DPII Discovery Partners

SAN DIEGO, Aug. 2 /PRNewswire-FirstCall/ -- Discovery Partners International, Inc. (NASDAQ:DPII) today announced unaudited financial results for the three and six months ended June 30, 2005. Revenue for the three months ended June 30, 2005 was $11.4 million, a decrease of $1.6 million, or 13 percent, compared to $13.0 million for the same period in 2004. The decrease in revenue for the second quarter of 2005 versus 2004 was due to lower product and screening service revenue, which more than offset higher chemistry service revenue. The reduction in product revenue was caused by the lack of Crystal Farm shipments to our distributors during the quarter due to their inventory levels. The reduction in screening service revenue was due to a lower level of screening service activity. The increase in chemistry service revenue was due to new revenue from the National Institute of Mental Health (NIH), which offset lower revenue from Pfizer. Revenue for the six months ended June 30, 2005 was $18.4 million, a decrease of $6.4 million, or 26 percent, compared to $24.8 million for the same period in 2004. The decrease in revenue for the 2005 period versus 2004 was due to lower revenue in all service and product categories. The primary driver of the decreased services revenue was lower chemistry service revenue from Pfizer and lower screening service revenue caused by a lower level of screening service activity. The decrease in chemistry service revenue was partially offset by new revenue from the NIH. The reduction in product revenue was caused by the lack of Crystal Farm shipments to our distributors during the first half of 2005 due to their inventory levels. Net loss for the three months ended June 30, 2005 was $1.4 million, or $0.05 per share, compared to net income of $0.7 million, or $0.03 per share, for the same period in 2004. Net loss for the six months ended June 30, 2005 was $5.9 million, or $0.23 per share, including a $1.0 million, or $0.04 per share, non-cash impairment charge associated with the write-down of our toxicology-based intangible assets, compared to net income of $1.8 million, or $0.07 per share, for the same period in 2004. Gross margin as a percentage of revenue for the second quarter of 2005 was 33 percent, down from the 40 percent result in the second quarter of 2004, due to lower service and product margins caused by lower volumes. Gross margin as a percentage of revenue for the first six months of 2005 was 29 percent, down from the 42 percent result in the same period of 2004, due to lower service and product margins caused by lower volumes. Research and development costs for the second quarter of 2005 were $1.6 million, compared to $0.9 million in the second quarter of 2004. Research and development costs for the first six months of 2005 were $2.9 million, compared to $1.8 million in the same period of 2004. The increase in research and development costs resulted from the acquisition of the natural compound based discovery business of Biofrontera Discovery GmbH and from the redeployment of development scientists and engineers from direct revenue generating activities of customer funded R&D programs and collaborations to internal programs focused on targeted libraries, compound storage solutions, in silico tools, screening assays and drug discovery process development. Selling, general and administrative costs for the second quarter of 2005 were $3.6 million, unchanged from the second quarter of 2004. Selling, general and administrative costs for the first six months of 2005 were $7.7 million, compared to $7.2 million in the same period of 2004. The increase in selling, general and administrative costs for the first six months resulted primarily from costs related to the separation agreement with a former executive. Cash, cash equivalents and short-term investments at June 30, 2005 were $80.0 million, a decrease of $4.9 million from the balance at March 31, 2005 due primarily to the significant increase in working capital requirements, caused by the increase in second quarter revenue over the first quarter level, and the net loss. Since our first quarter 2005 earnings report, Discovery Partners has achieved several milestones: * In May the Unistore Compound storage system was launched into the European market at the Compound Management Symposium in London, UK. * The Company became part of the Russell Microcap and NASDAQ Healthcare indices. * In June a scientific article on uARCS co-authored by scientists from Abbott and DPI was published in the Journal of The Society for Bimolecular Screening. * The NIH Compound Repository has become operational after the installation of the first of two Unistore systems. The first 100,000 compounds have been received, shipments have started to some of the newly selected screening centers and our recommendation for the second set of 100,000 compounds to be acquired has been submitted to the NIH for review and approval. "Our financial performance in the second quarter, although significantly better than the first quarter due to renewed shipments to Pfizer, is still below our expectations as we continue our efforts to refocus the Company toward larger value added collaborations and away from providing individual elements of our drug discovery capabilities as separate service offerings," commented Riccardo Pigliucci, CEO and Chairman of Discovery Partners. "During the quarter we have substantially increased the number and the level of discussions with several pharmaceutical companies aimed at entering into multi-target, multi-year collaborations to provide them with a stream of pre- clinical candidates. Our collaborative