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Gaining Speed on Turnaround Begun in 02, Accelrys Outlines Plans for Top-Line Growth

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Accelrys executives last week provided an overview of their strategy to drive top-line growth as the company moves forward on a “turnaround” that CEO Mark Emkjer began implementing when he joined the firm in late 2002.

Last week, Emkjer told analysts at the UBS Warburg Global Healthcare Services Conference in New York that the firm has so far “rationalized its cost structure” and “introduced quality systems” — thereby completing two out of three steps in his plan to steer itself toward profitability. The final stage in the process, he said, is still ongoing, and is centered around generating additional top-line growth.

Accelrys has not yet provided a target date for when it expects to break even. For the first nine months of its 2005 fiscal year, which will end in March, the company posted a net loss of $17 million.

David Sankaran, Accelrys’ newly appointed CFO, told analysts at the conference that the firm will provide more guidance when it discusses its year-end results in April. The company will be cash-flow positive “in the near future,” he said.

According to the company’s calculations, IT spending for drug discovery and development at top-tier pharmas alone is in the neighborhood of $7 billion — of which Accelrys should be able to capture a “real portion,” Emkjer said. But the picture isn’t as rosy as it may appear on the surface. Emkjer and Sankaran conceded that pharmas still spend 80 percent of their IT budgets on internal development, reducing the total market opportunity for Accelrys — and its competitors — to around $1.4 billion.

But Sankaran proposed that this 80/20 ratio is likely to change. With a background at firms like PeopleSoft and Arthur Andersen, Sankaran said that the life science informatics market resembles the market for ERP software several decades ago. These types of systems used to be in-house projects as well, he said. “Now, almost no one writes their own payroll software or human resources software.” The life science IT market, he said, “is at the beginning of a growth curve.”

Accelrys said it plans to follow that curve with a mixed strategy that includes expanding into new markets, extending its current product line, and through additional strategic acquisitions to follow on its purchase of SciTegic last September.

While conceding that Accelrys’ core modeling and simulation sales have been “flat” over the past six months, Emjker noted that the company is still on track to post an increase in sales for its existing product lines when its current fiscal year ends in March — the first time the company has witnessed organic growth in the last four years, he noted.

Meanwhile, he said, the company plans to “protect” that core business while expanding its efforts in several new areas. One of these is nanotechnology, which has applications beyond material science, where the bulk of the company’s development efforts in this area have been to date, Emkjer said. Nanotech has potential uses in drug delivery, he said, noting that Accelrys is “considering” establishing a research consortium to develop nanotech-based drug-delivery methods.

In addition, Emkjer said, the company is looking into expanding its current services offering, particularly for customers of SciTegic’s workflow software. Accelrys currently generates a “very low amount of services revenue,” Emkjer said, especially compared to software firms in other industries, where service agreements typically make up around 30 percent of total revenues, he estimated.

The SciTegic software is being marketed to a different kind of customer than the rest of Accelrys’ tools, Emkjer said — a factor that may help the company enlarge its services portfolio. Accelrys’ traditional modeling and simulation software appeals to computational biologists and computational chemists, who tend to buy only a few seats at a time, and aren’t looking to integrate their tools with other packages. SciTegic’s Pipeline Pilot, on the other hand, is marketed to higher-level informatics and IT managers with broader responsibility for the complete research informatics infrastructure.

Emkjer said that at least one of the company’s large pharma customers has already expressed interest in a service-based contract built upon an existing Pipeline Pilot deal, but he cautioned that the transition to this kind of sales model will not occur overnight.

“It’s a different sales rep, a different way of doing business,” Emkjer said. Scientists — Accelrys’ traditional customer base — “aren’t interested in consulting” services, he said. He estimated that the sales cycle for these types of agreements would also be longer than a typical software deal, generally taking between nine and 15 months to close.

The potential upside is worth it, however. Emkjer said that an agreement that SciTegic currently has with Pfizer is worth more than $1 million per year.

Emkjer said that Accelrys has also built a new business-development group led by Mahesh Krishnamurthy, who was hired as senior vice president of corporate development last summer. That group is responsible for building out the company’s portfolio of in-licensed technologies, as well as for scouting out promising investments, collaborations, and new acquisitions.

Emkjer said that Accelrys is in discussions for possible collaborations with some of the larger IT consulting firms that already have a foothold in pharma, as well as with LIMS vendors, who might be interested in integrating their systems with Accelrys tools that can “inhale and massage” the data that comes off their LIMS platforms.

Finally, Sankaran said that Accelrys will tread carefully as it plots out its future acquisition strategy. “We’re not looking at piling acquisition on top of acquisition,” he said. Any future acquisitions would likely be cash — not equity — deals, he added.

Officials did not disclose any details about future acquisition possibilities, but Emkjer did note that Accelrys is looking for candidates with a presence further downstream in the discovery process in order to tie the value of its software more closely to drug products.

— BT

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