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LSBC Bows Out of Contract Service: Future of Proteomics Business Murky

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Large Scale Biology is shutting down its fee-for-service proteomics contract business and is “reviewing and evaluating its business, prospects, and programs” in regards to the rest of its Germantown, Md.-based proteomics business, the company said in a series of reports over the past week. The news was punctuated by a sharp 44 percent drop in the company’s stock price on Friday. (The stock has since recovered, but has not reached its Nov. 13 levels.)

“Our intentions certainly were to focus, and are to focus, this company as a product company and not a fee-for-service company,” Ryan said in a conference call Tuesday. He said that LSBC has been focusing on product development since April.

The company indicated that selling its proteomics technologies is on the table, but CEO Kevin Ryan clarified that LSBC may also redirect its proteomics capabilities toward product development. Product development is currently being undertaken only at the company’s Vacaville, Calif., facility and does not involve proteomics at all, Ryan said.

It is not clear, however, how proteomics might be involved in future product development. What is clear is that the proteomics contract service is done. “The -omics aura kind of came and went. This type of service is being done internally by every major research center … the problem obviously commercially is that there is no money in it,” Ryan said in the call. Lack of intellectual property coming out of such contracts made them “not a desirable long-term business model for the company,” a company spokesman added in an email to ProteoMonitor.

The uncertainty over the company’s future in proteomics began with the release last Friday of the company’s quarterly 10-Q form filed with the US Securities and Exchange Commission, and an accompanying press release that stated that that LSBC was going to “re-evaluate its fee-for-service proteomic contract research.” In the 10-Q, the company announced the termination of a large toxicoproteomics contract with the National Institute of Environmental Health Sciences that was originally expected to bring in more than $12 million over five years to LSBC (see PM 7-29-02). The contract, originally awarded in July 2002, called for LSBC to use its automated 2D gel and mass spec platform to study protein expression patterns in rodents exposed to specific environmental toxins. A database of the results from these experiments was also slated for development as part of the contract. Revenues from this contract — combined with that from contracts or grants with the Growers Research Group and the National Institute of Standards and Technology — were the primary reasons for the $1.3 million growth in revenue that the company experienced thus far in 2003, according to the 10-Q report. The report continued, “Recently signed contracts and awarded grants are not expected to provide sufficient revenues in 2004 to offset the loss of NIEHS revenues. Accordingly, we expect that quar-terly revenues will be lower in the first half of 2004 than 2003, absent any new sources of significant revenues.”

This language, along with a statement that the company could not guarantee its ability to “con-tinue as a going concern” — in other words, it could not show that it had enough cash or deals on hand to supply funds through another year — led a Dow Jones Business News reporter to link the two and report that the loss of the contract had caused the going concern problem. LSBC responded with two more press releases attempting to clarify its position and rebuke the writer, followed by a Nov. 18 conference call. In the call, Ryan vehemently denied that the NIEHS contract termination and the going concern problem were related, and insisted that although the going concern language was legally necessary in the report, LSBC had enough funding opportunities in the works to keep the company afloat through the next year. “The end of third quarter required the language simply because mathematically it couldn’t be demonstrated that there were 12 months cash on hand and/or material contracts on hand that would be sufficient to make up the difference,” Ryan said during the call. “In spite of that, we certainly have an active basis of contract opportunities and product agreement opportunities.”

As of Sept. 30, 2003, LSBC had $11.3 million in cash and marketable securities, down from $23.1 million on Dec. 31, 2002 (see PM 10-24-03). Over the past four quarters, the company has burned an average of $4 million of these assets per quarter, so the company’s current top-line assets would sustain it for less than three more quarters at current burn rates.

In the call, Ryan also denied that the NIEHS contract was at all important to LSBC’s bottom line, calling it “at best break-even and cash-neutral.” LSBC corporate communications officer Dan Moriarty later told ProteoMonitor that although the NIEHS revenues were in fact significant, the deal overall was not profitable.

Loss of “Key People” Precedes Loss of Contract

But the loss of the NIEHS contract certainly seems indicative of tough times for LSBC. Allan Benton, chief of the research contracts branch of the NIEHS, told ProteoMonitor that an important reason the government agency had for terminating the deal with LSBC was that some of the “key people” working at LSBC who had precipitated the agency’s decision to work with the company had since left, and they had not been replaced with comparable talents. “There are certain people we designate on a contract that are key — they’re the ones that play a substantial role in our selection of a particular contractor,” Benton explained. “When people leave like this, you see what actions the contractor takes in terms of replacing them.” Benton also noted that just as LSBC was rethinking its future in proteomics contracts, “we are too.”

LSBC said in the 10-Q filing that it did not fail to deliver under the contract: “Our performance under the [NIEHS] contract including sample analysis, reports, and data deliverables has been in strict conformance with contract-specified research protocols and timetables.”

It was not immediately clear what is likely to happen to the rest of LSBC’s proteomics division. Company officials would not comment on the future of LSBC’s ongoing work or deals in biomarker discovery, protein biochips, or protein database development, other than to repeat that “the company is reviewing and evaluating its business, prospects, and programs.” LSBC most recently announced the receipt of a biomarker discovery grant from the National Institute on Alcohol Abuse and Alcoholism at the end of September (see PM 9-26-03).

Company officials also would not comment on the future of LSBC’s Germantown, Md. facility, which currently houses the proteomics division, or on the fate of the facility’s employees. In the 10-Q, however, LSBC said that it is attempting to sublease about 75 percent of the facility’s space for 2004. The company’s lease expires in 2010.

LSBC is not the only company to announce that it is getting rid of its proteomics contract services business in recent days: Celltech also announced this week the closure of the contract business it inherited from Oxford Glycosciences, after failing to secure an interested buyer (see Briefs, PM 6-2-03).

LSBC also announced this week that it had signed an exclusive licensing agreement with the Cincinnati Children’s Hospital Medical Center in Cincinnati, Ohio for the development of a drug to treat atherosclerosis.

— KAM

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