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NetGenics Trims Workforce, Delays IPO; Could a Sale be in the Offing?

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Bioinformatics pioneer NetGenics is struggling to remain independent in the wake of massive layoffs and further delays in a planned IPO. While the company’s recent decision to axe almost one-third of its workforce was positioned as a cash-preserving move, it could also be viewed as a preliminary step toward a sale of the business.

“I think it’s pretty obvious that everyone has their price,” said well-known biotech investor Alan Walton, senior general partner at Oxford Bioscience Partners and a NetGenics director. Other company sources confirm that finding a buyer might be preferable to toughing it out until IPO market conditions improve.

Walton declined to comment on whether Cleveland-based NetGenics was looking to sell the company, while NetGenics CEO and founder Manuel Glynias said the company was not currently in talks with a potential buyer.

Given the recent $80 million private sale of a smaller bioinformatics company – Neomorphic – to Affymetrix, an outright sale of NetGenics might be a way for Walton and other investors to get their money out and make a profit without waiting for an IPO. To date NetGenics has raised $49 million in venture financing.

NetGenics was the first of a cohort of bioinformatics companies to file for a public offering in 2000, but thanks to miscues involving major customers they couldn’t get the deal done. So NetGenics spent the year on the sidelines watching competitors like Genomica, Lion Bioscience, Compugen, and InforMax raise hundreds of millions of dollars in the public markets.

In one case of exquisitely bad timing, NetGenics lost its single biggest customer just as it was beginning its pitch to prospective public investors. “The day they were due to start their roadshow, they lost their biggest account, which was American Home Products,” said Walton. “So, they decided not to go ahead with the roadshow until they got their act together again.”

The AHP project was a big undertaking for a new company that then had only about 50 employees. In a multi-million dollar deal cobbled together over nine months, NetGenics promised American Home Products a system that would work across seven sites in a distributed environment. NetGenics had never executed such a large deal and, sources said, it didn’t even have the technologies yet to make it happen. When AHP stepped up the pressure to get the project completed sooner than originally agreed, NetGenics failed to deliver and AHP backed out.

In retrospect, Glynias said that the AHP deal was too much for NetGenics to handle. “It was a mistake for us to try and do that big a deal in the first place,” he conceded. “It wasn’t the right approach. We’ve since learned that the market is much more receptive to smaller deals.” The company now has about 10 customers.

But NetGenics’ troubles apparently didn’t end with the AHP deal, sources said. Last summer Pfizer also decided not to go ahead with negotiations, and last fall, after three years of doing business with NetGenics, Abbott Labs decided not to renew its license for Synergy, the company’s flagship bioinformatics platform.

Glynias declined to comment on the collapse of the deal with Abbott. Neither American Home Products nor Abbott responded to requests for comment.

Glynias said that since the debacles with AHP and Abbott, the company has gotten its act together and that the decision to lay off 29 of its 100 employees reflects the company’s inability to raise capital rather than a problem drumming up business. “We haven’t been able to get the IPO done and it doesn’t look possible for the next quarter or two,” said Glynias. “We always hired because it was easy to raise money. Now it seems very sensible to me to focus the business.” The company, which still has “enough cash for at least a year,” does not intend to try to raise more money privately, he said.

While he could not discuss details due to the pre-IPO quiet period, Glynias said the decision to trim down the workforce did not reflect declining revenues. “This is not because we didn’t have a good year” in 2000, he said.

The company had accumulated revenues of $2.2 million through 1999, the last year for which figures were available.

Glynias said that “essentially no programmers” were laid off. The layoffs, which were originally reported by the Cleveland Plain Dealer, primarily affected the marketing, consultancy, IT, and administration departments, Glynias added. Glynias said that due to the quiet period he could not discuss the company’s future plans.

According to NetGenics’ S-1 statement, filed in March, the company had accumulated net losses of $25.9 million at the end of December 1999, the last year for which data was available. NetGenics originally planned to raise some $60-$70 million through an IPO.

— JF and BT

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