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With Sales Tumbling Across the Sector, Informatics Firms Rethink Their Strategies

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“Fall” has taken on new meaning for the life science informatics sector this year.

The quarter ended Sept. 30 added one more chapter to a revenue slide that has plagued the bioinformatics market since mid-2002. All of the publicly traded firms in the sector, with the exception of Tripos, reported plummeting sales over the last few weeks, accompanied by changes in their strategies, business models, and management teams.

Lion Bioscience, for example, announced that former CEO Friedrich von Bohlen will be returning to the company after a 10-month hiatus. Von Bohlen resigned in January, but will now serve as chairman of the company’s newly appointed supervisory board. The move comes less than a month after Lion’s two co-CEOs and three board members resigned in mid-October, due to the company’s inability to pay for their liability insurance [BioInform 10-18-04].

Joseph Donahue, who now serves as co-CEO at Lion alongside Thure Etzold, announced the appointment of the new supervisory board during the company’s quarterly earnings call, in which the company reported a 50-percent drop in revenues to €2.6 million ($3.3 million) from €5 million ($6.4 million) in the comparable quarter a year ago.

Compugen, meanwhile, announced that Mor Amitai, who has served as CEO of the firm for the past seven years, will step down from that position so that the firm can appoint someone “with more experience in pharmaceutical product development and commercialization” in line with the company’s new downstream-oriented strategy. Amitai said he intends to hand over the reins to his successor before the end of 2005, at which time he plans to remain with the company in a “long-term” — but still unspecified — role.

The decision to seek a new CEO “was 100 percent [Amitai’s] decision,” said Martin Gerstel, Compugen’s chairman, during a conference call to discuss financial results for the company’s third quarter, in which it posted only $1 million in revenues — a 50-percent drop from $2 million that the company reported for the prior-year period.

Gene Logic also announced management changes in concert with disappointing financial results. The company has hired Dennis Rossi, most recently vice president of life science marketing at Accelrys, for the newly created position of senior vice president and general manager of genomics and information services. Gene Logic also hired Carlos Orantes, a former Covance exec, as vice president of operations for Gene Logic Laboratories — the preclinical toxicology research business that the company created after acquiring TherImmune last year.

Gene Logic CEO Mark Gessler said that the new hires were made “to restructure our business model under new leadership and to improve our performance significantly.” They follow a six-month assessment of “key issues” that have led to the company’s lackluster performance, Gessler said.

Rob Burrows, a Gene Logic spokesman, explained to BioInform via e-mail that Rossi and Orantes will be responsible for all aspects of the two business units, and will report directly to Gessler. “This leaves Gessler to take a more global view of the company, its ongoing strategy and, ultimately, more time to affect things that can take the company in the direction he wants it to go.”

Finally, Accelrys, which disclosed two weeks ago that CEO John Hanlon will resign as of Dec. 31, reported a drop in revenues for its second straight quarter. Accelrys said that the falloff is the financial consequence of changes to its revenue recognition policy that went into effect at the beginning of the year.

Accelrys has also had to lower its pricing in order to win deals in an increasingly competitive marketplace, according to CEO Mark Emkjer. “We’re still seeing continued discounting at levels that we experienced last year and possibly even slightly higher — and I would say particularly in the life sciences area,” Emkjer said. “I think we have competitive situations where people are pricing to win.”

Details of the companies’ quarterly earnings reports follow:

Lion Still Mulling Nasdaq Delisting to Cut Costs

Lion posted €2.6 million ($3.3 million) in revenues for the second quarter of its 2004/2005 fiscal year, down from €5 million during the same period last year.

Cost-cutting measures during the quarter helped the company narrow its net losses to €3.4 million from €6.5 million during the year-ago quarter.

Lion’s R&D expenses dropped by 65 percent to €1.4 million from €4.1 million in the comparable quarter last year.

As of Sept. 30, Lion had €33.3 million in liquid assets, €13.9 million of this available as cash and cash equivalents.

Donahue said during the conference call last week that he and Etzold are currently working without liability insurance, but that they are in discussions with several insurance providers and are “optimistic” that they can resolve the issue.

The company is also still “reviewing” whether it will continue to be listed on the Nasdaq exchange and be registered with the SEC, Donahue said. He said that the costs associated with complying with the Sarbanes-Oxley act would account for more than 7 percent of the company’s total estimated costs in its next fiscal year.

“Our objective is to reach profitability in fiscal year 2005/2006, and our assessment is currently along the lines that this is an unnecessary expense,” he said.

The decline in Lion’s revenues this quarter “is in line with our budget,” Donahue said, and the company reaffirmed its forecast of €12 million to €13 million in sales for the current fiscal year, with “double-digit” growth rates in the following fiscal year.

Donahue said that Lion received the first order for its LeadNavigator cheminformatics product during the quarter, as well as the first order for its SRS Gateway for Oracle product, which came from a “top-10” pharma company.

An additional agreement worth $1 million with another pharmaceutical company for an SRS extension and SRS Gateway for Oracle was delayed from the second quarter to the current quarter, Donahue said.

“Customer activity has clearly increased, particularly in North America and Asia Pacific,” Donahue said. “We therefore anticipate a rising order volume in the upcoming months, resulting in higher revenues in the next fiscal year.”

Compugen Touts Predictive Modeling as Revenues Sink

Compugen reported $1 million in revenues for the quarter ended Sept. 30, down from $2 million during the same period last year. The company’s net loss widened to $3.6 million, or $.13 per share, from $3.2 million, or $.12 per share, during the year-ago quarter.

