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Paracel Attributes Sales Slowdown to Soft Market, Loss of Government Contract

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Celera Genomics reported a surge in annual revenues for fiscal 2001, but the news wasn’t as good for Paracel, the bioinformatics unit it acquired last year.

For the year ended June 30, 2001, Celera earned $89.4 million, in comparison with $42.7 million in fiscal 2000, an increase in revenues it attributed to new subscription agreements with commercial and academic customers. But the company posted a net loss of $186.2 million for the year, which included a $69.1 million non-cash special charge for a write-down in the assets associated with Paracel. Excluding the special charge, Celera said, its net loss would have been $119.0 million, compared to $92.7 million for the year-ago period.

In a conference call to discuss the earnings, Craig Venter, Celera’s CEO and chief scientific officer, said that Paracel’s lower-than-expected sales performance was due to an overall softness in demand for computing hardware and software.

“Set against our increased focus on therapeutic discovery,” explained Celera spokesman Robert Bennett, “it was in the judgment of management that it made sense to revalue [Paracel’s] assets.”

Added Bennett, “We see it as an overall trend versus something specific to demand for their products.”

Kwang-I Yu, president and CEO of Paracel, told BioInform that most of the company’s business loss was in the government sector. “We had a major change on our government customer side and essentially that revenue stream had stopped as we shifted toward bioinformatics,” said Yu.

“We had a long-term, very large customer who had a change of management right at the top of the department. They are therefore going through a major review of the types of systems that we used to supply a lot of equipment to.”

Yu declined to disclose the identity of the government agency, but Venter told the New York Times in August 2000 that the company has sold systems to the National Security Agency. Sean Moran, who heads up US government program sales for Paracel, declined to comment on the company’s contract with the NSA.

Yu also attributed the drop in sales to an overall downward trend in capital expenditures. “We got hit, like everybody else, by some major capital equipment budget issues.”

But Paracel’s chief competitor in the accelerator business, Time-Logic, said it hasn’t experienced that trend. “We’re not finding it to be a slowing market at all,” said TimeLogic CEO Jim Lindelien. TimeLogic’s revenues are expected to be higher than last year’s, Lindelien said, and the company has made several recent sales and has other orders in the pipeline.

“If Paracel’s results are disappointing it implies TimeLogic continues to attract, win, service, and earn the loyalty of a growing share of the market,” Lindelien said.

Some have noted that since its acquisition by Celera, Paracel has shifted its focus from serving its customers to serving Celera. “Celera bought Paracel predominantly for its algorithm capabilities, and less so for the actual sales of the hardware,” said Winton Gibbons, an analyst with William Blair who covers Celera. “That would have been a nice upside, but what they were looking for was really just to get the computer scientists who developed all the search algorithms.”

And now that Celera’s parent company Applera has formally unveiled its plan to spend $75 million over the next year to establish a broad discovery and diagnostics development program across Celera Genomics, Applied Biosystems, and the newly launched Celera Diagnostics, Paracel’s position as a tool and service provider within the increasingly product-focused company seems even less certain.

“With Celera’s change in direction, clearly we’re looking at strategically how we might fit in a different way,” said Yu. “But as far as Paracel’s business in the bioinformatics area, we have a full product pipeline and we’re going full steam ahead in that area.”

Bennett noted that Celera expects to continue to operate Paracel and receive revenue, “but we will certainly take a look at what makes sense to do with it in the mid- to long term.”

— BT

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