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Tripos in Talks to Sell Software, Chemistry Units; Snag in Wyeth Deal Hurts Q3 Revenue

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Tripos is in “advanced talks” to sell its Discovery Informatics and its UK-based Discovery Research business units, signaling an end to a strategic review process that the company began at the beginning of 2006, company officials said this week.
 
Tripos CEO John McAlister said during a conference call that the firm is in “advanced discussions” with an undisclosed suitor for the Discovery Research business, which he said “would assume substantially all of the assets and liabilities of this business.” He added that Tripos has also been speaking with a potential buyer for the Discovery Informatics business.
 
Tripos disclosed its plans as it reported a decline in third-quarter revenue for both segments that contributed to a 44-percent slide in total receipts. Total revenue declined to $7.7 million from $13.2 million, and the company swung from a $160,000 profit in the year-ago period to a $4 million net loss in the current quarter.
 
Sales in the Discovery Research group fell by 62 percent to $1.6 million from $5.8 million, while Discovery Informatics software and services revenues fell 18 percent to $6 million from $7.3 million in the third quarter of 2005.
 
In a conference call this week, Tripos officials attributed the fall-off in Discovery Informatics revenues to a number of factors, including a delay in its $5 million enterprise informatics contract with Wyeth, announced in January [BioInform 01-13-06].
 
This delay was due to “a number of disparities in the respective organizations’ understanding of the design and implementation of the project that resulted in an extension of the timelines for this project beyond those originally understood by both parties,” McAlister said during the call.
 
As a result, Tripos was unable to recognize $1.4 million in revenue from the Wyeth project during the quarter due to a “recalculation of the current percentage of completion on the project,” McAlister said.
 
CFO John Yingling said that additional factors contributed to the sliding revenues, including lower sales in the Pacific Rim “as we work to replace two regional distributors.”
 
The company also saw a dip in revenues from its current docking software as it rolls out its new Suflex Dock module. Yingling said that Tripos is “pursuing market acceptance” for Surflex Dock “by offering an extended trial period.”
 
Other factors included $370,000 in revenue from the prior-year period “recognized from an early license termination,” Yingling said. The third quarter of 2005 also recognized $200,000 in previously delayed revenues from Japanese customers that was freed after resolution of a patent-infringement suit.
 
Contributing to the slide in Discovery Research revenue during the current quarter was the termination of a four-year file-enrichment collaboration with Pfizer. This contract, which Pfizer chose not to renew in late 2005 [BioInform 12-26-05], contributed more than $5 million to Tripos’ top line in the third quarter of 2005.
 
Tripos has struggled to compensate for the loss of Pfizer revenue. While McAlister said that revenues from discovery research projects for customers other than Pfizer are up “three-fold” in 2006 compared to 2005, he acknowledged that these revenues “did not replace the approximately $25 million in revenue provided by Pfizer in 2005.”
 
Furthermore, McAlister said, increased competition from lower-cost overseas outsourcing thwarted a number of potential discovery research deals with large pharmaceutical firms.
 
“Each time we were led to believe that we had capabilities that were of great interest to pharmaceutical companies that distinguished us from others, and each time after multiple visits and long discussions, the prospect took its business to a less costly labor venue, either in Asia or in Eastern Europe,” McAlister said.
 
In addition, two chemistry research contracts worth more than $700,000 went unsigned in the third quarter “due to customer internal issues that arose unexpectedly post negotiation,” McAlister said.
 
As a result, Tripos cut its UK-based Discovery Research staff several times during the course of the year to adjust for the waning projects. The business, which began 2006 with around 165 employees, now has 43.
 
On the Block
 
Pfizer’s decision to end its relationship with Tripos triggered a nearly year-long strategic review that ended with the decision announced this week to sell its UK-based Discovery Research business and restructure itself as a pure-play discovery informatics provider until it can find a buyer for that business as well.
 
Though each of its businesses has had its share of difficulties, McAlister said that since Tripos began its review in early 2006, it has “engaged in extensive discussions involving well over 100 potential partners, both domestic and international,” and that it received “well over a dozen proposals involving all the options that we set out to explore.”
 
McAlister said the company is in “advanced discussions” for the sale of the Discovery Research business with an undisclosed buyer “who would assume substantially all of the assets and liabilities of this business.” 
 

“It’s a mystery to me, in such a small industry, why it would take almost a year to identify interested buyers and move forward. That’s the real hanging question.”

Tripos is also in discussions with an undisclosed suitor for the Discovery Informatics business, though McAlister said Tripos will “continue to evaluate possible sales transactions for this unit.”
 
Likely suitors for the informatics business may include longstanding cheminformatics rivals Elsevier MDL or Accelrys, which recently confirmed its plans to grow through acquisitions [BioInform 10-27-06].  
 
In the short term, McAlister said that Tripos has “developed plans” to restructure the Discovery Informatics business as a public company.
 
To do so, the firm, which held $2.3 million in cash and cash equivalents as of Sept. 30, will have to raise more capital. The company intends to do so either through the replacement of a bank credit facility that matures Jan. 1, 2007, or through other debt or equity financing.
 
Investor Reaction
 
Shares of Tripos plunged 61 percent on the day the company announced its plans for selling its two business units, closing at $.62.
 
Nevertheless, some investors view the decision as the best possible choice for the beleaguered firm.
 
Larry Callahan, a broker at Huntleigh Securities, which recently purchased an 11.62-percent stake in Tripos, told BioInform said that the sale of both business units represented a better strategy than other options — such as divesting one business and retaining the other as a publicly traded firm — because of the “inefficiency of being a very small public company.”
 
Nevertheless, he said that there are “many unanswered questions” surrounding the company’s actions.
 
For example, he said, “It’s a mystery to me, in such a small industry, why it would take almost a year to identify interested buyers and move forward. That’s the real hanging question.”

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