Lion Bioscience said last week that it plans to acquire Cleveland-based NetGenics in an all-stock transaction valued at approximately $17 million.
The move offers a number of advantages for both companies: It gives Lion the missing pieces of its integration platform for far less than it would have cost to build the technology itself, while keeping NetGenics’ staff of 65 employed — an option that may not have been available to them without the timely sale of the struggling company.
The only negative about the deal may be the bargain-basement price Lion is paying for NetGenics. “It’s a barometer for the relative success of a lot of these bioinformatics players,” said Mike Clulow, an analyst with UBS Warburg. “Lion did not overpay” for NetGenics, he said, which had hoped to raise $60 million to $70 million in an IPO less than two years ago.
While conceding that the transaction price “isn’t a fantastic success for an exit value,” Tom Daniel, a general partner at NetGenics shareholder International Biotechnology Trust, noted that the combined entity’s potential for appreciation in the future looks promising. Clulow agreed that the combined company, while not yet profitable, is on track to break even in the near future.
After the acquisition, which is expected to close in the first quarter of 2002, NetGenics will become a wholly owned subsidiary of Lion. The deal came just in time, said NetGenics CEO Manuel Glynias. The company had been looking to sell or raise more funding since October, he said, and was down to a “negligible” cash position. In light of the current economic climate, it made more sense to sell, he said.
NetGenics’ Cleveland, Columbus, San Diego, and Boston offices will be consolidated as part of Lion’s San Diego-based Lion Bioscience Inc. subsidiary (formerly Trega Biosciences). The Cleveland and Columbus offices will remain open as “centers of excellence” within Lion. Lion has offered positions to all NetGenics employees, said Lion CEO Friedrich von Bohlen, although the management structure has not yet been finalized.
Lion will merge its SRS database integration platform with NetGenics’ DiscoveryCenter application integration tool, expanding Lion’s platform architecture into lead finding, lead verification, and preclinical development.
“Through the merger we overcome a major hurdle for the life science industry: the easy integration of information from different disciplines,” said von Bohlen. “By owning and merging SRS with DiscoveryCenter we can now offer the ultimate standard platform for parallel knowledge management of multiple disciplines to the whole life science industry as a product. Therefore we expect very strong demand from the industry for it.”
An integrated version of the companies’ merged technologies is expected by the middle of the year.
The IBM Connection
DiscoveryCenter is built upon IBM’s DiscoveryLink middleware, which IBM developed in cooperation with NetGenics. In light of Lion’s recently announced partnership with IBM, Big Blue may gain the most from the acquisition by consolidating its key DiscoveryLink distribution partners under one roof.
Glynias and von Bohlen said their mutual partnership with IBM did not play a direct role in the acquisition, although it will net Lion a full staff of bioinformaticists, programmers, and scientists with at least three years of experience working with IBM’s architecture. NetGenics has written all the wrapper code for DiscoveryLink so far — experience that will surely benefit Lion in its ongoing partnership with IBM in addition to ensuring job security for NetGenics employees.
The expanded platform will benefit from the “triangle situation” the three companies create, von Bohlen said. SRS offers the capability to integrate flat file databases, while DiscoveryLink addresses relational databases and DiscoveryCenter adds the ability to integrate bio- and cheminformatics applications. Third-party applications will also be able to plug into the combined platform.
Lion gains more from the acquisition than NetGenics’ staff and technology, however. It gives the Heidelberg, Germany-based company an even stronger reach into the US market and adds NetGenics customers Schering, Paradigm Genetics, and Avalon Pharmaceuticals to its client base.
These customers should benefit from the acquisition as well, as they will have almost immediate access to an expanded set of resources for DiscoveryCenter.
An Eleventh-Hour Deal
Meanwhile, the acquisition rescues NetGenics from the brink of dissolution and gives Discovery-Center a fighting chance to work its way into the market. The product, launched in September, turned out to be too little, too late, for the company as it attempted to improve its fortunes following the loss of several key accounts that led to massive layoffs last January.
“We’ve had a number of difficulties in trying to get Discovery- Center sold,” said Glynias. One problem was the ill-timed release of the product just before the September 11 terrorist attacks in the US. Another difficulty was that NetGenics’ four-person sales force just wasn’t enough to penetrate the pharmaceutical market.
“It was clear to people that we were a small company with a nice technology, but it would be a risk to buy enterprise software from such a small company that was in fragile condition,” Glynias said. Now, with Lion’s much larger sales and marketing force backing DiscoveryCenter, Glynias said potential customers should be more comfortable with a purchase.
Clulow agreed, noting, “A pharmaceutical company wants to partner with someone who will definitely be around three years from now, so this should help NetGenics in terms of closing new business.”