quality control procedures, and plans to hire “a significant amount of project managers.” The net of it is “real simple,” he said: “We just want to put out better quality code, and we believe our clients will perceive much higher value.”

In line with the streamlining strategy, the company laid off 50 of its 200 San Diego employees earlier this month [BioInform 01-19-04] as a way to consolidate product development activities. Emkjer said that Accelrys currently employs around 540 people between its San Diego; Cambridge, UK; and Bangalore, India, sites.

Working Toward Profitability

Ultimately, Emkjer said, the proposed spin-off will not alter any of the goals that he set for Accelrys. “Being a standalone really doesn’t change anything we were doing here. Our focus was to get our company to break even and begin to make a profit, our focus was to generate positive cash flow, and I believe that we absolutely have made significant strides in that direction,” he said.

There will be one difference following the split, however, in terms of greater transparency of the company’s financial performance. As part of the combined company, Accelrys reported its software revenues — around $54 million for the first nine months of 2003 and $95 million for the full year 2002 — but Pharmacopeia did not break out R&D spending or net losses for either of its business units.

According to recent documents filed with the US Securities and Exchange Commission that estimate PPD’s portion of these figures, Accelrys spent around $21 million on R&D in 2002, and $13.5 million on R&D for the first nine months of 2003. The software unit’s net loss for 2002 was around $9.5 million, with a net loss of around $9.3 million for the first nine months of 2003.

Is profitability within reach? According to Philip Nadeau, an analyst who covers the company for SG Cowen, “this year, they’re probably just going to miss profitability by a few cents per share.” Going forward, he noted, Accelrys should “at least break even” if pharmaceutical and biotech spending picks up, “and if they’re able to cut costs even a little bit more.”

But Emkjer said that short-term profitability isn’t his primary concern. “I’m not overemphasizing the next three to six months,” he said. “I’m thinking about the full year 2004, the full year 2005, and 2006, and where we’re going to be at that point in time.” It’s likely, he said, that Accelrys will “err on the side of making more investments in our business to get it at the level of quality and service we want,” adopting a “short-term sacrifice, long-term gain” strategy.

Emkjer also dismissed concerns regarding the market valuation of Accelrys as a standalone software company in an investment climate that favors compounds over tools. “The first full day of trading, we’ll see what each individual company is valued at, and honestly the market will determine that — it’s not anything that I can predict or that I honestly know with certainty … what happens after the first day of trades or even shortly thereafter, that’s the market. But I think our long-term prospects are very exciting.”

Nadeau predicted, however, that the spin-off won’t impact investor confidence on the software side, noting that both sides of Pharmaceopeia’s business rely on “pharma and biotech companies having the money to spend to pay for services … and I think it’s been equally hard to come by [money] for a software tool as for very early-stage drug discovery services.” While separating the companies may not change investors’ perceptions of the risks associated with either, Nadeau added that “for Wall Street to love either of the businesses, we’ll have to see a return to more spending from pharma and biotech companies.”

— BT

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