Genomica Dumps Staff and Software to Appease Shareholders in Exelixis Deal

Within a matter of weeks, Genomica laid off two-thirds of its staff, adopted a shareholder rights plan to stave off a hostile takeover, and reported a six percent drop in its third-quarter earnings — so news of the company’s impending acquisition by Exelixis shouldn’t have come as a huge surprise to anyone.

Just over a year ago, Boulder, Colo.-based Genomica served as a prime example of the IPO boom in the bioinformatics sector, raising $122 million in its initial public offering on the Nasdaq. Now it looks like the company’s employees and software customers will be the victims of that remarkable success, since the $110 million stock-for-stock transaction will net Exelixis approximately the same amount in Genomica’s remaining cash, while most of its remaining employees will be let go and its software business will be abandoned.

But just as Genomica’s monstrous IPO served as a prime example of the market’s fervor for bioinformatics and genomics a year ago, the company’s recent history makes it a poster child for the waning enthusiasm witnessed in recent months. Informax, which also went public in last year’s frenzy, is currently trading below cash, while other public bioinformatics companies are trading very close to their 52-week lows. Rosetta Inpharmatics, another 2000 IPO, was acquired by Merck earlier this year (see chart on p. 8).

In a conference call to discuss the acquisition, Exelixis CEO George Scangos stressed that he does not plan to continue commercial sales of Genomica’s products and said that he is more interested in the company’s assets, which comprised $113.1 million in cash, cash equivalents, and investments as of September 30.

“We do not intend to get into the software business,” said Scangos. “The two things that are interesting to Exelixis out of this transaction are the cash balance that Genomica has and the software for our internal use.”

Scangos said the company is “exploring third-party options” for continuing the software business, “but we’re not counting on that.”

Exelixis CFO Glen Sato told BioInform that the Genomica management team had “already started down the path” on several discussions regarding third-party commercialization of its products.

Genomica CFO Dan Hudspeth said further details of the company’s intentions in this area could not be discussed until it files its Solicitation/Recommendation statement on Schedule 14D-9 with the Securities and Exchange Commission on November 27.

Further Layoffs Expected

Following the acquisition, which is expected to close on or about December 27, Genomica will merge with a subsidiary of Exelixis, although it’s unlikely that much of the company’s remaining staff will be staying on.

Scangos said that “a small number” of employees might be brought to Exelixis, which is based in South San Francisco, Calif. “We do not intend to hire a substantial number of [Genomica employees],” he said.

None of the Genomica management team is expected to remain following the acquisition.

Genomica’s existing customer contracts “will be honored,” said Sato, who added that no long-term contracts remain, and the “last obligation” expires in June 2002. Genomica’s current customers include AstraZeneca, GlaxoSmith-Kline, Aventis Pharma, and the National Cancer Institute.

Genomica CEO Teresa Ayers said, “It’s our intent to fulfill all of our obligations to these customers under their existing contracts and we will be discussing how to transition them smoothly from our product into the next version of the product or into other choices that they may have.”

Genomica’s current strategic alliances with Applied Biosystems and Celera will also be supported, Sato said, but was unable to provide further details. Applied Biosystems purchased a $3 million equity stake in Genomica in September 2000. The role this stake may play in any upcoming discussions remained unclear as BioInform went to press.

The $110 Million Sales Call

The acquisition agreement had its beginnings when Genomica approached Exelixis to pitch its software, Sato said, “and that’s where we started our discussions.”

Scangos said that Exelixis intends to use Discovery Manager to manage human data during the clinical development of its compounds. “The software is very good for handling data in human populations and as we go to the clinic now we expect the software to be useful as we go forward,” he said.

Scangos noted, however, that, “the software would be most useful if it were written in Java, which it is not right now.” While much of it has been ported already, some work remains before the company will deem it useful for its internal purposes.

Exelixis currently supports a bioinformatics staff of around 12 people. Genomica’s software will complement Exelixis’ current bioinformatics tools by serving as the “next leg of our development platform,” Sato said.

Sato said there was little financial temptation for Exelixis to follow the model of Merck’s acquisition of Rosetta Inpharmatics earlier this year, which resulted in the creation of a separate Rosetta BioSoftware unit to handle continuing commercial sales.

“You’re talking about a software business that generates $1 million to $2 million in revenue. Is it a principal part of the business? No. We’re a $40 million-plus revenue business this year, so it would be a small component no matter what.”

Sato stressed, however, that there might be plenty of opportunity for third parties with experience in the software business and an established customer base. “We do bioinformatics for our internal use and don’t have customers in that space, so we wouldn’t profess to be able to build this business in a way that would compete with the companies out there already,” he said.

— BT