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GE Healthcare Deal, Q2 Revenue Growth Drive Gene Logic Shares to 52-Week High


Shares in Gene Logic climbed nearly 27 percent over two days last week in the wake of a bioinformatics distribution agreement with GE Healthcare and a positive second-quarter earnings report.

On Tuesday, Gene Logic said that GE Healthcare would market its new Sciantis web-based gene expression analysis system in 32 countries, including Japan, where GE will serve as the exclusive distributor for the product. The news drove the company's shares up by almost 9 percent during the day to close at $3.94.

The following day, Gene Logic posted revenues of $20.1 million for the quarter ended June 30 — up 8 percent from $18.6 million during year-ago quarter — and reported that its genomics business had reached profitability for the second consecutive quarter. The company's stock soared another 16 percent to close at a 52-week high of $4.58 — surpassing the $4 mark for the first time since July 9, 2004.

Shares continued to inch upward through the week. At press time Friday morning, Gene Logic shares were trading at $4.79.

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The company is hoping that the positive momentum will continue. In a conference call to discuss the second-quarter financial results, Gene Logic CEO Mark Gessler said that the firm is "on track to achieve 10-percent revenue growth in 2005" and to reach company-wide profitability in 2007.

To do so, Gene Logic is counting on an expanding market for its core genomics data products, as well as steady progress in the other two, more recent, components of its business model: contract research services and drug repositioning. The company entered the former market with its acquisition of TherImmune in 2003, and the latter with its purchase of Millennium Pharmaceuticals' Horizon group a year ago.

These newer businesses have yet to make much of an impact on Gene Logic's top line, however. Contract research service revenues of $5.8 million made up only 29 percent of the company's total revenues for the quarter, and were 2 percent behind the $5.9 million recorded for the same quarter of 2004. Drug repositioning, meanwhile, brought in only $147,000 during the quarter.

The bulk of Gene Logic's revenue still comes from its traditional genomics and toxicogenomics services unit, which was formerly called its information business. This unit brought in $14.2 million, or 71 percent of the company's total revenues, in the quarter — a 12-percent increase over $12.7 million in the year-ago quarter.

Even with its expanding business model, Gene Logic will need sustained growth in its genomics business to achieve the 10 percent company-wide revenue growth for 2005 and profitability by 2007 that Gessler promises.

The Sciantis distribution deal with GE Healthcare is expected to help accomplish this in several ways, Gessler told BioInform in an interview following the conference call. Most notably, he said, the Sciantis deal represents "a new product, a new market, and a new distributor relationship for us." Gessler said the agreement will give Gene Logic a presence in new geographic markets as well as in the academic, government, and non-profit sector — an entirely new customer base for Gene Logic. The company has historically focused on selling multi-year, multi-million-dollar database subscriptions to large pharmaceutical firms.

Gessler has said for some time that the company would have to look beyond pharma in order to grow its informatics business. As part of this strategy, Gene Logic released Ascenta, a reduced-price subset of its BioExpress database, in 2003 in an effort to attract small to mid-sized biotech customers [BioInform 09-29-03].

Gene Logic has followed on this strategy with Sciantis, which Gessler described as "a subset of the data that has been in BioExpress and Ascenta," along with visualization and analytical tools. The company will host the service from its Gaithersburg, Md., headquarters, and will provide support and continued development, while GE Healthcare will assume sales and marketing responsibility, Gessler said.

Gessler declined to provide pricing information on the online system, but the GE Healthcare website lists the price as $3,500 per user.

A GE Healthcare representative could not be reached to confirm this information before press time.

The distribution deal is the first for Gene Logic outside of Japan, and builds on a previous pact the company penned with Amersham Biosciences. In 2000, Gene Logic entered into a distribution agreement with Amersham for its informatics products in Japan. The company then turned to Japanese informatics distributor CTC Laboratory Systems when GE acquired Amersham, and has now come full circle by teaming with GE Healthcare.

"We just don't have the product-line breadth in that academic market where it would make sense for us to build a sales force to go out there and target that group."

As Gene Logic took steps to enter the academic market, it became clear that it would have to align with a distributor, Gessler said. "We just don't have the ability with our sales force to cover that much ground. [...] Our core competency has been focused really on the top pharma and biotech companies in the United States," he said. "We just don't have the product-line breadth in that academic market where it would make sense for us to build a sales force to go out there and target that group."

But entering new markets is not without its drawbacks. For one thing, as the company has broadened its pricing and licensing models, "the number of transactions has increased, and the amount of each transaction varies more than in our traditional subscription model," Gessler said during the conference call. "This may lead to revenue flow that is a bit less predictable quarter to quarter than it had been when we were primarily a subscription business." However, he said, "We believe that this will smooth out over time as we increase our client base."

The company signed on seven new customers in its genomics business in the second quarter, and 16 new customers for the first six months of the year — a record for a six-month period, according to Gessler.

Gene Logic expects total revenues of $83.5 million to $85.5 million for the 2005 fiscal year, which would be an increase of between 9.8 percent and 12 percent over 2004. The company did not provide revenue estimates for its individual business units, but Ted Tenthoff, a senior research analyst at Piper Jaffray, has projected that the company will generate $83.2 million in total revenues for the year — a 9.4-percent increase over 2004 — while the genomics group will contribute $56.4 million, which would represent 8-percent growth year over year.

Piper Jaffray also increased the company's share price target from $3.10 to $5. "Business appears to be turning and we have increased confidence in our numbers," Tenthoff wrote in a research note.

— Bernadette Toner ([email protected])

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