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Tripos Software Sales Nearly Flat in 05; Optive Revenues Barely Offset Decline in Other Areas

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In its first full-year earnings report to include the results of its acquisition of Optive Research last January, Tripos this week reported nearly flat revenue growth in its discovery informatics business year-over-year.

The company reported discovery informatics revenues of $24.9 million for 2005, compared to $24.6 million in 2004. Revenues from the company's discovery informatics services group fell to $3.1 million for the year from $4 million in 2004. Total revenues declined 14 percent for the year to $55.4 million from $64.8 million, reflecting a 25-percent revenue drop-off in the company's discovery research business related to the wind-down of its four-year, $90-million file-enrichment collaboration with Pfizer.

When Tripos acquired Optive last year in a transaction worth $8 million, the company predicted that the acquisition would contribute incremental revenue growth in the "low single-digit millions" of dollars in 2005 "in addition to preserving over $3 million in existing revenues from Optive products" that were already being distributed by Tripos. [BioInform 01-10-05].

While the company did not break out its 2005 annual revenues by product line, CFO Jim Rubin said in a conference call this week that Optive's revenues were "partially offset by declines in our other products" during the year.


"As we believe that the growth of the computational chemistry business will be slow and somewhat flat going forward, we believe that growth in the software area will be provided by technologies moving into the Benchware area, into a much larger market."

Company officials did not specify which products experienced the biggest fall-off, but CEO John McAlister said during the call that Tripos' traditional computational chemistry and modeling business "has been affected by the pharmaceutical industry's mergers and consolidation, as well as by their focus on becoming more efficient. As a result, we believe that that business is pretty well served at this point, and mature."

Nevertheless, he said, Tripos is counting on its new Benchware line of products, which is targeted to laboratory scientists rather than computational specialists, to drive future sales in the discovery informatics business. "As we believe that the growth of the computational chemistry business will be slow and somewhat flat going forward, we believe that growth in the software area will be provided by technologies moving into the Benchware area, into a much larger market," McAlister said.

McAlister cited the company's recent agreement with Wyeth as another positive indicator for the coming year. In January, Tripos announced that Wyeth would use its SMART-IDEA (Structure Modeling Analysis Research Tool Integrating Data for Experimental Analysis) integration technology as the basis for a new IT infrastructure that will support its worldwide discovery research team [BioInform 01-13-06].

Under the terms of the agreement, Tripos will receive around $5 million in software license and professional service fees from Wyeth over the next 12 to 18 months.

McAlister said that the pharmaceutical industry remains "substantially behind other industrial segments in the United States in the use of information and decision support processes throughout their operations. We believe — and what we are seeing at Wyeth is an example of this — that research assets are becoming much more focused on efficiency and productivity, and, frankly, one of the key aspects to that is developing the appropriate information infrastructure."

McAlister added that "the entire industry is facing that same decision point," and that Tripos is in a "unique position" to take advantage of that demand. "We expect 2006 to be an exciting and rewarding year in this segment of our business," he said.

Tripos officials did not provide a financial outlook for 2006, however, citing ongoing discussions with financial advisor Seven Hills Partners regarding the company's potential strategic reorganization [BioInform 01-13-06].

It appears that all the options that the company said it was considering when it announced the agreement last month — including mergers and acquisitions, becoming a private company, and separating its informatics and research businesses — are still on the table.

Tripos did not provide details of the ongoing strategic evaluation, but McAlister noted that the company "will strive to make the transition period as short as possible."

Year-End Analysis Uncovers Spreadsheet Error

Tripos disclosed that it had identified an error in its reported financial results for the first three quarters of 2005 in the process of closing its year-end financials.

John Yingling, vice president and chief accounting officer, said in the conference call that the error was the result of "incorrect cell references" in a consolidation spreadsheet application "related to foreign currency gains and losses from inter-company transactions." These transactions should have been recorded as "other income and expenses" on the company's statement of operations, but were instead recorded as "other comprehensive income" within the shareholders' equity section of the balance sheet.

Yingling said that Tripos will file a form 10QA for each of the first three quarterly reports in 2005 to restate its financial results, and that "the spreadsheet has been corrected and additional procedures and validation steps have been implemented."

As a result, the company's restated net results will see a benefit for the first and third quarters of 2005, while second-quarter restated earnings will take a hit. For the nine-month period ended Sept. 30, 2005, net income will be reduced by 34 percent from the previously recorded $1.4 million to the newly updated $952,000.

For the fourth quarter, Tripos reported a 19.6-percent drop in revenues to $13.9 million from $17.3 million in the comparable period of 2004.

The company attributed the fall-off to the expiration of the Pfizer agreement, which caused discovery research revenues to fall to $6.6 million from $9.5 million in the year-ago period.

Quarterly discovery informatics revenue also fell, to $6.1 million from $6.4 million in the fourth quarter of 2004, while discovery informatics services revenue dropped to $1.1 million from $1.3 million in the prior-year period.

Tripos reported a net loss for 2005 of $5.2 million compared with a net income of $246,000 for the fourth quarter of 2004.

Quarterly R&D spending rose to $4.1 million from $1.9 million in the year-ago period.

As of Dec. 31, Tripos had $6.2 million in cash and cash equivalents.

— Bernadette Toner ([email protected])

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