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With Sale of Bioinformatics Unit Looming, Lion s Annual Report Sheds Light on Business Value

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Lion Bioscience said last week that it is on track to close the sale of its bioinformatics group by the end of the month, keeping a promise made in April when it disclosed its plans to sell the business.

The company also reported financial results for its 2004/2005 fiscal year, which ended March 31, revealing new information about the health of the business that will soon be in the hands of its new owner.

Lion said in a statement that "the sales process of the bioinformatics business started successfully" and that it expects to close a sale "before the summer break." Company officials did not respond to BioInform's requests for additional information.

In line with the planned sale, the company said in its annual report that it transferred its "operational bioinformatics business" to its Lion Bioscience Ltd. subsidiary in Cambridge, UK, as of March 31, leaving only administrative staff in its Heidelberg, Germany, headquarters. This move brought further headcount reductions to the firm, which began the calendar year with a staff of 128. By March 31, Lion had 39 employees at its Heidelberg headquarters out of a total headcount of 85. By May 31, the company said in its annual report, it employed a total of 58 people and 11 people in Heidelberg.


Chart 1: click for larger view

Lion has since cut its staff in Heidelberg to five, and employs a total of 50 people, according to its annual report (see chart 1 for a look at Lion's headcount reductions since 2001).

Lion also took steps to disentangle the financial results of its discontinued operations â€" the UK-based bioinformatics business that is on the block â€" from its continuing operations. This business will be headquartered in Heidelberg and act as a private equity firm that will manage strategic investments "in the field of life sciences and the IT sector," the company said in the report. In the process of separating the operations financially, Lion provided a bit more clarity about the financial state of its bioinformatics business than it has in the past.

For the full year, the company placed under continuing operations only those revenues generated by its LBRI facility in Cambridge, Mass., which amounted to €200,000 (around $247,000) for the 2004/2005 fiscal year, and €300,000 for the prior year.

The bioinformatics business, meanwhile, posted receipts of €9.8 million for the most recent fiscal year, which represented a 49-percent drop from €19.4 million in the 2003/2004 fiscal year. Lion attributed the decline to the expiration of its bioinformatics and cheminformatics contracts with Bayer, "a reluctance to purchase on the part of customers, who had become nervous as a result of what was happening in the company," as well as the launch of several products â€" including Lion Target Engine, Lion Lead Engine, and Lead Navigator â€" that "did not lead to the market success that had been expected."

The company noted, however, that its flagship SRS product was an "exception" to this downward sales trend, and that its market penetration "is still high â€" an important prerequisite to getting future products and solutions that are closely related to SRS established on the market."

Indeed, as the company's overall sales have declined over the past few years, SRS has made up a larger portion of Lion's revenues. Even though SRS sales dropped 20 percent year over year to €3.3 million in the 2004/2005 fiscal year, they made up 71 percent of the €4.7 million in software licensing revenues that the company reported in 2004/2005. This compared to 51 percent of the €8.2 million in software licensing revenues that the company generated in the prior year (see table 1 and chart 2, below).

Table 1: Lion's Software Licensing
Revenues, by Product, 2004-200
5
2003/2004
2004/2005
Revenues
Percent of Total Revenue
Revenues
Percent of Total Revenue
SRS
€4,200,000
51%
€3,300,000
71%
Lion Discovery Center
€330,000
4%
€330,000
7%
LBRI Licensing Fees
€1,300,000
16%
€330,000
7%
Scouts/Lion Target Engine
€1,300,000
14%
€240,000
5%
Other
€1,200,000
15%
€470,000
10%
Total
€8,200,000
100%
€4,700,000
100%


Chart 2: click for larger view

The ongoing decline in software revenues has led to a fall in maintenance and professional services revenues, as well. The company posted €2.1 million in maintenance and support revenues for the 2004/2005 fiscal year, compared to €3 million a year ago. Professional services revenues declined by 60 percent to €3 million from €7.5 million. As a result, SRS generated 33 percent of the company's total revenues in the 2004/2005 fiscal year, compared to 20 percent of total revenues a year ago.

Considering these recent trends, the buyer of Lion's bioinformatics business will essentially be acquiring the SRS technology, development team, and customer base.

The company said it expects revenues of "just under" €6 million for this business in the 2005/2006 fiscal year â€" a 39-percent decline. "This is primarily due to the delay in the placing of customer orders last year," the company noted in its report.

However, the UK development team is currently working on the next release of SRS, version 8.2, which the company expects to launch in the second half of its fiscal year, or some time between September 2005 and March 2006. Lion expects orders to pick up in the coming year "as the frequency of discussions with customers has increased once more and there is increased interest in the new product releases."

Lion has projected a "positive result" for the bioinformatics group for the 2005/2006 fiscal year, "based primarily on the optimization and relocation process implemented in the UK." This would mark the first time that the business will emerge from the red since it began a concerted effort to manage its losses in its 2003/2004 fiscal year (see chart 3).

For the recently ended fiscal year, Lion reined in its losses for both its continuing and its discontinued operations, with the proposed holding company posting a loss of €3.9 million, compared to €5.6 million in the prior year. Losses in the bioinformatics side narrowed even more considerably to €9.2 million for the 2004/2005 fiscal year from €15.1 million a year ago.


Chart 3: click for larger view

Will the Price be Right?

Lion's projections for its current-year sales may point toward the eventual selling price of its bioinformatics business. The firm has declined to disclose the financial details of its discussions with potential suitors, but one commonly used gauge for determining a company's value â€" doubling its annual revenues â€" would place the company in the €10 million to €12 million range. This price is still a bit higher than the single-digit-millions that most industry observers predicted when Lion first confirmed its plans to place the bioinformatics business on the block in April [BioInform 04-25-05].

But the value of the business will ultimately be in the eye of the buyer. Lion has declined to discuss its potential suitors, but the list of possibilities is broad and the sector is abuzz with potential post-sale scenarios. For example, small, privately held bioinformatics companies with competing products, such as Biomax, or complementary products, such as InforSense, might be interested primarily in Lion's customer base, which they would try to convert to their own products. The value of this type of sale would depend on the price of the acquirer's own software â€" and the percentage of Lion's customer base that it would be able to convert.

Larger life science software companies, however, like Accelrys or Tripos, could add SRS to their own portfolios while selling their current products into Lion's customer base. The value for this type of sale would depend on the overlap between these companies' current customer base and Lion's.

Some observers have speculated that other life science vendors, such as Invitrogen, Agilent, or Applied Biosystems, may also have their eyes on Lion, although it's likely that these companies would not use software sales to calculate the value of the firm. All three have moved toward a strategy that relies on bioinformatics as an important, but often free, support feature for their core instrument and reagent products. Whether such firms would use SRS as part of their own professional services business, or make it available as a free online support tool, the ultimate gauge of Lion's value in this type of scenario would be based on the impact that SRS would have on instrument or reagent sales.

â€" Bernadette Toner ([email protected])

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