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How Much is that Lion in the Window? On the Block, Value of Firm is Unclear

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Lion Bioscience confirmed last Wednesday that it plans to sell its bioinformatics business, kicking off what will likely turn out to be a closely watched bidding war for the company's assets.

BioInform spoke to a number of sources familiar with the deal last week, who all agreed that pinning a price on the company's bioinformatics software assets will be tricky. Lion's revenues have been declining steadily over the last three years (see chart, below), future sales prospects for its flagship SRS technology are uncertain, and, as one observer noted, no one knows what "skeletons in the closet" may surface during the due diligence process.

In addition, Lion's €25 million ($33 million) in remaining cash will not be part of the sale. Peter Willinger, Lion's CFO, told BioInform last week that the sale would proceed along the same lines as a new corporate structure approved by shareholders at a March 24 meeting [BioInform 03-21-05] . Under that plan, Lion would create a holding company based in Heidelberg, Germany, that would invest whatever cash remained after the sale. Any sale would involve only the "bioinformatics entity," which includes technology assets, contracts, and bioinformatics staff based in Cambridge, UK, and in Heidelberg.

Lion's board had previously recommended a management buyout for this portion of the business, to be led by Thure Etzold, SRS developer and current CEO of the company. Last week, in order to eliminate any potential conflict of interest at the bargaining table, Lion said that Etzold would step down from the board.

Willinger said that the management buyout "is definitely still a valid option for us," adding that it's been "deferred" while the company considers other offers. While he declined to disclose which companies have made a bid for Lion's assets, he confirmed that there were more parties involved than the two venture capital firms — FM Funds and Zapis Capital — that initially expressed interest in purchasing the assets at last month's shareholder meeting [BioInform 03-28-05].

The interest of other parties is certain to ratchet up the proposed purchase price of €680,000 ($890,000) that Lion's board had set for the MBO. Willinger told BioInform that any MBO offer "has to be compared and it has to be competitive" with the offers from other parties.

Willinger said that "due to the fact that we want to get the offers from interested parties, we don't want to announce" a target price for the bioinformatics assets.

He said that the company is preparing to arrange due diligence right now, "and I think that through this process, when the first numbers are on the table, then we could say whether it's in the range of what we think is a fair price, or if we think it's definitely out of range."

Ultimately, he said, "we hopefully will have different options — three or four offers, including the MBO — and the management will have to decide which is the best option for our shareholders."

The company hopes to have the purchase finalized by September.

The Price Tag

Valuations for bioinformatics companies have declined steadily since the high-water mark of 2001, when Merck acquired Rosetta Inpharmatics in a deal valued at $620 million. The two most recent high-profile acquisitions in the bioinformatics sector — Agilent's purchase of Silicon Genetics and Accelrys' acquisition of SciTegic — were both in the $20 million range (see table, below).

But several people that BioInform spoke to last week doubted whether Lion would be able to fetch that much for its SRS business. A common rule of thumb for company valuations — twice the company's annual revenues — could put Lion's asking as high as €20 million, based on its projected revenues of €8 million to €10 million for the fiscal year ended March 31. But several factors may bring that price down into the single-digit millions, some observers said.

A former executive of a publicly traded bioinformatics firm, who spoke on the condition of anonymity because his current employer is a business partner of Lion's, said he would be "very surprised" if the selling price is above $10 million. The company's declining revenues, combined with the fact that its customer base for SRS appears to be tapped out, point toward a single-digit million purchase price, he said.

Klaus Schneider, chairman of Germany's Association for the Protection of Shareholders (Schutzgemeinschaft der Kapitalanleger, or SdK), which recommended in March that Lion shareholders vote against the proposed restructuring, hesitated to pin a price on the firm.

Noting that SdK would prefer liquidation over the restructuring for Lion, he said that the plan to sell the assets to an outside party is a better option than the management buyout. Such a sale, "on an auction basis," could "give us an indication of where the correct valuation of the company is, but we have no concrete idea of how much it would be worth," he said.

The range of €16 million to €20 million — twice Lion's current revenues — would be fair, he said, "depending on the detailed circumstances, but roughly, we would agree" to a sale at that price.

Gordon Wilson, of life science investment bank Madison Keats, said that while Madison Keats is not directly involved in the Lion transaction, it's likely that any agreement "will likely not constitute a large up-front payment. Rather, he said, a sale will probably include terms that are "tied to the future performance" of Lion's bioinformatics business, in order to mitigate the risks for both parties.

Several people that BioInform spoke to noted that the final value of the company will ultimately depend on the buyer. As Jim Matheson of Flagship Ventures explained, "it depends on the lens through which you see the business through." The business goals — and purchase price — for an equity investment firm would be very different from Lion's management team, or from a life science tools provider, for example, because the amount of additional investment that these different parties would have to put into the company following the acquisition would vary.

Who's Shopping?

Richard Bongorno, a principal with Zapis Capital, confirmed last week that his firm is still interested in purchasing Lion's bioinformatics assets. Zapis has invested an undisclosed sum in Lucidyx, a bioinformatics firm founded by Manuel Glynias, founder and CEO of NetGenics, which Lion acquired for $17 million in 2002.

Bongorno said that if the acquisition goes through, Zapis would combine Lion's assets with those of Lucidyx "in some fashion," although he said the details for how that would be done have not yet been worked out.

So far, Bongorno said, the company has "done no due diligence to ascertain a value for Lion's assets," so he was unwilling to discuss a possible purchase price. However, he said, while revenue is a "factor" in the asking price, it's "not the controlling factor." For any company, he said, the true valuation "is a function of its potential profitability."

It is still unclear what other firms may be interested in purchasing Lion's assets, although the list of potential candidates is broad. Lion's SRS technology — and existing customer base — could be of interest to a small software company looking to add the product to its own portfolio, or to a larger firm seeking a means of entering the integration services market. Possibilities range from privately held competitors like Biomax, which sells a product similar to SRS called BioRS, to larger informatics companies like Accelrys, to multi-platform vendors like Agilent or Applied Biosystems, or even IT firms like IBM.

Hein Paul Osenberg, Biomax's CFO, declined to comment on whether his firm would be bidding on Lion's assets. However, he said, the fact that several companies made unsolicited offers for Lion's assets is good news for the bioinformatics sector in general, because "it's a sign that there's interest in the marketplace for that kind of software."

Lion's Willinger said that the company has a number of possible options for a sale. "I think we're in a good position due to the fact that SRS has a very large customer base, which includes more or less all the big pharma companies, and with the technology itself, which is well known in business and in academia, so we feel quite comfortable that a lot of structures are reasonable."

— BT

Bioinformatics M&A Deals, 2004-2005
Date Buyer Acquisition
Value
Terms
March
2004
Paradigm Genetics
(now Icoria)
TissueInformatics
$4.5M
Stock (3.4 million shares at $1.33, plus another 2.7 million shares if TissueInformatics reaches certain revenue and research targets)
October
2004
Agilent Technologies Silicon Genetics
$19M
All-stock (771,573 shares at $24.80)
November
2004
BioImagene SciMagix
undisclosed
Equity transaction
September 2004 Accelrys Scitegic
$21.5M
Cash and stock
($13 million cash and 1,040,119 shares at $5.65)
January
2005
Tripos Optive Research
$7.9M
Cash and stock ($4.75 million in cash and 599,521 shares at $5.31)
January
2005
Biobase Proteome (subsidiary
of Incyte)
undisclosed
Financed through private equity firm Avida
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