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Shareholders React Positively as Accelrys Wraps Up SciTegic Deal, Commits to Linux, More M&A


Accelrys saw its stock rise 14 percent last Wednesday, following announcements that it had closed its acquisition of SciTegic and committed to release two more software products on the Linux operating system in a partnership with IBM.

The company’s share price, which has steadily declined following its spin-off from Pharmacopeia in early May (see chart, p. 9), jumped by more than 14 percent — to $6.59 from $5.76 — the day following the announcements on Sept. 28.

“Accelrys is in a turnaround situation,” said CEO Mark Emkjer in a presentation on Tuesday at the UBS Global Life Sciences Conference in New York. He said the company has made “solid progress” toward its goals in recent months.

The firm’s management team is now complete, he said, and it has “rationalized” its cost structure, lowered its breakeven point (to $83 million from more than $100 million when he came on board), and committed to seek additional merger and acquisition opportunities in a mission to foster “strong top-line growth.”

Emkjer added that the company had also recently in-licensed two additional informatics tools to round out its product offering: the Phred/Phrap contig assembly package from the University of Washington, which will be integrated into its DSGene software package; and Sigma-Aldrich’s chemical catalogs, which will be available through its CAP (Chemicals Available for Purchase) database.

Sealing the Deal

On Sept. 27, Accelrys paid $13 million in cash and 1,040,119 shares of stock to close the SciTegic acquisition. SciTegic shareholders will also receive an additional 334,324 shares of Accelrys stock over the next two years, “subject to the continued employment of two of SciTegic’s key employees,” according to a form 8-K filed with the Securities and Exchange Commission. Accelrys previously said that SciTegic’s founders — Matt Hahn and David Rogers — were guaranteed positions after the acquisition. Up to $3 million of the cash payment will be held in escrow “as security for certain indemnification obligations to Accelrys,” the 8-K stated.

The value of the deal is around $20.5 million, based on the company’s closing share price on Sept. 27.

The $13 million cash payment is higher than the $12.25 million in cash that the company originally said it would pay under the terms of the agreement [BioInform 09-20-04]. The merger agreement filed with the SEC refers to an “MDL dispute” — a disagreement between SciTegic and Elsevier’s MDL Information Systems unit regarding a marketing agreement that the companies entered in January 2003. An amendment to the merger agreement dated Sept. 28 states that the amount owed to MDL is $1.2 million, but Accelrys officials were unable to confirm the financial terms of the dispute — or whether it had been settled upon closure of the SciTegic acquisition — before press time.

MDL officials declined to comment on the company’s relationship with Accelrys or SciTegic. In a statement e-mailed to BioInform, MDL said that it is “continuing to develop flexible, open-architecture discovery informatics solutions with a focus on integrating content and workflow applications for life sciences organizations and will continue to explore strategic alliances with partners that can assist in this effort.”

Accelrys did not disclose future revenue projections for SciTegic, which is now a subsidiary of the larger firm. Emkjer did say, however, that the company’s 2003 revenues of $86 million should “approach” $100 million following the acquisition.

Accelrys has boosted its headcount to 590 from 550 as a result of the acquisition. Hahn, co-founder and CEO of SciTegic, will serve as general manager of the subsidiary and report directly to Emkjer.

Fleshing out the Product Line

Emkjer said that its partnership with IBM has enabled it to “accelerate” the Linux porting process for its software products. In February, the company launched its first two Linux releases, in the form of its Insight II molecular modeling and Catalyst drug design packages. Last week, Accelrys said that Linux versions of its Cerius2 and Quanta modeling packages are next on the list. An Accelrys spokesman said the software would be ready “early in the new calendar year.”

In an earlier interview with BioInform, Accelrys’ senior director of new business development, Steven Levine, said that the company’s Linux strategy has proved successful so far, and that “virtually all” new sales for Catalyst and Insight II have been on Linux [BioInform 08-16-04].

In addition, Emkjer said that the Phred/Phrap and Sigma-Aldrich in-licensing deals are only the latest examples of the company’s push to beef up its product offering through similar agreements. Contig assembly “was the one piece of functionality missing” from DSGene, Emkjer said. He said that the algorithms should be available as part of the system “early next year.”

Accelrys joins only one other company, CodonCode, as a reseller of the Phred and Phrap assembly algorithms developed at the University of Washington. A spokeswoman for the U Wash tech transfer office said that the university sells the software directly to commercial users at a cost of $10,000 per seat, but did not disclose pricing terms for reseller agreements. More than 200 commercial entities currently license some combination of Phred and Phrap directly from the university, she said.

Rob Arnold, president and COO of Geospiza, which sells its own versions of the Phred and Phrap algorithms, said that he didn’t view Accelrys’s move into this sector as “directly competitive.” The current version of Phrap doesn’t work on whole-genome shotgun assembly, he noted, and many users prefer other assembly algorithms, such as Arachne and the Celera Assembler.

Nevertheless, he said, Phred/Phrap is “a tried and true product with a lot of history behind it, and there has been a nice adoption of it in the marketplace.”

Emkjer agreed, noting that the decision to offer the algorithms through DSGene was the direct result of customer requests.

Emkjer added that the company is making progress toward its “lifetime dream” of integrating its entire product portfolio under the single user interface of its Discovery Studio platform, but said it would likely be another two or three years before the company can “sunset” its current product offerings.

Keeping Wall Street Happy

Emkjer declined to provide any forward-looking financial guidance for Accelrys, noting that the company is in a “complex turnaround situation,” and that recent modifications in the company’s fiscal year and revenue recognition policy have made future revenue projections a bit complicated.

Most of the company’s shareholders have been patient with regard to these changes, he said. Only one large shareholder — Orbimed — reduced its holdings significantly following the split from Pharmacopeia, but Emkjer chalked this up to Orbimed’s history of investing in drug discovery companies rather than tools companies.

Accelrys’s institutional ownership is still around 75 percent, Emkjer said. However, he admitted, “we need to do a better job of getting out to Wall Street.”

The company’s share price began to dip again on Sept. 30, closing at $6.52.

— BT


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