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Galapagos Buys Inpharmatica in Bid to Add Content to In-House Discovery, Services Arm

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Drug-discovery firm Galapagos said this week that it plans to buy privately held cheminformatics database provider Inpharmatica in an all-stock deal valued at €12.5 million ($16.6 million).
 
Galapagos officials said that Inpharmatica’s Admensa and Chematica databases and services will bolster both aspects of its business: an in-house drug-discovery operation based out of its headquarters in Mechelen, Belgium, focused on bone and joint disease; and a drug discovery-services business, BioFocus DPI, that is spread across six sites worldwide and is responsible for the bulk of the company’s revenues.
 
“With this acquisition, we will add a range of predictive drug-discovery technology — the Admensa and Chematica technologies — to our service offering,” Galapagos CEO Onno von de Stolpe said during a conference call to discuss the acquisition. “That will accelerate our internal drug discovery, but also broaden the service offering for BioFocus DPI,” he said.
 
Inpharmatica’s technology and staff will become part of the BioFocus DPI business. The Inpharmatica name will not survive the integration, but the Admensa and Chematica brands will remain in place, Galapagos officials said.
 
The “majority” of Inpharmatica’s 30 staffers will join the BioFocus DPI group, with the exception of CEO John Lisle, CFO Patrick Banks, and some sales and administrative staff who are considered redundant.
 
Lisle and Banks will assist in the transition until Dec. 31 and March 31, 2007, respectively.
 
Chris Newton, senior vice president of BioFocus DPI, will run the operational aspects of Inpharmatica’s business, while David Phillips, senior vice president of sales and marketing for BioFocus DPI, will be responsible for sales and marketing of Admensa and Chematica.
 
Von de Stolpe said during the conference call that the company will also consolidate three facilities in the UK. Inpharmatica is currently headquartered in London and has a site in Cambridge, while BioFocus has a facility outside of Cambridge, in Saffron Walden. “Clearly, at some point all three sites will get together, and we will let the market know when that is due,” von de Stolpe said.
 
Total Value Hinges on Pending Deal
 
The total value of the acquisition could reach as much as €19.1 million ($25.4 million) if Inpharmatica successfully closes a “significant” deal that it is currently negotiating.
 
Von de Stolpe said that Galapagos currently values Inpharmatica’s ongoing business at €6.5 million — about 1.4 times its 2006 revenues of €4.7 million — and that the firm also has around €6 million in cash.
 
In addition, Inpharmatica is currently in discussions regarding a “large contract” based on Admensa and Chematica that is anticipated to close in the first quarter of 2007. Depending on the size of that deal, Galapagos will need to pony up an additional €6.6 million.
 
Based on an average share price of €8.82 over the 30 days prior to Dec. 5, Galapagos, which trades on the EuroNext and AIM exchanges, will issue a maximum of 2,165,532 new shares to Inpharmatica shareholders in three tranches: The first, of 623,582 shares, will be issued in December. The second two tranches are due in April and May 2007.
 
Following the completion of the transaction, Inpharmatica shareholders will hold up to 13 percent of Galapagos’ shares.
 
The acquisition is the third for Galapagos in just over a year. In October 2005, the company bought BioFocus for £20.2 million ($39.5 million) in stock as the first step in a plan to grow its services offering. The acquisition more than doubled Galapagos’ staff to around 120 people and gave it capabilities in chemistry, lead discovery, and lead optimization.
 
For the first six months of 2006, the BioFocus group generated €10.2 million of the company’s total revenues of €11.0 million.
 
Then in July, Galapagos picked up the drug discovery-service operations of Discovery Partners International for €4.5 million in cash to further bolster the services business and bring its headcount to more than 320. Galapagos said the business should contribute an additional €8 million to its revenues in the second half of the year.
 
Following the DPI acquisition, Galapagos increased its revenue guidance for 2006 by up to 32 percent, to €33 million-€38 million from €25 million-€30 million.
 
The company has not yet revised its guidance to reflect revenues from Inpharmatica, though company officials said that they believe that the firm’s revenue level of €4.7 million in 2006 should be “sustainable” in subsequent years.
 
In response to a question about the relatively high premium that Galapagos is paying for Inpharmatica on a revenue basis compared to DPI, von de Stolpe noted that DPI was a “fire sale” situation.
 
From 3D to ADME
 
Inpharmatica’s business model has changed quite a bit since it was founded in 1998 to commercialize 3D protein structural analysis technology developed by Janet Thornton, then a professor at University College London and currently director of the European Bioinformatics Institute.
 

“There’s a halo effect that we’re able to generate by having Inpharmatica included in our portfolio of offerings.”

Since then, the firm has raised a total £49 million ($95.8 million) in venture capital funding and has steadily expanded its scope beyond protein annotation toward cheminformatics and ADME.
 
Biopendium, a protein-annotation database once considered the company’s core offering, is “not a flagship product for us these days,” CEO Lisle told BioInform this week. Indeed, Galapagos officials did not even mention Biopendium among Inpharmatica’s offerings during the conference call, choosing to focus their attention on the firm’s Admensa and Chematica products.
 
Admensa is a two-pronged offering: Admensa Interactive, an informatics product that includes a database of predicted ADME properties for compounds; and Admensa Laboratory, a set of in vitro ADME assays and in vivo pharmacokinetic experiments.
 
Chematica includes three components: Starlite, a database of structure-activity relationship data; Sarfari, a database of protein structures, ligands, and compounds; and DrugStore, a database of information on all FDA-approved drugs.
 
Galapagos CFO David Smith said that Inpharmatica has between 30 and 35 customers for these products. He said that Chematica agreements are generally 90 percent services and 10 percent database and software licenses, while Admensa deals are 65 percent services and 35 percent product licenses.
 
Smith said that Inpharmatica’s ADME capabilities should be particularly important for the BioFocus DPI services business. He cited a recent example in which the firm was in discussions with a major pharmaceutical company regarding a potential agreement, but was unable to close the deal because of its relatively “weak” ADME offering.
 
“We had only four employees in ADME,” he said, “and the pharma said, ‘Well, that’s a bit of a shame because we’d like to give you a collaborative deal where we will use not just the ADME part of your business, but we would also want to use other parts of the business, such as the chemistry.’”
 
The Inpharmatica acquisition “immediately shores up this potential weakness that we had in the eyes of this particular customer,” Smith said. He added that the ADME portion of that deal would have only been 20 percent of the total agreement, “so there’s a halo effect that we’re able to generate by having Inpharmatica included in our portfolio of offerings.”

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