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Informatics Sector Struggles in Q4 03: Firms Adjust Strategies Amid Falling Revenues


Last week’s quarterly earnings reports for publicly traded informatics firms reflected the breadth of tactics available to companies struggling to stay afloat in an inhospitable economic climate that shows little sign of short-term recovery.

Incyte, for example, announced plans to shed its Palo Alto, Calif.-based genomics and information business facility, laying off 257 employees, or 57 percent of its staff, as it devotes nearly all of its remaining resources to its drug discovery and development activities in Wilmington, Del. The sole survivor of the company’s information business is its Beverly, Mass.-based Proteome subsidiary, which employs 35 people and is cash-flow positive, according to the company.

In Compugen’s case, the sale of hardware, software and databases is “no longer the focus of our company,” according to CFO Nurit Benjamini. The company has embarked upon a new commercialization strategy focused around its in-house “discovery engines,” she added, with the goal of “downstream participation in the products discovered through their use.”

Lion Bioscience, meanwhile, said it plans to pull back on promoting its Lion Discovery Center integration platform, because “we’re seeing a very huge resistance currently from the market to move into such [large-scale] systems,” said Daniel Keesman, Lion’s CBO. Instead, he said, the company is focusing its marketing efforts on lighter-weight products like SRS, “because the resistance in the market is smaller for such a smaller piece compared to the broad piece.”

Finally, Accelrys, which laid off 50 R&D employees from its San Diego headquarters in January [Bioinform 01-19-04], will “more than offset” those lost jobs by new hires at the company’s Cambridge, UK, and Bangalore, India, sites, according to Mark Emkjer, president of the Pharmacopeia software subsidiary. The company’s quarterly revenues increased modestly year-over-year, but not without a struggle, Emkjer said: Reduced budgets in biopharmaceutical R&D, coupled with more aggressive pricing from competitors, forced Accelrys to provide its customers with “larger than usual discounts” in order to close its sales.

Details of the company’s quarterly earnings reports follow:

Incyte: The End of an Era

Incyte, which reported its fourth-quarter earnings on Feb. 2, has effectively eliminated all traces of its prior business model by shuttering its former headquarters in Palo Alto. The company said in November that it was weighing its options with regard to the information business, and was looking into selling it. [BioInform 11-10-03]

John Keller, Incyte’s CBO, who has led the information business unit since he joined the company in September, said that Incyte “will continue to explore options for the sale of our information product line,” but “given the realities of the genomic information product marketplace, and the difficulty of predicting the probability of success, timing, or economics of these efforts, we have not assumed any proceeds from such sales in our 2004 cash projections.”

Keller said that the company’s decision to focus its resources on drug discovery and development left it little choice but to shut down the Palo Alto operations. The company has dropped its LifeSeq and ZooSeq products, and has retained only those information product-related activities “that have the immediate potential to make a positive cash contribution to Incyte,” he said. These include the Proteome subsidiary’s BioKnowledge Library product, Incyte’s gene-related IP portfolio, and “the potential milestone and royalty obligations of current and past LifeSeq subscribers.”

In August [BioInform 08-04-03] , Incyte attempted to rejuvenate the Palo Alto information business by consolidating LifeSeq, ZooSeq, and the BioKnowledge Library into a single, value-added “biocuration” product. Plans for this effort were abandoned, however, because it “would have required a large, high-risk investment to realize this vision, and … there are no guarantees that the market would be sufficiently receptive to justify this investment,” Keller said.

As for current subscribers to ZooSeq and to LifeSeq, Keller said, “we will be working closely with them very shortly to assure that they are comfortable with our decision.”

Incyte posted revenues of $10.3 million for the quarter ended Dec. 31, 2003, down by 50 percent compared to the prior-year quarter. For the fiscal year, Incyte’s revenues were $47.1 million for 2003, compared to $101.6 million in 2002. The company expects its 2004 revenues to be in the range of $7 million to $9 million.

The company’s quarterly net loss narrowed year over year, at $40.8 million for the fourth quarter of 2003 and $67.5 million for the same period of 2002. Incyte’s full-year net loss widened, however, at $166.5 million for 2003 and $136.9 million for 2002.

Incyte’s R&D spending dropped to $27.8 million in the fourth quarter from $33.6 million in the year-ago period. The company spent $116.2 million on R&D for the 2003 fiscal year, up from $152.4 million in 2002.

As of Dec. 31, 2003, Incyte had $293.8 million in cash, cash equivalents, and marketable securities on hand, compared to $429.0 million at the close of 2002.

Compugen: Shopping out In-House Technology

Compugen, which reported its fourth-quarter and year-end results on Feb. 4, is pinning its future financial success on its ability to partner out the “discovery engine” technology that it has used to build its own pipeline of potential therapeutic proteins.

