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Still Mulling Strategic Options, Tripos Board Opposes Shareholder Proposal to Sell Company


Tripos investors next week will vote on a resolution seeking to put the company up for sale before officials complete an ongoing evaluation of "strategic alternatives," even though the firm's board of directors has already vehemently opposed the resolution, according to a recent proxy statement filed with the US Securities and Exchange Commission.

The company's top line has been heavily hit over the past few quarters by the wind-down of a long-term collaboration with Pfizer, but the proposal was driven by the firm's lackluster share price, which has languished under the $5 mark for more than a year and hasn't seen $4 since late 2005 (see chart). The company's shares closed at $2.75 on May 11.

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Tripos investors will vote on the resolution, proposed by Anthony Magnoli, a private shareholder who owns 38,000 shares -- less than 1 percent of the company's 10.2 million outstanding shares -- during their annual shareholders' meeting on May 17.

In the resolution, Magnoli noted that the company's single-digit share price does not reflect its value. He cited the company's small size relative to other publicly traded companies, the fact that analysts do not cover the company, and an "illiquid" market as possible reasons for the discrepancy.

"I have concluded that the best way for the shareholders to recoup some of their investment is by a sale of the company," Magnoli said in the resolution. "I am certain that with the worldwide climate for takeovers and buyouts we could realize a fair price with the small amount of shares outstanding."

The Tripos board opposes the proposal, however, and has urged shareholders to vote against it "because its current efforts to evaluate the company's strategic alternatives to maximize shareholder value clearly encompass the matter requested by the proponent."

Indeed, the company hired investment banking firm Seven Hills in January to help it evaluate a number of strategic alternatives, including a sale of the company, becoming a private company, and separating its informatics and research businesses [BioInform 01-13-06].

The company noted in the proxy statement that "The sale of Tripos is a significant consideration in our ongoing process," but added that "solely pursuing an immediate outright sale of the company would ignore the strategic analysis and ongoing discussions that the investment bankers, board, and management have been carefully undertaking."

Tripos added that Seven Hills has identified "a number of potential strategic and financial partners with whom the company has engaged in discussions," but did not offer further details of any potential transactions.

The company noted in the proxy statement that it has "sought on many occasions" to convince Magnoli that his proposal is "moot" because the board is already exploring strategic options. "However, rather than incur the additional cost of seeking a ruling from the Securities and Exchange Commission that the proponent's proposal is excludible due to being moot or for other reasons, or incur further distraction of management attention through further discussions with the proponent, the company has agreed to accommodate proponent's demand to include the foregoing proposal in the proxy statement."

Tripos is clearly confident that shareholders will not vote in favor of the resolution, but the informatics sector has seen at least one surprise under similar circumstances. Just over a year ago, a proposal from a single investor at Lion Bioscience's shareholder meeting ultimately led to last month's sale of the firm to BioWisdom, rather than a management buyout, as the company's board had originally planned [BioInform 03-28-05].

Business as Usual

While Tripos weighs its options, it is remaining true to its hybrid business model, which consists of its US-based Discovery Informatics business and its UK-based Discovery Research business.

Revenues for both sides of the business fell in the first quarter of 2006, but the Discovery Research group was hit especially hard by the recent conclusion of a four-year, $90-million file-enrichment collaboration with Pfizer.

For the quarter ended March 31 -- the first after the completion of the project in December -- Discovery Research revenues fell 78 percent to $1.8 million from $8.1 million in the first quarter of 2005.

The company attributed the fall-off to the end of the Pfizer deal, as well as to "interruptions and inefficiencies" in operations related to a reorganization that included laying off 76 of its 161 Discovery Research employees [BioInform 1-27-06].

In a conference call to discuss the company's first-quarter earnings this week, CEO John McAlister said that certain of these "inefficiencies" were due to "the job action process mandated by the UK government for handling such issues," and will carry into the second quarter.

On the Discovery Informatics side, revenue fell slightly to $5.9 million from $6.3 million in the first quarter of 2005.

"I am certain that with the worldwide climate for takeovers and buyouts we could realize a fair price with the small amount of shares outstanding."

CFO Jim Rubin said in the conference call that the drop in software sales is mainly attributable "to biotech customers whose software license contracts were terminated early or not renewed due to cessation of business, refocusing on biological development, or loss of funding."

One bright spot was in the company's Discovery Informatics services business, which generated revenues of $789,000 compared to $668,000 in the prior-year period. Rubin said this increase reflects the ramp-up of a contract Tripos signed with Wyeth to use its Smart-Idea integration technology as the basis for the company's global research infrastructure [BioInform 01-13-06].

Under the terms of the agreement, Tripos will receive around $5.2 million in software license and professional service fees from Wyeth through mid-2007 in the first phase of the project.

McAlister said in the call that the company is already in discussions with Wyeth about "defining phase two," and added that "I believe there will be continued development beyond that."

McAlister added that the company is developing a "pipeline of new customers for the consulting business," as well as for its new line of Benchware software products, but he declined to provide further details on potential customer agreements.

Tripos' research and development spending rose to $2.8 million from $1.9 million in the first quarter of 2005. The company attributed this increase to the "interruptions and inefficiencies" at its UK Discovery Research facility, as well as to software development activity. McAlister said in the call that the company's "initial" product development focus in 2006 is on the next version of its Benchware Notebook electronic laboratory notebook.

The drop in overall revenue to $8.5 million from $15 million in the first quarter, combined with increased costs, caused the company's quarterly net loss to skyrocket to $3.7 million from $19,000 in the year-ago period.

During the conference call, Gary Siperstein of Eliot Rose Asset Management, which owns about 1.6 million Tripos shares, noted that the software business appears much healthier than the research business, and that the company may appear more appealing to Wall Street if it were to "sell off the research business or carry it as discontinued operations."

Rubin responded, however, that the firm is "not at liberty to discuss the ongoing strategic evaluation."

While remaining mum on potential future directions, company officials were quick to note some positive progress in the first quarter.

The company extended a loan agreement with LaSalle Bank for up to $6 million through Jan. 1, 2007, and recently raised net proceeds of around $5 million through the sale of 1.8 million shares of common stock [BioInform 05-05-06].

In addition, McAlister said, Tripos "reached a tentative settlement" of a shareholder class action suit at no cost to the company, "removing a potential financial exposure for the company in the future."

According to SEC filings, the suit was filed in July 2003 on behalf of purchasers of the company's stock during the first half of 2002, and was later amended to include purchases between February 2000 and July 2002. The complaint alleged that "statements made by the company in press releases and other public disclosures contained materially false and misleading information in violation of the federal securities laws."

Tripos filed motions to dismiss the amended complaint in 2004, but the motion was denied on Sept. 30, 2005.

On March 21, the parties reached a verbal agreement to settle the litigation. The amount of the settlement, $3.15 million, will be paid by Tripos' insurers, according to the SEC filings.

-- Bernadette Toner ([email protected])

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