R&D expenses decreased slightly to $2.8 million, from $3.1 million during the same quarter in 2003.

The company attributed its poor performance to a new focus on moving certain proteins it discovered with its predictive modeling technology downstream into diagnostics and therapeutics. The company said earlier this year that as a result of this new strategy, it is no longer pursuing deals related to its LEADS computational biology platform, which had previously made up the bulk of its revenues [BioInform 04-26-04].

But Compugen did not offer a clear plan for making up the revenue shortfall as it quickly runs out of cash. As of Sept. 30, the company had $25 million in cash, cash equivalents, short-term cash deposits, and short-term marketable securities, enough to last around two years at its current burn rate.

Amitai, however, told analysts during the quarterly earnings call last week that Compugen’s diagnostics pipeline probably won’t have a positive impact on cash flow for another five years, and Gerstel warned that proteins in the company’s therapeutic pipeline will not reach Phase I trials within two years.

Gerstel sidestepped an analyst’s question about Compugen’s plans for raising cash by touting the potential for the company’s technology, which he said, “can now begin to produce on a routine basis the kinds of discoveries that the entire industry is looking for.”

The success of the company, he said, “will be realized by the financial community well before we have substantial earnings.”

Amitai’s decision to step down as CEO “was a shock to all of us,” Gerstel said during the conference call. He added that the Tel Aviv-based company announced the news on Oct. 31 — a Sunday, and a working day in Israel — so that Compugen officials could break the news to the company’s employees before they learned about it from news reports.

Gene Logic Hires Rossi to Guide Struggling Info Business

Gene Logic reported $17 million in revenues for the third quarter, down from total revenues of $17.7 million for the year-ago quarter. The company’s information services business contributed $11.9 million in sales for the quarter, a 2.8-percent decline from $12.3 million in the prior year, while its contract services business posted a 6.3-percent decline, to $5.1 million from $5.5 million last year.

Gene Logic’s net loss for the quarter increased to $14.6 million from $10 million in the year-ago quarter, based largely on a $9 million charge for purchased research and development associated with its acquisition of the Horizon technology group from Millennium in July.

Gene Logic spent $631,000 on R&D in the quarter, up from $540,000 for the year-ago period.

The company had cash and cash equivalents of $47 million on hand, plus marketable securities of $60.1 million, as of Sept. 30.

Admitting that Gene Logic is “not making progress” on either side of its business model, Gerstein said that the new management should have a positive impact on sales.

“For the genomics and information services business, while we’ve been successful in developing significant subscription relationships with many of the world’s largest pharmaceutical companies, in recent years we have not been successful in expanding our business beyond these customers,” he said.

Rossi, he said, will be “focused on growing the business” based on a three-pronged strategy: “driving the application of our genomics and toxicogenomics outfit further downstream in the pharmaceutical value chain” into areas like biomarker discovery and patient stratification in clinical trials; expanding the services component of the company’s genomics business to build upon recent growth in its toxicogenomics services business; and broadening its customer base, “particularly to pick up the biotech part of the market that we have thus far not been able to execute well on.”

In response to an analyst question about whether Gene Logic may consider liquidating its assets and returning cash to shareholders, Gerstein responded, “Certainly not at this point. We believe that we have significant opportunities to grow this business.”

New Accounting Drives Down Revenues at Accelrys

Accelrys posted revenues of $14.3 million for the quarter ended Sept. 2004, the second quarter of its 2005 fiscal year. This was a 19-percent decrease compared to $17.7 million in sales that the company reported for the same quarter in 2003, but the company attributed the drop to the change to its new “subscription accounting” model, which recognizes revenues over the length of the license term instead of as one up-front payment.

As evidence of this pattern, the company cited its orders for the quarter, which remained relatively flat year over year, at $13.3 million booked during the quarter ended Sept. 2004, compared to $13.7 million booked in the year-ago quarter. In addition, deferred revenue was $29.5 million, up 55 percent from $19 million in the prior-year period. Hanlon said that deferred revenue is expected to “decrease in relation to the decrease in reported revenues” as a result of a change in revenue recognition, and that the negative impact of the new model will continue for the next two quarters.

R&D spending remained flat, at $4.4 million for the second quarter of 2004 compared to $4.2 million in the same period of 2003.

The company wrote off $700,000 related to its acquisition of SciTegic, which closed on Sept. 27, and said it expects to record similar charges in future quarters.

Accelrys posted a net loss of $5.1 million, or $.21 per share, for the quarter, meeting analyst estimates. The company reported a net loss of $2.1 million, or $.09 per share, for the comparable quarter in 2003.

Cash, cash equivalents, and marketable securities were about $66.7 million as of Sept. 30.

Hanlon said that orders are expected to increase “modestly” for the full year compared to the 12 months ended March 31, but that full-year revenues “will be substantially lower” due to subscription accounting. Revenues from SciTegic “will provide some support to our year,” he said, but added that “the majority of SciTegic licenses likewise require subscription accounting.”

The company declined to disclose any specific revenue projections for the SciTegic subsidiary.

Emkjer said the life science informatics market is in a period of “stabilization,” with total orders at levels very similar to last year. “In the biotech segment, we’re not having the number of customers going out of business at the rate that the company has experienced over the last couple of years,” he said.

— BT

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