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Faced with Falling Revenues, Tumbling Shares, Ciphergen Points to New ProteinChip System

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Ciphergen’s rollercoaster revenue growth over the last few quarters — culminating in a hefty shortfall of expectations in the quarter that ended June 30 — has made investors wary, and its stock has tumbled to about half its value since the beginning of July. Meanwhile, the company has been pointing to a possible future upturn driven by new products and diagnostic tests, and has promised to rein in costs by making cuts in its instrumentation division. As ProteoMonitor went to press, Ciphergen launched a new mass spec platform called ProteinChip System Series 4,000.

Two weeks ago, Ciphergen broke the news to investors, customers, and collaborators that revenues for the second quarter will be disappointing. Instead of the $17 million to $18 million analysts had expected, the company said it now expects to post between $10 million and $11 million in revenues — a shortfall of approximately 40 percent, and about $3.8 million less than for the same quarter one year ago.

“I think such a striking miss in the second quarter tells you that Ciphergen really doesn’t have a handle on how quickly the ProteinChip systems are ramping up,” said Eric Schmidt, who covers the company for SG Cowen.

Wall Street acted accordingly, sending shares in Ciphergen plummeting by half, from $7.32 at the close of Nasdaq trading June 30 — the day of the announcement — to $3.52 on Thursday morning.

Ciphergen plans to cut costs this quarter in its biosystems division “to bring down our operating costs in line with with our revenue run rate,” Rich said during the July 1 conference call. This will likely affect some early-stage research programs as well as general and administration expenses. The sales and marketing group may also come under the knife if it doesn’t perform according to expectations. Ciphergen said it plans to make more details available during its quarterly earnings call and webcast, scheduled for July 29.

Why the Slide?

This is not the first time Ciphergen’s revenues missed expectations. In the fourth quarter of last year, the company reported $15.2 million in receipts (see PM 2-20-04), an increase of 12 percent over the previous year’s quarter but less than anticipated. At the time, Ciphergen blamed the results in part on delayed orders. Indeed, its revenue growth picked up again to 21 percent year-over-year in Q1, when the company reported $15.5 million in revenues (see PM 5-14-04).

Like in previous quarters, Ciphergen blamed this period’s shortfall on increased competition from other companies selling mass specs for biomarker discovery, core proteomics labs jumping onto biomarker studies and favoring different approaches than Ciphergen’s SELDI technology — which caters to biologists with little mass spec experience — and a lack of funding and spending for proteomics in academia and companies.

But in addition, the company said it had recently suffered from “a strong backlash within the scientific community” against the ovarian cancer study published in 2002 by Lance Liotta and Emanuel Petricoin in The Lancet (see, for example, PM 2-13-04), according to CEO and president Bill Rich. That study used Ciphergen’s SELDI technology and an algorithm developed by Corre-logic Systems to discover mass spec patterns indicating disease.

The study, though, represents “a completely different pattern-based biomarker discovery and validation approach,” Rich said during the call, because Ciphergen uses a different algorithm and aims to identify the proteins underlying the mass spec patterns. However, “we have been adversely affected by the widespread criticism of the original study and by the attendant backlash against pattern approaches in general,” especially in the second quarter, he said.

Rich also acknowledged that competition in the mass spec-based biomarker field has become heated, “with multiple technologies creating confusion among scientists and potential customers alike,” he said. “These other sources have increased the sales cycle, and in some instances, have resulted in lost sales,” he added.

He claimed that other mass spec vendors are also “having a lot of problems in the proteomics area.” From talking to other companies’ representatives, he said, the company has found that “things aren’t booming.” His statement was somewhat confirmed by Bruker BioSciences’ announcement yesterday that its revenues for the second quarter will be smaller than expected (see Industry Briefs, p. 8).

New Platform Launched

Ciphergen is planning to counter the competition with its new mass spec platform, which “we believe … will go a long way toward creating new market momentum for us,” Rich said, but he did not provide any details about the instrument during the call.

The company also reported progress in ongoing biomarker discovery studies in its diagnostics division, in collaboration with academic institutions, which it hopes will re-fuel instrumentation sales in the future. These include studies in ovarian cancer, kidney transplant rejection, breast cancer, prostate cancer, and Alzheimer’s disease.

Ciphergen said it still expects to sign up a reference lab or an in vitro diagnostic company by the end of this year to develop diagnostic tests, the first one most likely for ovarian cancer.

However, this may not help the company in the short term. “I think until diagnostic ramps up as a significant percentage of sales, Wall Street will consider this to be an expectation company and will judge on the progress with instruments,” said Schmidt, the SG Cowen analyst. “But […] over time, diagnostics could turn into a sizeable opportunity, it’s just a long way away.”

— JK

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