Mor Amitai, Compugen’s CEO, described one such discovery engine — a therapeutic protein variant engine — during a conference call to discuss the company’s quarterly earnings. The therapeutic protein variant engine, he said, “identifies novel splice variants of proteins that are known to have a therapeutic utility by combining knowledge from our unique transcriptome model with information about therapeutic proteins that are now in the marketplace or in development by others.” This engine was used to discover six new therapeutic protein candidates that will join the company’s pipeline this year, he said.

So far, the company has used these engines solely for its internal research, but “at the present time, we are evaluating various formats for collaborations based on these and other engines,” said Benjamini. Compugen also plans to expand outlicensing of discoveries it doesn’t wish to pursue itself, she said.

For the fourth quarter of 2003, Compugen’s revenues dropped to $1.4 million from $2.7 million in the year-ago period. The company posted a decrease in full-year revenue, as well, with $8.8 million for 2003, compared to $11.1 million in 2002. Compugen forecast revenues of $5 million for 2004.

Compugen’s R&D expenses were $3.3 million for the fourth quarter of 2003, down slightly from $3.6 million in the year-ago period; and $13.0 million and $13.6 million for the full year 2003 and 2002, respectively.

The company’s net loss widened for the quarter — to $3.5 million in the fourth quarter of 2003 compared to $3.2 million in the same period of 2002. For the full year, the company posted a net loss of $11.4 million in 2003, compared to $12.2 million in 2002.

As of Dec. 31, 2003, Compugen’s cash, cash equivalents, short-term cash deposits, and marketable securities totaled $16.7 million, down from $48.4 million at the close of 2002.

Lion: Accounting Changes and the Pending Closure of LBRI

Due to a recent change in its accounting practice — in which it will now recognize revenue from software licenses ratably over the term of the contract, rather than upon delivery of the software — Lion reported only preliminary earnings for the third quarter of its current fiscal year, which ended Dec. 31.

The company had already changed its recognition for annual licenses on a forward-looking basis, but “our auditors informed us that our revenue recognition policy also for multi-year licenses did not seem to be appropriate anymore, and suggested that we assess the situation,” said Martin Hollenhorst, CFO. Therefore, the company will have to restate its results for prior fiscal years. Hollenhorst said the company expects to release its final quarterly earnings, as well as its guidance for the year ahead, by the end of February.

As a result of the change, the company expects to see increased revenues for the current fiscal year, and reduced revenues for prior years. “This is by no means window-dressing,” said Hollenhorst. “No company wants to file a restatement, but when an error or change in position is detected and is deemed to be material, we have absolutely no choice.”

In addition, the company said it no longer expects to reach its goal of break-even by the end of its fourth fiscal quarter, which ends March 31.

In a further blow, Hollenhorst said that Bayer has decided not to renew Lion’s LBRI collaboration in Cambridge, Mass., which will lead to a further reduction in staff by about 30 people before the end of the year, bringing the company’s total headcount to 150. Hollenhorst noted, however, that Lion is still in “very constructive discussions” with Bayer regarding other aspects of their collaboration.

On the product sales front, Keesman said the company is still seeing “a very hesitative investment environment in the pharma industry, particularly for IT investments, and particularly in the very early discovery phase.” In addition to slow sales for Lion Discovery Center, the company is seeing a delayed sales cycle for its other platform product, Lion Target Engine. The 6-12 month sales cycle that the company was originally expecting has been extended to 12-18 months, Keesman said, adding that the company has closed one LTE deal that has not yet been announced.

Lion reported preliminary revenues of €6 million ($7.5 million) for the quarter, down from €8.5 million the year before.

The company’s net loss is expected to be €6.1 million, down dramatically from €22 million for the same period last year.

As of Dec. 31, Lion had cash, cash equivalents, and marketable securities of €48.1 million.

Accelrys: ‘03 Revenues Up, but Accounting-Based Drop in ‘04

Accelrys also embarked upon a new accounting strategy in January that recognizes its software revenues over the length of the license term [BioInform 11-10-03]. As a result, its reported revenues will be “significantly lower” for the current quarter and its 2005 fiscal year, while deferred revenues will be higher, Emkjer said.

In the meantime, however, the software unit of Pharmacopeia enjoyed a slight boost in revenues for the quarter ended Dec. 31, 2003 — up modestly to $31.6 million from $31.2 million in the year-ago period.

The company’s annual revenues dropped, however, to $85.6 million in 2003 from $95.1 million in 2002.

Emkjer said that Accelrys signed “substantial” agreements during the quarter with Pfizer, GlaxoSmithKline, Johnson & Johnson, and Bristol-Myers Squibb.

Joseph Mollica, Pharmacopeia CEO, said that the proposed spin-off of PPD, Pharmacopeia’s drug discovery business, is “progressing in line with our expectations.” The spin-off, which will make Accelrys a standalone software unit, is on track to close before the end of the current quarter, he said.

— BT


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