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Now a Standalone Firm, Accelrys Projects $82M Break-Even Point for FY 2005


One day after it officially separated from its drug-discovery Siamese twin PDD, Accelrys offered a cautiously optimistic outlook for its future as an independent scientific software firm.

On May 3, Accelrys’ parent company Pharmacopeia finalized its spin-off of the PDD drug discovery group, and the two firms began trading separately on Nasdaq under the ticker symbols ACCL and PCOP, respectively. One lingering detail in the spin-off process — the change of Pharmacopeia’s name to Accelrys — should be wrapped up at the company’s annual shareholder meeting this week.

On May 4, the newly autonomous software group disclosed in its quarterly earnings announcement that its revenues for the quarter ended March 31, 2004, fell to $11.1 million from $17.2 million in the same period of 2003. During a conference call to discuss the results, company officials cited a laundry list of reasons for the drop in revenues, including the discontinuation of one-off consulting projects, the finalization of consortia, and a decrease in bookings during the quarter because “the sales force was more focused on preparing for the new fiscal 2005 year, which began on April 1,” CFO John Hanlon said.

But CEO Mark Emkjer made it clear that Accelrys does not intend to dwell on the past, and he projected an “exciting future” for the company based on a plan “that will allow us to break even at the operating income line at approximately $82 million in revenue” during fiscal 2005, “subject to the mix of orders we bring in.”

Historically, Pharmacopeia has not broken out expenses for Accelrys and PDD [BioInform 03-22-04]. This trend continued for the quarter ended March 31, 2004 — the last in which the two arms conducted business as a single entity — so it is unclear how much Accelrys will have to rein in costs to reach the break-even milestone. Pharmacopeia reported consolidated net losses of $26.8 million for Accelrys and PDD during the quarter, a dramatic increase from $5.5 million in the year-ago period. The current-year loss included $900,000 in relocation costs, $11.1 million of restructuring and other charges, and $2.3 million in spin-off transaction costs.

The software group posted revenues of $85.6 million in FY 2003, and $95.1 million in 2002 and 2001, so the $82 million revenue mark may be within reach for FY 2005, even if the cost side of the equation remains a challenge. Emkjer said that in 2002, the company would have had to record revenues of $103 million — $7.9 million more than what it posted — to reach break-even in operating income. Since then, Emkjer noted, the company has “rationalized our R&D functions involving co-location of products and resources around specific product silos,” in an effort to streamline operations.

One factor that may influence the company’s ability to reach its target revenue number, however, is its move to a new licensing model in which subscription-based revenues will be recognized over the length of the subscription rather than in one lump sum at the time the agreement is signed. So, even though the company is projecting a “modest increase” in bookings for FY 2005, “We expect reported revenues to be substantially lower in fiscal 2005 compared to fiscal 2004,” Hanlon said. Deferred revenues, however, are expected to increase “proportionally,” he added. This drop in reported revenues will have the most “dramatic” impact during the quarter ended Dec. 31, 2004, Hanlon told BioInform, because that has historically been the company’s strongest quarter.

Emkjer said he’s “guardedly optimistic” about FY 2005, “in light of feedback from the sales force and the many activities we have underway in the business development side.” New business development activities, Emkjer said, include in-licensing and out-licensing, as well as “select acquisitions that add value to our clients and shareholder base.” However, he added, “until we actually experience a leveling or upturn in new orders for at least two to three quarters in a row, we will remain cautious in our approach to spending.”

Emkjer’s optimism appears to be justified in the pharmaceutical sector, where the company is signing “longer-term deals with firmer pricing,” he said. Hanlon told BioInform that the company booked a “substantial, multi-year agreement” with AstraZeneca during the quarter, and signed three deals worth more than a million dollars each with top-tier pharmaceutical firms in the fourth quarter of 2003.

In the biotech sector, however, where money is beginning to flow again, “that should downstream translate into business for us, but it hasn’t really picked up extensively yet,” Emkjer said.

Industry observers were sanguine about the current health of Accelrys and its future as a standalone software company. Stefan Loren, an analyst who covers Accelrys at Legg Mason, noted that Accelrys should benefit from the split because “they don’t have to worry about chemistry and a CEO who cares about the chemistry division more than the software division — that was an issue [under the combined entity].” Lauren said the company’s $82 million break-even point seems reasonable and that Emkjer has done a “great job” of executing the cost-cutting endeavors that he initiated over a year ago when he joined the company.

Phil Nadeau, an analyst with SG Cowen, said it’s doubtful that Accelrys will meet the $82 million revenue mark this year “because of the way they account for new subscription revenues,” but added that break-even should be attainable “once they [reach the] anniversary [of] the change in accounting.”

— BT

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