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Ciphergen Lays Off One-Third in Reorg; Sources Blame Reach-Through for Woes

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Around one week before it was set to release its second-quarter earnings, Ciphergen laid off approximately 45 staffers, or around one-third of its workforce worldwide, as part of a broader restructuring aimed at saving costs, according to several people familiar with the events.

The restructuring comes amid significant and ongoing declines in share price and revenue that some believe is the result of a controversial royalty policy enacted last year. The move could make Ciphergen an attractive takeover target, especially by large mass spectrometry tool vendors, according to people familiar with the market and with the developments at the company.

It is unclear whether Ciphergen has been discussing options that include divesting all or part of its business. However, people familiar with Ciphergen's technology and with the restructuring suggested that Waters, Thermo Electron, and Applied Biosystems are likely suitors.

These companies would be interested in Ciphergen for its SELDI technology, which in theory could run on their MALDI mass spectrometers. The SELDI technology, though popular among biological researchers eager to dip their toes in the mass-spec field, has been hamstrung by Ciphergen's own mass-spec, which is generally believed to be a low-end instrument.

A spokesperson for Ciphergen declined to comment on the reorganization or whether the company is in talks with a potential suitor. An ABI spokeswoman said the company does not comment on market rumors. A Waters spokeswoman said the company does not comment on potential or possible acquisitions. Officials from Thermo were not immediately available for comment.

The job cuts trimmed Ciphergen's headcount to around 115 and included a reduction in certain severance packages, which were cut by as much as half in some cases, according to these people. The steps affected the entire company, including sales, marketing, research and development, and customer service, these people said. It was not immediately known how much money Ciphergen hopes to save in the short term or annually by taking this step.

Upper management was to have met as early as this week to discuss details of the reorganization, according to these people, though topics of their discussions were not immediately known. These people spoke on the condition of anonymity because they are either current employees, in which case they fear reprisals, or they are former employees who signed non-disclosure agreements.

Risky Business?


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The restructuring, most of which occurred last Friday, comes at a time when Ciphergen has been weakened by substantial stock declines and revenue shortfalls (see accompanying charts). The company's stock has lost more than 75 percent of its value since January 2004, while receipts have sunk by more than half between the first quarter of 2004 and the same period in 2005. Meantime, Ciphergen's first-quarter losses widened 25 percent to $9.3 million year over year.

At least two former mid-level Ciphergen employees said the revenue declines can be traced back to a controversial reach-through royalty policy that was enacted soon after Gail Page, president of the company's diagnostics division, was hired in January 2004.

According to these people, the reach-through agreement was designed to obtain royalties from potential SELDI customers for any products developed using the platform. These sources said that the reach-through gambit caused many customers to pull out of deals, which left Ciphergen with fewer sales.


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"Most of the people who buy the Ciphergen systems are buying them for biomarker discovery, and they want the biomarkers to develop new diagnostics," said one former mid-level Ciphergen official, who spoke on the condition of anonymity. This person said that the policy would see Gail Page, president of the diagnostics division, "jump in at the last minute and try to make [the potential customer] sign a reach-through license" specifying that "whatever is discovered on the Ciphergen platform is owned by Ciphergen."

Such an agreement would give Ciphergen rights to that discovery, and the customer that discovered the biomarker would be required to pay royalties to Ciphergen on sales of any diagnostics that are commercialized.

Because Page was "doing a very aggressive campaign" to obtain these reach-through agreements, "Ciphergen was consistently losing sales," this person said. This person also said that Page "obstructed" the sales process and in turn "ruined a lot of key business relationships" for the company.

Unless the company changes this strategy, the business "just won't work," according to another former mid-level official.

Speaking with ProteoMonitor this week, CEO Bill Rich disputed that Ciphergen has such a policy in place, but said the company offers other royalty and licensing options. For example, he said, Ciphergen has agreements with a number of institutions, including Johns Hopkins and MD Anderson, in which the institution agrees to license discoveries to Ciphergen in exchange for royalties on whatever tests are developed out of those discoveries.

"They don't have to license to us," said Rich. "If they'd like to do it, they can do it."

Rich added that he does not believe that sales of SELDI platforms have been hurt because of these kinds of royalty agreements.

Robert Verhagen, senior director of biomarker development at the MDS, said that the practice of reach-through royalty agreements based on equipment sales is something that is not widely practiced in the industry.

"It's a bit of a new paradigm, but I can't say I've never heard of it," he said.

Verhagen noted that a royalty agreement might be attractive in some situations, depending on what each party has to offer. For example, if a company discovers a useful assay in exchange for payment in royalty rates, that would be a kind of an alliance that could be more amenable than a straight payment agreement.

"It gets down to what it is that each party brings to the table and the value that that party provides in the process," he said.

Shareholder Revolt

Around the time Ciphergen was reporting its fourth-quarter earnings, events were brewing outside the company that could impact the way it does business. Capped by a 13-percent year-over-year decline in third-quarter revenue, and a 31-percent drop in fourth-quarter receipts, and a precipitous slide in stock valuation, at least five investors in February said they would call for a no-confidence vote with the hope of sparking a board meeting to discuss the direction and management of the company [see 2/25/05 ProteoMonitor].

ProteoMonitor recently learned that the shareholders will issue a letter this month to 30 institutional investors asking for their no-confidence vote. They will then present their response to Ciphergen's board.

Ciphergen's chief financial officer, Matthew Hogan, said at the time that the company had no comment on the pending no-confidence letter.

The shareholders called for the resignation of Rich, Page, and biosystems President Martin Verhoef.

"If you look at the share price, it's pretty dismal, and they don't look like they're recovering," one shareholder involved in the no-confidence campaign said on the condition of anonymity. "I think the stock could be a lot stronger, and they've got to execute a market strategy to get there. The market strategy just has not worked."


Unless Ciphergen changes its reach-through strategy, the business "just won't work."

Some Strides

In the ensuing five months, Ciphergen has made strides in at least two components of its business: biomarker discovery and molecular diagnostics. In June, Ciphergen said Bayer tapped it to help it identify biomarkers and develop an assay that could be used in its clinical trials in cancer [see 7/1/05 ProteoMonitor].

And few a weeks later â€" though it missed its self-appointed deadline â€" Ciphergen announced that Quest Diagnostics acquired a 17-percent stake in the company as part of its intent to develop and commercialize proteomic diagnostic tests based on the SELDI ProteinChip technology [see 7/20/05 ProteoMonitor].

Quest purchased 6.2 million shares Ciphergen's common stock â€" essentially gaining working control of the company â€" and obtained a five-year warrant to buy an additional 2.2 million shares for an aggregate price of $15 million.

Quest has also agreed to loan Ciphergen up to $10 million to fund certain development activities. The loan would be forgiven if certain undisclosed milestones are met. The cash is much needed by Ciphergen: The company had around $37.5 million in cash, equivalents, and short-term investments as of March 31. Ciphergen plans to release second-quarter earnings Aug. 8.

Asked whether Quest would be a potential suitor, a person close to the restructuring said "no." This person said Quest "feels burned" by its investment in Correlogic â€" whose OvaCheck test for ovarian cancer has not yet been approved by the US Food and Drug Administration â€" and would likely be unwilling to acquire Ciphergen outright.

â€" Kirell Lakhman ([email protected])
and Tien-Shun Lee ([email protected])

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