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Lion Dumps Discovery Unit, Fine-Tunes Strategy to Penetrate Top-Tier Pharma

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The business model shuffle continues in the bioinformatics sector, with the latest move coming from Lion Bioscience.

After fruitlessly shopping its iD3 drug-discovery business around to potential buyers for three months, the company has bitten the bullet and dissolved the unit completely, vowing to become a market success on the strength of its life science IT solutions alone.

This move was hailed as a promising step in the right direction by industry watchers, but skepticism lingers about the company’s ability to succeed solely on informatics.

Lion said it would shutter its discovery facilities in Heidelberg and San Diego and let go 45 and 41 staffers at the two sites, respectively, by the end of the year. The move will cut the company's burn rate by up to $20 million annually beginning in January 2003, and will help keep it on track to reach break-even by the end of its 2004 fiscal year.

Lion said the iD3 unit contributed 17 percent of its €40.3 million in revenues in FY 2002, but added that it expects to make this future loss up with increased software licensing activity.

The belt-tightening decision may seem counter-intuitive in an investment climate that has driven other firms to downplay their platform businesses in favor of discovery’s higher upside potential. But CEO Friedrich von Bohlen said Lion's investors were sending a different message: “It’s better to focus on fewer things, to focus on who we are and where we want to go,” he said at the company’s first US Investor Day, held in New York last week.

Von Bohlen noted that the risks — and costs — associated with discovery often outweigh the potential rewards. “Drug discovery is great if you win,” he said, “but the likelihood you’ll win is not very high.”

Pledging to refocus on its core business of life science informatics “and nothing else,” von Bohlen and Lion’s executive management team outlined the company’s revamped strategy for accelerating sales over the next three years.

Painful Assessment, Tough Decisions

It was clear that the company has done a fair bit of soul searching recently. Aside from discontinuing its discovery operations, Lion conceded that the window of opportunity for signing a deal equivalent to the $125 million collaboration it signed with Bayer three years ago has all but closed.

In addition, the company has gone over its product portfolio with a fine-toothed comb, culling out poorly performing offerings to rebuild its solution base around a core of successful products — SRS, BioScout, and its iDEA ADME-Tox prediction technology.

SRS will continue to be available separately, and will also be available as part of the newly launched Lion Discovery Center, the marriage of SRS with the cheminformatics integration capabilities Lion picked up in its acquisition of NetGenics.

Several of Lion’s vertical applications — ArrayScout, PathScout, PiScout, and GenomeScout — have been pulled off the market completely. Capabilities from these products, along with technology developed in the Bayer partnership, will be folded into a broad vertical solution — dubbed Target Engine — that will be released in the second quarter of 2003. BioScout will remain available as a standalone product as well as a component of the Target Engine offering.

Lion said it would support the discontinued Scout products for the next two years as it weans customers off the individual solutions onto the Target Engine platform at their own pace.

“This is a suspicious market and we want customers to know that we’re a trustworthy company,” said Daniel Keesman, Lion’s chief business officer.

An additional chemistry vertical solution, called Lead Engine, will be built upon the iDEA technology and is scheduled for release in the third quarter of 2003.

The result, according to Keesman, is a new middle ground in what the marketplace had previously perceived as an all-or-nothing solution. “Customers saw either a $50,000 SRS license or a $100,000 million iBiology deal like Bayer,” he said. The new approach will allow customers to pick and choose components of the iBiology solution in a modular way, allowing Lion to ease its customers toward similarly sized solutions in manageable steps.

“I’d prefer 20 deals at $1 million rather than one deal at $20 million,” said Keesman, citing the potential for evolving those smaller agreements into full-blown partnerships over a two- to three-year time frame.

The company has also taken a long, hard look at its potential customer base and restructured its sales organization to capture what it sees as the meat of the market — the top 20 to 30 pharmaceutical firms responsible for over 70 percent of the sector’s R&D spending. Seven global account executives will divvy up that top-tier target market, while a regional sales fleet will handle the secondary market of smaller pharmas and biotechs.

Lion hopes to build on its existing customer base for SRS and BioScout, putting several integration platform and Target Engine pilots in place over the next few years, and eventually expanding usage of Lion’s suite of products within each organization to reach the equivalent scope and price structure of an iBiology deal.

Pricing will be based on a per-user model. Lion has seen a significant boost in revenues over the last year by modifying its SRS licensing strategy in line with this approach, Keesman said. For example, he noted, a customer who paid $50,000 for a single-seat SRS license last year recently committed to a multi-seat five-year license at $180,000 per year.

Long term, von Bohlen is confident that the company’s revised business model will not only help it meet its break-even goal at the end of FY 2004, but will eventually make it a billion-dollar company in life sciences informatics.

Is Standalone Success within Reach?

Reaching break-even may be within Lion’s power, but industry observers remain skeptical of the company’s ability to hit the billion-dollar mark any time soon.

“It will be a very challenging process to turn this into a billion-dollar company with their present business model,” said Ravi Mehrotra, an analyst with SG Cowen in London. While noting that Lion made the right decision in discontinuing its drug discovery business, Mehrotra is not convinced that the company’s current strategy will get it where it wants to be. “Pharma will buy what they want. The problem with breaking something up and saying, ’Well, people will buy a little bit and like it and buy the whole thing,’ is that they’ll just buy exactly what they want.”

Lion’s biggest obstacle to securing future Bayer-sized deals, either in one shot or gradually, according to Mehrotra, is pharma’s bottom-line concerns. If a pharmaceutical company spends $150 million on bioinformatics, “It’s going to have a negative impact on your P&L, and it’s not going to create any significant publicity for you or a perception of value for your shareholders,” said Mehrotra.

“Now, what else can you do with $150 million? Well, you can license two biotechnology drugs. It won’t have any impact on your P&L and you’ll be able to go out to meetings and say, ‘I’ve got another two products in clinical development.’ What are you going to do? It’s a no-brainer.”

Oliver Schl ter, an analyst at DG Bank in Frankfurt, Germany, echoed Mehrotra’s concerns. While “the refocusing was necessary to save cash for reaching break-even,” Schl ter said Lion still faces many challenges in penetrating the top-tier clients it sees as its target market.

“It’s hard to step in as a supplier company with the intention to do the business far better than the pharmaceutical companies themselves. There’s still a lot of reluctance from the heads of bioinformatics departments,” he said.

Keesman agreed that this remains one of the primary challenges of the bioinformatics software sector. “The pharmaceutical industry is still struggling with its suppliers: ’You don’t deliver what we need, so we’re building it ourselves,’” he acknowledged, but added that this is where Lion’s “investment to do our own drug discovery to understand the process” — short-lived as it was — will pay off.

Von Bohlen also admitted that “there’s been no incentive so far” for pharmaceutical companies to turn over their bioinformatics research to a third party, but remains convinced that the industry is in the midst of a transition. “No one doubts that a change is happening,” he said. “It’s not a question of whether it will come, but how quickly it will come.”

— BT

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