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Bleak Economy Hits Informatics Companies Hard in Q3; Revenues Fall Throughout Sector

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Publicly traded informatics businesses will likely remember the quarter ended Sept. 30, 2003 as a low point in the economic slide that began several years ago. Judging from the strategies that some companies are putting in place to improve their bottom lines, no one is counting on a market upswing any time soon.

Quarterly revenues for the public informatics firms that BioInform tracks (see table, page 6), were down across the board, spurring companies to launch a range of tactics to cut costs and boost sales over the short term: Lion Biosciences announced that it will lay off 30 percent of its workforce; Incyte is considering a divestment of its information business; Accelrys plans to tweak its licensing options to make it easier for cash-strapped companies to purchase its software; and Compugen said it may divest some of its tool products [BioInform 11-03-03].

Even Tripos — the only informatics firm to buck the trend in declining revenues — offered little hope for a market recovery in the short term. Even though the company reported a 12 percent year-over-year increase in its third-quarter revenues, it lowered its expectations for its fourth-quarter and full-year earnings, “because economic uncertainty continues to affect our customers’ decision-making,” according to Tripos CEO John McAlister. [BioInform 10-27-03].

In addition to the nearly universal drop in revenues, informatics companies reported a sector-wide decrease in third-quarter R&D spending of 35 percent (from a total of $103.6 million in the third quarter of 2002 to $67.1 million in 2003), accompanied by narrowed operating losses across the boards as belt-tightening efforts initiated in prev-ious quarters began to take effect.

Lion Cuts More Staff to Reach Break-Even

In an effort to make good on its long-standing promise to break even in its fourth fiscal quarter ended March 31, 2004, Lion said it would implement additional layoffs over the next six months, reducing its headcount from its current level of 271 employees to 190 at the end of March. Lion employed 590 people as of March 31, 2002, and 337 as of March 31, 2003.

“We regret to reduce our headcount so drastically, but we are bound to the commitment we made to breaking even at the last quarter of this year,” said Martin Hollenhorst, Lion’s CFO, during a conference call to discuss the company’s earnings on Nov. 5.

Lion also reduced its annual revenue expectations from €27.5 million ($31.4 million) to €20.0 million. Hollenhorst cited “the disappointing first half of this fiscal year, the … difficult market conditions, and the longer sales cycles of our products,” as factors in the decision to further reduce the company’s annual revenue estimates. In June, [BioInform 06-30-03], Lion projected €40 million in annual revenues.

For the quarter ended Sept. 30 (the company’s second fiscal quarter) Lion reported total revenues of €3.6 million compared to €5.0 million in the same period of 2002. The company dramatically reduced its net loss, however, to €8.0 million for the quarter, compared to €93 million for the year-ago period.

Lion will consolidate its software development activities from three sites to one, in Cambridge, UK, by the middle of next year. The company is also considering “solutions outside of the company” for its ADME development activities in San Diego. “We are currently looking for a venture capital-financed new company, which would retain an exclusive right for Lion to sell these products in the future,” said Hollenhorst.

Lion said its sales and marketing efforts located in Cambridge, Mass., would be unaffected by the restructuring measures.

Incyte Mulls its Options

Incyte, meanwhile, is considering selling its information business unit as it continues to funnel its core resources toward its makeover into a drug company.

“With regard to the information business, we continue to assess the best strategic direction for this part of the company, given that our core focus and our greatest potential to deliver shareholder value is through drug discovery and development,” said CEO Paul Friedman during the company’s quarterly earnings conference call on Nov. 4.

The company intends to make a determination “before the end of 2003” regarding the future direction of its information product business, Friedman said.

Incyte’s information business is currently responsible for the bulk of the company’s revenues, but that income has been dropping. Revenue for the third quarter, was $13.2 million, compared to $22.4 million for the year-ago period. Furthermore, Incyte doesn’t foresee its database business picking up any time soon. The company reduced its annual guidance to $45 million from $50-60 million, citing decreased demand for its databases as potential subscribers shift their own R&D dollars away from discovery programs toward development.

Moreover, only 150 out of Incyte’s 450 employees work in the company’s drug discovery unit in Wilmington, Del., so the bulk of its payroll is currently directed toward what it now views as a non-core business.

Friedman said that Incyte is winding up its database deliberations, and noted that he “wouldn’t want to rule anything in or out” at this point, but observers are doubtful that Incyte will retain the information business. An analyst report from SunTrust Robinson Humphrey projects that the company “will divest its database business in the next six months.”

Friedman declined to provide an asking price for the information business if Incyte were to divest it.

Incyte’s R&D spending decreased to $28.6 million for the third quarter of 2003 from $47.4 million in the third quarter of 2002, and the company’s net loss widened to $43.0 million from $38 million in the year-ago period.

Accelrys Adjusts its Licensing Model

Pharmacopeia, the parent company of Accelrys, is implementing a two-part strategy in an effort to adjust to current market conditions. First of all, the company plans to shift the close of its fiscal year from December 31 to March 31, effective April 1, 2004, as a means to better account for Accelrys’ sales cycle. Around 35 percent of Accelrys’ software sales occur in the last calendar quarter, according to CFO John Hanlon, which currently provides a very short time frame to analyze year-end results and prepare for the following year. “By shifting our year-end, we believe we’ll be better able to plan for the following fiscal year during calendar Q1, our slowest quarter,” Hanlon said.

In addition, Accelrys will offer a new subscription license for its software beginning in 2004. “We believe this will provide our customers with additional flexibility in making buying decisions,” said Hanlon. The revenue for these licenses will be recognized over their term, rather than recording a significant portion at signing, he said.

Software revenues for the Accelrys software division decreased in the third quarter of 2003 to $17.7 million from $22.9 million in the year-ago period. Pharmacopeia CEO Joseph Mollica noted that the “challenging market conditions that persist for IT companies” was not only to blame for Accelrys’ poor sales, but was also “reflected in the reported results of our competitors.”

Mollica estimated that Accelrys saw about $3.5 million of software orders deferred from the third quarter into future periods “as a result of increased scrutiny by customers who, like ourselves, are focused on controlling spending.” In addition, he said, the company identified “about $1.5 million in lost business in the biotech space this past quarter as customers went out of business or discontinued research functions that would require our products.”

Pharmacopeia estimates that its annual revenue for 2003, including both Accelrys and its drug discovery business, will be 5-9 percent below 2002 annual revenues of $124.4 million, which included $95.1 million in software revenues.

Despite the harsh spending climate, Mollica offered a glimpse of optimism for his company’s future prospects: “We are hopeful that the recent up-tick in biotech financing will translate into new business for Accelrys in future periods,” he said — a hope that is most likely shared by his competitors across the informatics sector.

— BT

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