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With Bayer Deal Gone, Lion s Revenues Set To Continue Sliding; Cost Cutting Expected

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Note: This article has been updated to clarify the details of Lion's relationship with Bayer and its plans for a Nasdaq delisting, and to correct the names of the company's products in the 10th paragraph.

Reporting its financial results for its fiscal first quarter last Thursday, Lion Bioscience said it expects revenues to continue their downhill slide in the next quarter due to the expiration of its five-year target discovery project with Bayer at its LBRI facility in Cambridge, Mass.

But the bioinformatics company assured investors that it nevertheless expects to reduce cash burn to zero by the end of its fiscal year — March 31 — through aggressive cost-cutting. Lion is also planning a Nasdaq delisting and possibly a deregistration with the US Securities and Exchange Commission that could impact its bottom line in the following fiscal year.

“This is the last quarter with a strong Bayer contribution to our revenues,” said Martin Hollenhorst, Lion’s CFO, in a conference call with investors last week.

Lion reported €4 million ($4.81 million) in revenues during the three months ended June 30, compared to €5.5 million for the same period one year ago. According to Hollenhorst, the Bayer deal, penned in 1999, contributed €2.1 million, or 53 percent, of receipts in the first quarter.

In the second quarter, which began July 1, Lion expects revenues from Bayer to total about €1 million from an ongoing project with the German pharma to develop software for pharmacophore analysis. This deal will end in September.

While Lion has said it’s been negotiating with Bayer to extend their original collaboration, Hollenhorst said last week that in light of Bayer’s recent acquisition of Roche’s over-the-counter drug business, “negotiations for us are very difficult … with those major strategic discussions going on at Bayer.”

Amid these signs of current and future revenue decline, Lion said it is continuing the cost-cutting measures begun during the company’s restructuring over the past year (See BioInform, 05-19-03). Lion said its costs and expenses for the quarter declined 32 percent to €6.3 million, and it subsequently reduced its net loss for the first fiscal quarter to €2.6 million from €4.5 million in the comparable period a year ago.

Lion said it received three new orders for its SRS software and a new cheminformatics professional services order in North America during the quarter. The company’s order backlog decreased during the quarter by about €3 million to about €5.9 million, mostly due to the expiration of the Bayer deal, Hollenhorst said.

But he said the sales pipeline has been improving, and assured investors that Lion would start to turn around as soon as the new products launches this year are absorbed by the market.

“The pipeline for our existing products [SRS and Lion Target Engine] remains to be still too small to fuel the growth that we are looking forward to and that we are expecting,” Hollenhorst said in the call. However, he added, “the new product releases for SRS and for [Lion Lead Engine] will affect the upcoming quarters.”

Lion recently launched version 8.0 of SRS, which Hollenhorst said “is now based on today’s ... IT standards, web services, and Java server pages.”

The company is planning to launch four additional products or product versions in the fiscal year, which it is counting on to get its growth engine going again.

Hollenhorst said these new releases are “extremely important.”

“Our current investments [in this software] are the prerequisite for a profitable business in the next fiscal years,” he said.

Hollenhorst also said the company could save about €400,000 per quarter from a planned Nasdaq delisting and a successful deregistration with the SEC. He did not specify further when this delisting and deregistration are likely to occur.

Lion still expects to lose between €10 million to €11 million in fiscal 2005, and to have €30 million in liquid assets by the end of the fiscal year.

— MMJ

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