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With Product ‘Modernization’ Complete and Revenue Stable, Accelrys Targets Innovation

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Accelrys officials this week said that the company is entering a new phase of innovation and product development that will help it tap into a market potentially worth up to $3 billion.
 
CEO Mark Emkjer said in a conference call to discuss the company’s fiscal third-quarter earnings that Accelrys has historically addressed the early-stage research informatics market, which is valued at approximately half a billion dollars. Now, he said, the company has embarked upon a strategy to move downstream into the biopharmaceutical-development and -manufacturing markets, which he estimated to be up to five to six times that figure.
 
The company also plans to gain a larger foothold in markets where it already has a presence. In cheminformatics, for example, Emkjer said Accelrys currently holds around 5 percent of a market valued at around $200 million. However, the firm recently launched a new suite of cheminformatics products (see Downloads & Upgrades, this issue), and has signed Pfizer as the first member of a new cheminformatics consortium with the goal of developing an “open, componentized cheminformatics platform” that will better meet customer needs (see Bioinformatics Briefs, this issue).
 
“There’s a $200 million market there that we have a low percentage share in, and we think there’s a lot of upside and that we’re ideally positioned to attack that market share,” Emkjer said.
 
He added that the Accelrys management team is “intensely focused on top-line growth.”
 
The company’s revenue flow has reached a point of “stabilization,” Emkjer said, in which an ongoing decline in its legacy modeling and simulation offerings is offset by growth in sales of its SciTegic Pipeline Pilot. Going forward, Emkjer said the company expects the balance to shift in its favor as it begins generating revenue from new product launches, such as an image-analysis collection that it launched last week [BioInform 01-26-07].  
 
During the quarter ended Dec. 31, 2006, Accelrys launched new versions of its primary informatics platforms — SciTegic Pipeline Pilot, Discovery Studio, and Materials Studio — effectively completing a two-year product “modernization” phase in which it integrated and consolidated a number of legacy products. Now, Emkjer said, the company has turned a corner and is setting its sights on new product development.
 
“For a software company to thrive, innovation on an ongoing basis is paramount,” Emkjer said. “We believe that we are now in a position to focus a majority of our investment on novel scientific capability that will protect and enhance our future streams of revenue.”
 
Emkjer did not provide details on specific product-development goals, but noted that Accelrys plans to “innovate through various methods,” including “onsite customer development, scientific sabbaticals, partnerships with leading academic institutions, government grants, and potential M&A activity.”
 
Emkjer has identified acquisitions as a potential growth driver for Accelrys on several occasions [BioInform 10-27-06], but he did not provide any details on the company’s M&A plans in this week’s call.
 
In line with the transition from “modernization” to innovation, Emkjer noted that the company made the “difficult decision” during the quarter to close its R&D facility in Bangalore, India, and lay off 60 staffers there [BioInform 01-05-07].
 
“The Bangalore team contributed greatly to the acceleration of our modernization process, and I am grateful for their many contributions,” he said. “However, as we move primarily to innovation, we believe Accelrys is better suited to concentrate its new science efforts within our Cambridge [UK] and San Diego R&D centers.”
 
Emkjer added that Accelrys will continue to rely on offshore subcontractors “where appropriate in the future.”
 
Q3 Revenues Flat
 
Accelrys’ fiscal third-quarter revenues increased 1 percent to $20.7 million from $20.4 million in the prior-year period. The company said that growth in the SciTegic Pipeline Pilot product line was offset by a decline in its legacy modeling and simulation products, which currently make up less than half the firm’s revenues.
 

“We believe that we are now in a position to focus a majority of our investment on novel scientific capability that will protect and enhance our future streams of revenue.”

Rick Russo, senior vice president and CFO at Accelrys, said during the call that the Pipeline Pilot product line is growing “at a very healthy rate, and you can see by the way the revenues are working out that that’s been offset throughout most of the year with some decline in the existing legacy product line.”

 
He added that the company is optimistic that its new product launches can continue to counteract that decline. “We think now with the new product releases that have gone out that the sales force has a much better quiver of arrows to go out and stem any future erosion going on,” he said.
 
Emkjer was cautious about the growth prospects for these new products, however. He declined to provide any revenue guidance, and stressed that the sales cycle for the company’s products is typically six to 18 months.
 
In addition, Emkjer pointed to “macroeconomic conditions” within the pharmaceutical sector, such as the recent layoffs at companies like Pfizer and AstraZeneca, that could have a negative impact on future sales. “There have been plant closings, research facility closings, and layoffs,” he said, “so we’re continuing to temper our forward-looking thoughts.”
 
Accelrys spent $4.7 million on product development during the quarter, down 6 percent from $5 million in the third fiscal quarter of 2006.
 
The company’s net loss nearly doubled to $1.1 million from $567,000 in the year-ago period, though it recorded a $200,000 profit on a non-GAAP basis.
 
As of Dec. 31, Accelrys held $60 million in cash, cash equivalents, restricted cash, and marketable securities.  

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