Investors Beam as Tripos Discloses Plan to Seek Strategic Alternatives, Pens $5M Deal with Wyeth

Shares in Tripos began to climb this week following news that the company had hired a financial advisor to help it "explore various strategic alternatives," and continued their ascent after the company disclosed an informatics collaboration with Wyeth Pharmaceuticals worth approximately $5 million.

At press time, the company's stock had risen 28.4 percent over the course of the week — a welcome boost after several years of lackluster performance.

Shareholders reacted positively to the company's decision to reconsider its options, which include "mergers and acquisitions, becoming a private company, and separating its informatics and research businesses," according to a statement.

Russell Piazza, senior vice president of investments at PiperJaffray, a Tripos shareholder, said that the company is currently facing "a challenge" regarding "these two businesses that are somewhat not co-dependent. I think that's the purpose for laying everything on the table and seeing what they can or can't do."

Tripos, headquartered in St. Louis, Mo., retained the services of San Francisco-based Seven Hills Partners for this task — the same firm that advised the company during its $8 million acquisition of Optive Research last year [BioInform 01-10-05].

Gary Siperstein of Eliot Rose Asset Management, which owns about 1.8 million Tripos shares, said that Tripos' prior experience with Seven Hills, coupled with the advisory firm's presence in the Bay area biotech hub, "could bode well for maximizing the value" of the company.

On the heels of that agreement, Tripos announced that Wyeth would use its SMART-IDEA (Structure Modeling Analysis Research Tool Integrating Data for Experimental Analysis) integration technology as the basis for a new IT infrastructure that will support Wyeth's worldwide discovery research team.

Tripos said it expects to receive around $5 million in software license and professional service fees from Wyeth over the next 12 to 18 months. The first phase of the framework is expected to be deployed in the fall (see sidebar, below, for further details on the Wyeth project).

The deal was the first agreement that Tripos disclosed since its November announcement that Pfizer had decided to end a four-year file-enrichment collaboration that had brought around $90 million into its Bude, UK-based Discovery Research group [BioInform 11-28-05].

Investors welcomed the announcement as a sign that the Discovery Informatics business remains healthy, despite the setback on the Discovery Research side of the business. "The size of this order [shows that] there's a real market opportunity there," Piazza said, adding that large pharmaceutical firms have "kind of struggled with where to spend their resources over the last year and a half, and maybe [this] announcement indicates that they're starting to get some priorities as to where to spend their resources."

'Ridiculously Undervalued'

Tripos shares hit at an all-time high of $34.40 on Jan. 2, 2002, but plummeted from $21.80 to $8.53 overnight when the company cut its 2002 revenue estimates by around 12 percent on July 1 of that year [BioInform 07-08-02].

The company's share price never recovered: It hasn't broken the $10 mark since, and spent most of 2005 below $5 (see chart, below).

This week's announcements appear to have emboldened investors, however. On word of the agreement with Seven Hills, the company's shares closed up 7 percent on Jan. 9, and the Wyeth announcement on Jan. 11 drove the price up another 9.5 percent, to close at $3.68. Shares continued to rise the following day, closing at $3.89 (see chart, below).

Regarding the history of the company's share price, Siperstein conceded that "maybe it was overdone on the upside at $30, but it was way overdone on the downside at 3 bucks." He added that the company is currently "ridiculously undervalued," with a market cap of $39.4 million, which he estimated to be "less than the value of [Tripos'] real estate alone, less than the value of the software company alone, and less than the value of the discovery research and intellectual property alone."

This yawning gap between the company's various assets and its market value led to the decision to hire Seven Hills. Investors "tend to be focused on a specific business segment, and when you combine business segments it's a harder story to explain and exemplify," John McAlister, Tripos CEO, told BioInform.

While he declined to reveal too many details about the specific options that Tripos management is mulling, McAlister said that moving to privately held status could offer a number of benefits, and cited the Sarbanes Oxley requirements as a particular challenge if it remains publicly traded.

"Clearly, as a relatively small company in the public sector, the burdens of that for us are enormous in time and in money. I think we're spending well over $2 million a year just in Sarbanes Oxley compliance activities these days," he said. "I think that for many companies that are our size, and even larger, this is a tremendous burden that makes it very difficult to justify, unless you're gaining a substantial benefit from being a public company, and we just don't think the trade-off is there."

McAlister said that Tripos management had "anticipated" a reevaluation of its strategy even before Pfizer confirmed that it would not renew its contract. "We've been looking at this for some time, and certainly we took into account the timing of any such announcements regarding any other activities that were ongoing," he said, "but I believe it's inevitable that we would have taken this action, because we just don't see the share price of any company responding these days the way it has in the past to single announcements — regardless of their magnitude."

Tripos warned in November that it may have to lay off employees at the UK chemistry facility [BioInform 11-28-05], and confirmed those plans in mid-December [BioInform 12-26-05]. But it appears that belt-tightening may not be enough to keep Tripos' current two-pronged business model afloat.

The Discovery Research segment has contributed a good portion to the company's top line over the last few years, and made up nearly half of the company's total revenues in 2004 (see chart, below). But the Pfizer file-enrichment project was responsible for 80 percent of that business — $90 million of the $113 million that the Discovery Research group generated during that four-year period.

On the software side of the equation, revenues have been relatively stable, but growth has been elusive. The company picked up Optive Research last January, expecting the new business to contribute "incremental revenue" in the "low single-digit millions."

So far, the acquisition has generated mixed results. Tripos posted a 6.6-percent decline in software revenues for the first quarter following the sale, a 6-percent decline in software revenues in the second quarter, and a 10-percent increase in software revenues in the third quarter, which it attributed to a number of new products — including the Benchware line of laboratory research software based on technology from the Optive acquisition [BioInform 10-31-05].

McAlister declined to comment on the likelihood that Tripos would divest the Discovery Research group and retain the Discovery Informatics group, but the Wyeth agreement could serve as an indicator that the company will indeed pursue that path.

"Since they lost the Pfizer contract, they have to do something in the UK," Piazza said. "It may be better for everyone involved, including the employees, if they sold that piece of the business, or joint-ventured it to somebody — all the options — because it's an awesome state-of-the-art facility that's worth a tremendous amount of money."

Siperstein said that Tripos has a number of promising options, including a "combination" that involves going private, selling off one or more pieces of the company, and possibly bringing just the software company or the discovery research group public. "Or if you can find the right buyers, you can just sell them off now, so the company can go in either direction," he said.

"I just hope if they choose to go private, that they do it at a fair price to the shareholders, because I think the pieces are worth a lot more" than their current value, he said.

McAlister stressed that there is "no guarantee" that Tripos will make any changes at all as a result of the agreement with Seven Hills. "We think it's prudent to at least look at the options at this point," he said. The evaluation is expected to take several months, he said, "and we have no expectations of the outcome at this point."

— Bernadette Toner ([email protected])