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At Tripos, Weak Service Receipts Eclipse Strong Software Sales in Q3, Hurting Revs


Tripos reported a 10-percent increase in software revenues for the third quarter of 2005 last week, but that growth was countered by a drop-off in the company's services business that resulted in an 18-percent decrease in overall revenues to $13.2 million from $16.1 million in the third quarter of 2004.

Tripos officials stressed during a conference call last week that the slide was expected due to the wind-down of a four-year chemical file-enrichment project that its Discovery Research services group is conducting with Pfizer, marking the second consecutive quarter that the expiring project has had a negative impact on the company's revenues [BioInform 08-01-05].

John McAlister, president and CEO of Tripos, said during the call that "any definitive determination" about continuing the Pfizer contract "likely will not occur until late in 2005." He said that Tripos will disclose the outcome of the discussions, but "until and unless there is an announcement, there is no guarantee that we will continue to work with Pfizer" beyond 2005.

Tripos reported receipts of $6.6 million for its Discovery Informatics business for the quarter ended Sept. 30, up from $6 million in the third quarter of 2004. The company attributed growth in software sales to a number of new products — including the Benchware line of laboratory research software that it launched earlier this year.

Though Tripos created its new LeadDiscovery program to develop novel lead compounds for its pharma and biotech customers, "it is important to note that Tripos is not transitioning to a therapeutic company."

Benchware 3D Explorer, a chemical visualization and decision-support tool and the first product Tripos introduced in the product line, "has gotten a lot of traction," McAlister said, noting that the company has "a number of significant customers" with "multiple tens of units installed, and we believe that that is going extremely well for us at the moment."

Software sales also got a boost from the resolution of a patent-infringement suit in Japan related to FlexX, a docking software product that Tripos in-licenses from a third party. Although Tripos was not directly involved in the patent-infringement case, renewal contracts for many of its products were on hold during the second quarter due to the ongoing litigation.

The company released a non-infringing version of FlexX in May, and it appears that the issue has been resolved. Jim Rubin, Tripos CFO, said that the company's distributor in Japan was able to recover approximately $200,000 worth of previously delayed transactions during the third quarter.

Another contributing factor for the growth in discovery informatics products was "the completion of an early-termination agreement with a customer, resulting in $280,000 of revenue in the third quarter of 2005," Rubin said during the conference call.

McAlister said that the sales cycle for the Benchware Electronic Notebook, launched in August, has proven to be slow, but that was to be expected. "That product is an enterprise solution. It's not something that you can adopt on a one-off basis within a company, but is something that a company decides to deploy across the organization and globally," McAlister said. "We have a number of opportunities being explored with that product right now and in evaluation stage. For a decision of that size, evaluations are lengthy, and we are extremely hopeful that that product will gain a lot of traction."

On the services side of the business, revenues from discovery informatics services fell 42 percent to $716,000 from $1.2 million in the third quarter of 2004, while discovery research services dropped 34 percent to $5.8 million from $8.8 million in the prior-year period.

Girding for the possibility that Pfizer won't renew its contract, Tripos has embarked upon a new strategy to exploit its chemistry facility in Cambridge, UK, with a new program called LeadDiscovery under which it plans to develop novel lead compounds for its pharma and biotech customers.

"There is no guarantee that [Tripos] will continue to work with Pfizer" beyond 2005.

"It is important to note that Tripos is not transitioning to a therapeutic company," McAlister said. "These programs do, however, position us as a much more attractive partner for pharmaceutical and biotech companies with high-value offerings that promise much better returns to our company and our partners than we experienced in the past."

McAlister said that Tripos began speaking to customers about the new offering during the second quarter, "and several companies have indicated interest in exploring these compounds in their internal projects." So far, he said, "one company has contracted to screen one of the new lead discovery libraries against their own targets, and we are awaiting the outcome of that activity."

If successful, the program is expected to generate up-front payments, funding for continued research, and milestone payments.

Quarterly R&D spending rose to $2.9 million from $2.1 million in the third quarter of 2004, primarily due to the transfer of some staff from the service side of the business to the software-development side.

"Certain software-development staff previously deployed in the discovery informatics service area have been redeployed to work on new products that have technical feasibility," particularly those products in the Benchware line, Rubin said.

Tripos had $3.6 million in cash and cash equivalents as of Sept. 30. In response to an analyst who questioned whether Tripos customers perceive "a lack of financial stability" at the firm, McAlister said, "That has not been an issue with our customers. We've been very transparent, providing products and services for the past 25 years, and it's never been from a position of having a huge pot of capital sitting in the bank somewhere. We don't believe that that's a particularly good use of shareholders' money to simply have cash sitting in a bank earning interest."

Tripos shares fell by as much as 14 percent in daytime trading after the company released its quarterly results, closing at $3.21 that day — 8 percent below the previous day's closing price of $3.50. The share price began inching back up the following day, however, closing at $3.40.

— Bernadette Toner ([email protected])

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