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Small Ciphergen Shareholder Group Drafts No-Confidence Letter; Will It Disrupt Dx Momentum?

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A group of Ciphergen shareholders are drafting a no-confidence letter stating that they are dissatisfied with the company’s progress and share values, and that they seek to replace top management, ProteoMonitor has learned.

The shareholders are taking these steps after Ciphergen reported last week a 12.7-percent fall-off in total revenue during the fourth quarter of 2004.

Shares of Ciphergen have declined more than 78 percent to below $3 per share from $14 last August, and more than 92 percent from $39 in September 2000, when the company went public, noted one letter co-author who owns 10,000 shares. The individual investor said he preferred to remain anonymous because he is a former employee.

“If you look at the share price, it’s pretty dismal, and they don’t look like they’re recovering,” the shareholder said. “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.”

However, Adam Chazan, who covers Ciphergen for Pacific Growth Equities, dismissed the shareholder’s complaint about share prices, pointing out that share prices are not a good indication of the Ciphergen’s success or failure. The entire stock market collapsed in 2000, Chazan noted, and no one was spared.

“Stock prices go up and down — that’s just what [they do],” said Chazan. “To look back and say it used to be 40 bucks per share and to compare — well the market collapsed and the entire life-science industry collapsed.”

The shareholder said he and about seven other investors plan to send their letter out to institutional and other investors, and to call for a no-confidence vote. He said he hopes the group’s actions will bring about a meeting of the board of directors to discuss the direction and management of the company.

The shareholders are calling for the resignation of CEO William Rich; Martin Verhoef, president of the biosystems division; and Gail Page, president of the diagnostics division.

“I hope the outcome is that there’s a talent review, and a discussion about how the company can be brought to the next level,” the shareholder said.

Ciphergen Chief Financial Officer Matthew Hogan said the company had no comment on the pending no-confidence letter.

According to Ciphergen’s fourth-quarter earnings report, released last week, total revenues for the three months ended Dec. 31, 2004, fell 12.7 percent to $10.1 million from $11.6 million year over year. Total revenue for fiscal year 2004 decreased 8 percent to $40.2 million from $43.6 million in 2003.

However, the company projected that its 2005 revenue would increase by as much as 20 percent to between $44 million and $48 million.

“We believe that our new product introductions and the results that prestigious laboratories are achieving through use of ProteinChip technology is creating growing acceptance by the market and we anticipate renewed revenue growth to result in 2005,” Rich said in the company’s earnings release last week.

Rich added that the company is expecting to achieve major milestones in its diagnostics division during 2005, including commercialization partnerships and the potential launch of a first clinical diagnostic test.

Chazan said that he wouldn’t be surprised to see Ciphergen do a deal with a large diagnostic-services company sometime before the first half of 2005. “That’s what it’s going to take to get shareholders excited about Ciphergen,” said Chazan. “From the standpoint of trying to get more bang for your buck, that’s the only thing that’s going to get the stock back up.”

The company reported that it has around $35.4 million cash and equivalents, and $2.2 million in short-term investment as of Dec. 31, 2004.

“Their current burn rate is about seven million [dollars] a quarter, so that gives them about a year to 18 months,” the shareholder said.

Chazan agreed with the shareholder that at the current burn rate, Ciphergen has enough cash to carry it for the next 18 months. He pointed out, however, that the company has undergone restructuring to reduce its burn rate. One cost-cutting measure was to reduce the company’s research and development spending by 35.6 percent during the fourth quarter to $3.7 million from $5.8 million year over year. The company has also reorganized its sales and marketing division to reduce costs.

“Ciphergen has always been a company that spends more money than they have,” said Chazan. “But they’re pushing things down to reduce forward-looking expenses.”

According to the disgruntled shareholder, Ciphergen has “phenomenal” technology, but has failed to make that technology accessible to enough people. They just haven’t executed a market strategy that is going to take the tools business to the next level,” the shareholder said.

The shareholder suggested that the company develop a lower-end instrument that is more accessible to basic researchers and to clinical researchers as well.

Chazan disagreed with the shareholder, pointing out that Ciphergen’s new Series 4000 instrument is priced reasonably low, at $125,000 to $150,000 for the manually operated “personal edition,” and $180,000 to $310,000 for the automated “enterprise edition.”

Ciphergen sold 32 Series 4000 instruments during the fourth quarter of 2004, with more customers choosing the higher-priced enterprise edition.

“It’s good that customers are choosing the higher-price boxes, because [Ciphergen] make[s] more money, and bigger boxes also consume more protein chips,” Chazan noted.

In its fourth quarter financial report, Ciphergen pointed out that the number of scientific papers that cited the use of ProteinChip technology increased by 60 percent from 2003 to 2004, with 122 papers in 2004, and more than 350 publications in total since the inception of the company in 1993.

“This growing list of successes continues to feed our systems growth and potential diagnostics pipeline and validates our Pattern Track process and ProteinChip technology,” the company said.

Despite the successes touted by Ciphergen in its diagnostics business, the disgruntled shareholder was skeptical that the division would pan out before the company runs out of money.

“With the diagnostics, you’ve got to ask, ‘Are you putting all your marbles into one basket?’” the shareholder said. “If you look at the diagnostics market in general, it just takes time.”

The shareholder said the no-confidence letter would be sent out next week after his group receives a list of investors from a Securities and Exchange Commission database.

— TSL