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Lion Warns of Poor FY 2003 Earnings, But Sticks To Break-Even Target. Are Layoffs Inevitable?

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With revenues for fiscal year 2003 looking 30 percent to 45 percent leaner than expected, Lion Bioscience will be facing some tough choices as it aims to break even by the last quarter of FY 2004 — a target CEO Friedrich von Bohlen insists the company will meet.

Based on preliminary second-quarter earnings, the company issued a revised outlook last week for the year ending March 31, 2003, warning of revenues as much as 25 percent lower than its FY 2002 revenues of €40.4 million. Lion previously expected “moderate” revenue growth of 5-20 percent for FY 2003.

The company cited the continued slowdown in life science spending as the primary reason for the shortfall, combined with a “longer than anticipated” sales cycle for its new solutions-based business model. This extended sales cycle will play a crucial role in the company’s fiscal fortunes, however, as it is tied to the company’s product release schedule. Lion is currently in the process of consolidating its extended line of Scout bioinformatics applications into a single “biology solution” that it has named Target Engine. However, this product won’t hit the market until the second quarter of 2003, resulting in a sizable lag in bookings as customers sit back and wait for the new product.

Explained von Bohlen: “If you have a product you can likely buy three to six months from now, and an older product you have already licensed, and when the overall spending on the pharma side is already reduced, the behavior is to wait until the new product is available.”

Do the Math

While this may be an entirely valid explanation of the company’s poor sales for the current quarter, if offered little solace for analysts seeking clues into Lion’s strategy for keeping its head above water for the next few quarters. During a conference call held to discuss the revised outlook, several analysts expressed concern about the intermission in new product availability as well as doubt that the company would meet its goal to break even by March 2004.

“I don’t see the break-even without a heavy reduction in the workforce,” Thomas Höger, an analyst with DG Bank, told BioInform after the call. “The SG&A costs and R&D costs are way too high.” While the discontinuation of its drug discovery business led to some cost reduction, “it’s not sufficient,” he added.

Lion CFO Martin Hollenhorst said the cost reduction strategies the company has already put in place — including staff cuts and the decision to close its lab — “take time to hit the P&L.”

Hollenhorst added that the company does not intend to reduce its staff based solely on bottom-line concerns. “A default on just consolidating for cost-saving doesn’t help us with the services we provide,” he said. “Know-how is important, but it comes with a lot of complexity. Short-term, to reduce or wipe out any sites is very difficult to do.”

While acknowledging that, “mid- to long-term, we have to reduce that complexity,” Hollenhorst added, “for the time being we need the talent there and we need the product.”

Lion is counting on strong sales for SRS and the company’s recently launched Discovery Center integration solution to sustain it through the upcoming product release drought. Coupled with the cost-saving measures the company has already put in place, von Bohlen and Hollenhorst are confident that break-even remains in reach.

Of course, strong sales for Discovery Center will be “absolutely necessary for the company to survive with their current workforce,” as Höger pointed out. “We really have to see if this product is, first of all, as good as Lion claims it to be, and if the customers can be convinced to invest some million euros in these solutions. This is the key question.”

Lion will provide detailed results of its second-quarter earnings on November 6.

— BT

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