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With Revenue Stable and Losses Narrowing, Accelrys Sets Sights on Downstream Growth and Acquisitions

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With its financial turnaround “well underway,” Accelrys is now poised for growth through acquisitions and new products that will span pharmaceutical research and discovery, according to company officials.
 
This week, the company reported an 83-percent reduction in its net loss for its first fiscal quarter, accompanied by a 1-percent decline in revenues that it attributed entirely to changes in foreign currency exchange rates. In local currencies, revenues were flat year over year, the company said.
 
In addition, the firm is looking to replicate the success it has seen with its Scitegic subsidiary, which it acquired in 2004, through additional acquisitions. Accelrys CEO Mark Emkjer said that the company has identified 55 potential acquisition candidates, and is currently going through a “filtering process” to winnow the list down to a handful of prospects.
 
In a conference call with analysts, Emkjer said that “every key metric that we measure is on track through the first 90 days of this fiscal year,” and said that he expects the firm to continue to improve its financial trajectory in the coming months.
 
Emkjer noted that when he joined the firm as CEO more than three years ago, Accelrys was in “a state of turnaround or on a reversal course.” Now, he noted, “we have arrived at a new inflection point where Accelrys is transitioning from a turnaround to a transformation. We are no longer just reversing the financial course but embracing serious change to the fabric of our business.”
 
This transformation entails targeting a broader customer base that includes the development stage of the pharmaceutical pipeline in addition to the firm’s historical territory of early discovery. Reiterating statements he made in May [BioInform 05-26-06], Emjker said that the firm is beginning to develop more “horizontal technologies,” such as text analytics, data mining, report generation, and statistical analysis, that will have applications in discovery as well as development.
 
The first of these products, an image-analysis software tool, will launch next quarter, he said.
 
“Our customers have said that nearly 80 percent of their stored information is in image files,” Emkjer noted. The new software, developed with “third-party image analytics experts,” will enable “rapid analysis of multitudes of images,” he said.
 
Accelrys also plans two more “major” releases of its Discovery Studio platform over the next year, “at which point we will have concluded the modernization of our legacy products entirely across the company,” Emjker said.
 
In terms of criteria for new acquisitions, “we would want it to be in a growth sector, we would want it to be either [No.] 1 or 2 in its space,” he said. “We have set some minimum hurdle rates in terms of revenue, but obviously we would look at it strategically too,” he added.
 
“We’re in no rush to pile acquisitions on,” Emkjer noted, “but we also think we’re at a place and time with our portfolio being modernized and the leveragability of the company available that the time to look at this and to pursue quality M&A similar to what we experienced with Scitegic is now.”
 

“We’re in no rush to pile acquisitions on, but we also think we’re at a place and time with our portfolio being modernized and the leveragability of the company available that the time to look at this and to pursue quality M&A similar to what we experienced with Scitegic is now.”

Emjker said that some of the potential acquisition targets that Accelrys is eyeing are in early-stage discovery, “but I would say predominantly they tend to be more informatics and many of them span discovery and the development area.”
 
Narrowing the Gap
 
Accelrys reported revenues of $20.2 million for the quarter ended June 30, a 1-percent decline from $20.4 million in the first fiscal quarter of 2006. CFO David Sankaran said in the conference call that this decline was due to changes in foreign currency exchange rates, particularly for the US dollar vs. the Japanese yen. In constant currency terms, revenue was essentially flat year over year, Sankaran noted.
 
The company’s sales mix for the quarter was in line with trends that the firm has reported for the past several quarters. Sankaran said that the firm saw “robust growth in sales of our platform technologies, modest growth in sales of cheminformatics and other informatics products, and declines in sales of some of our traditional modeling and simulation products to life science companies.”
 
Deferred revenue, which Sankaran described as a “key” metric for indicating total orders and future revenues expectations, rose 5 percent to $53.9 million from $51.7 million in the year-ago period.
 
Accelrys lowered its total operating costs by 9 percent, to $20.6 million from $22.6 million in the first quarter of 2006. Expenses included $500,000 related to the recent restatement of its historical financial statements and $1 million in stock-based compensation expenses related to the US Securities and Exchange Commission’s FAS 123R regulation. Excluding these expenses, the firm’s operating costs were $19.1 million, representing a 15-percent improvement over the prior-year quarter, Sankaran said.
 
The company’s product development costs dropped to $5.1 million from $5.8 million in the prior-year period.
 
Accelrys reported a net loss of $300,000, an 83-percent reduction from $1.9 million in the prior-year period. Excluding one-time costs, the firm posted a $1.2 million profit for the quarter.
 
As of June 30, Accelrys had $63 million in cash, cash equivalents, restricted cash, and marketable securities.   
 
Growth Platform
 
The company did not provide guidance for the full year, but Accelrys officials were optimistic about the firm’s future performance. “We believe the financial turnaround of the company is well underway,” Sankaran said.
 
“In many turnaround situations, you simply cut expenses and make money,” Emjker added. “In this situation, however, we improved the financial trajectory while building the business platform for future growth.”
 
Emjker noted that the source of that growth will come from many of the same customers that Accelrys already has, via a portfolio of new tools that will address the demands of downstream research within pharmaceutical and biotech firms.  
 
The market for the firm’s early discovery research tools is recovering from several years of biopharma belt-tightening, Emjker said. “I see stabilization right now in early stage discovery, and for us, as we look toward downstream development, we are very optimistic about the prospects there.” 
 

Accelrys believes that the software market is “much larger” in development than in early-stage discovery. However, Emkjer noted, the firm does not intend to lose its position in the discovery market. “We intend to continue dominating the discovery software,” he said. “It’s just that we want to move downstream with those same customers and earn the right to larger, deeper, longer business relationships.”

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