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Falling Quarterly Revenues Place Pressure on Tripos Upcoming Discovery Informatics Tools

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Tripos is counting on an expanding informatics product portfolio to reverse an 18-month trend of anemic quarterly revenues.

The company last week reported a 16-percent drop in total revenues for the quarter ended June 30, posting $13.4 million compared to $15.9 million in the second quarter of 2004. Tripos attributed the slide primarily to the wind-down of a four-year chemical file-enrichment project that its Discovery Research group is conducting with Pfizer.

This project is currently in the final year of the original agreement, and company officials said that they are still in discussions with Pfizer about extending it beyond 2005. As a result, the Discovery Research group posted $6.9 million in revenues for the quarter, a 22-percent decline from $8.9 million in the prior-year period.


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But the company's Discovery Informatics group also contributed its share to the fall-off in revenues, posting a 6-percent decline to $5.8 million from $6.3 million in the second quarter of 2004. This marked the seventh consecutive quarter in which the discovery informatics products business posted anemic revenue growth, despite the company's acquisition of Optive Research in the first quarter, which was expected to jumpstart short-term revenues [BioInform 01-10-05]. Furthermore, it was the first quarter in which the informatics products business posted a decline in year-over-year revenues since the first quarter of 2004 • a trend the company plans to nip in the bud (See chart for further details on the company's revenue growth since 2003.)

Tripos blamed the decline on a number of factors, including "softness" in the Pacific Rim triggered by a patent-infringement suit in Japan related to FlexX, a docking software product that Tripos in-licenses from a third party. The company declined to disclose the licensor of the technology, but the Tripos website lists Germany's BioSolveIT, which holds the exclusive rights to the Flex* suite of programs from Germany's Fraunhofer Institute for Algorithms and Scientific Computing, as a "software partner" for FlexX.

Although the patent-infringement case is "not a direct Tripos liability, the software was an important component of our suite of tools in Japan," Tripos President and CEO John McAlister explained during a conference call to discuss the company's quarterly results. "The ultimate result was that renewal contracts for many of our products were delayed by this suit."

McAllister said that "a new, non-infringing version" of the FlexX suite of tools was introduced in May, and is now being marketed in the Pacific Rim. "There has been a delay as our distributor [in Japan] has come up to speed on this new product, and customers have evaluated the new technology," he said. "We believe this issue is now behind us, but full recovery will take some time."

Informatics sales also took a hit from "some personnel changes in the academic sales area" that "had a negative impact on our sales to academic, governmental, and non-profit organizations during the second quarter," McAllister said. "We believe that we have addressed this issue as well, and anticipate recovery in the near term."

James Rubin, senior vice president of finance and chief financial officer, told BioInform in an interview following the conference call that the personnel changes involved the departure of a European sales representative, and the repositioning of a US sales rep to a marketing position. Both open sales positions have now been filled, he said.

Rubin said during the call that these two areas of decline in the informatics business during the quarter "were only partially offset by incremental revenues from the Optive Research acquisition."

Banking on Benchware

Tripos is confident that a series of new informatics products that it expects to launch before the end of the year will help turn the tide. As BioInform reported in June, the company plans to expand beyond its traditional customer base of computational chemists with a new line of so-called "laboratory informatics" tools that it has dubbed Benchware [BioInform 06-20-05]. This portfolio includes a number of software products that are targeted towards laboratory chemists and biologists for visualizing molecules, prioritizing leads, and designing compound libraries.


"We are investing substantially in the development and launch of Benchware, and have high expectations for it helping us to achieve revenue growth in our software business over time."

The company announced the availability of the Benchware products two weeks ago [BioInform 07-25-05], with its official launch slated for the Drug Discovery Technology conference in Boston, Aug. 9-11. Bryan Koontz, senior vice president and general manager of the discovery informatics group, said during the conference call that several customers have already purchased "bits and pieces" of the Benchware line, but the company has not yet signed an enterprise-wide deal for the product line.

"We are investing substantially in the development and launch of Benchware, and have high expectations for it helping us to achieve revenue growth in our software business over time," Koontz said in the call.

Koontz said that the company has a number of other new products in the pipeline, including the commercial version of an electronic laboratory notebook that it recently rolled out at Schering, which the company will also launch at DDT, and a new pharmacophore-modeling and molecular-alignment tool called Galahad, which shipped last week as part of the company's Sybyl 7.1 release.

Tripos also plans to launch a new "discovery logistic solution" called ChemCore RIO (Registration, Inventory, and Ordering) in the fourth quarter, Koontz said. This product is currently deployed at Schering as well as within Tripos' Discovery Research organization.

The company is making other changes. Acknowledging that "marketing has not traditionally been a strong point for Tripos in the past," Koontz said that the firm is taking steps to ramp up its marketing efforts. As one example, he said, "We have created for the first time at Tripos a formal product-management group responsible for the definition of products and a strategic product roadmap" that is expected to keep the company focused on "building products that solve key customer problems and contribute significantly both strategically and financially to Tripos' overall business."

The company has also introduced a new product-release process that "orchestrates the activities of our product marketing, product management, product development, and sales teams," Koontz said.

Finally, Tripos has "introduced new leadership and new metrics" into the professional services side of its discovery informatics business organization.

"As we are seeing some new signs that the pharmaceutical industry is budgeting for projects that can help them improve their overall discovery operations, we anticipate that a well-managed professional services organization will become even more important to the success of our software business," Koontz said. As a result, "we have been assessing how we can approach our services engagements to best manage the balance of margin contributions, staff utilization, and customer satisfaction. We are also currently assessing how partnerships in this area, including strategic IT outsourcing partnerships, could help us ramp up on projects more quickly, and could help us provide higher levels of service to our customers."

Tripos spent $2 million on R&D during the quarter, down from $2.5 million in the prior-year period. Rubin said that this decline does not reflect a lack of innovation, however. While the company records early-stage research as an R&D expense, the development of products with "technical feasibility" is capitalized as an expense against future sales. Rubin said that products such as Benchware, Galahad, and the new electronic laboratory notebook all fall into this latter category, so that $558,000 of development expenses in the second quarter were actually capitalized against future sales.

The company posted $1.7 million in net income, or $.17 per share, for the quarter. While this represented an enormous increase over net income of $156,000, or $.02 per share, for the prior-year period, the company realized a tax benefit of $2.1 million in the UK during the second quarter of 2005. Without the tax benefit, Tripos would have posted a net loss of $400,000 for the quarter.

Tripos held $6.2 million in cash and cash equivalents as of June 30.

• Bernadette Toner ([email protected])

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