concept and capabilities have been extremely well received and are predicated on a rapid deployment of scientists as soon as collaborations are signed. Given the uncertain lead-time associated with the establishment of significant scientific collaborations and the time associated with re-establishing research teams, we have decided, for the time being, to keep our scientific resources intact and ready to be deployed on short notice. As a result, we are redeploying our scientists from revenue generating activities toward internal R&D and business development efforts. We are fully aware that this can only be a short term situation that is sustainable for a limited period of time but we are confident that we will soon be able to successfully conclude ongoing collaboration discussions. In any event we are also fully prepared to implement appropriate actions to reduce expenses by year end should our expectations for new business not be fulfilled," continued Pigliucci. "Our current 12-month backlog is just over $20 million, substantially lower than what we reported last quarter due to the pending expiration of our Pfizer contract in early January, 2006. Based on our current new business visibility, we now estimate revenues for the second half of 2005 at approximately the same levels as the first half with a slightly higher loss due to the additional R&D expenses at the newly acquired natural product operation in Heidelberg, Germany. This revenue amount does not include the revenue for the two Universal Store Systems to be deployed to the NIH project in 2005, as they will be recognized over the life of the NIH contract and the loss does not include any potential restructuring charge that could be required depending on the future business outlook that evolves during the last half of 2005. We continue to estimate that cash at the end of 2005 will be in excess of $75.0 million, absent any further M&A activities, restructuring activities or stock repurchases under our current authorization," concluded Pigliucci. A conference call discussing second quarter 2005 financial results and outlook for the remainder of 2005 will be publicly available via the Company's website, at http://www.discoverypartners.com/. The live webcast will begin at 11:00 am Eastern Time, on Tuesday, August 2, 2005. In addition to the live webcast, replays will be available to the public on Discovery Partners' website, http://www.discoverypartners.com/ and by calling 888-203-1112, access code: 6414617 through Tuesday, August 9, 2005. About Discovery Partners Discovery Partners International, Inc. offers integrated services, products, and systems that span the drug discovery continuum, including target characterization, targeted and screening-library design and synthesis, high throughput and high content screening, lead generation and optimization, gene expression analysis, compound management, and protein crystallization. Discovery Partners has actively contributed to dozens of drug discovery collaborations. Discovery Partners is headquartered in San Diego, California. Statements in this press release that are not strictly historical are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a high degree of risk and uncertainty. Discovery Partners' actual results may differ materially from those projected in the forward looking statements due to risks and uncertainties that exist in Discovery Partners' operations, research and development efforts and business environment, including whether the Company's relationships with Pfizer and the NIH continue through and beyond their contractual terms, the mix and timing of revenue from sales of products and services, the ability to establish and maintain collaborations, execute more profitable business and realize operating efficiencies, the level of expenditures necessary to enable the Company to achieve its objectives of focusing its business on providing lead drug candidates to pharmaceutical companies, the ability to successfully commercialize the uARCS technology, the ability to acquire complementary businesses or capabilities and the integration of acquired businesses or capabilities, the trend toward consolidation of the pharmaceutical industry, quarterly sales variability, technological advances by competitors, and other risks and uncertainties more fully described in Discovery Partners' annual report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission and Discovery Partner's other SEC reports. Backlog measures are not defined by GAAP and our measurement of backlog may vary from that used by others. While we believe that long-term backlog trends serve as a useful metric for assessing the growth prospects for our business, backlog is not a guarantee of future revenues and provides no information about the timing on which future revenue may be recorded. DISCOVERY PARTNERS INTERNATIONAL, INC. Selected Consolidated Financial Data (In Thousands, Except Per Share Amounts) Consolidated Statements of Operations Three Months Ended Six Months Ended June 30 June 30 2005 2004 2005 2004 (Unaudited) (Unaudited) Revenues: Services $11,092 $11,699 $17,938 $21,974 Products 270 1,300 491 2,833 Total revenues 11,362 12,999 18,429 24,807 Cost of revenues: Services 7,411 7,076 12,636 12,740 Products 250 744 439 1,631 Total cost of revenues 7,661 7,820 13,075 14,371 Gross margin 3,701 5,179 5,354 10,436 Operating expenses: Research and development 1,605 900 2,856 1,793 Selling, general and administrative 3,599 3,597 7,670 7,155 Amortization of stock-based compensation 314 135 598 304 Restructuring -- -- 130 -- Impairment of intangible assets -- -- 1,000 -- Total operating expenses 5,518 4,632 12,254 9,252 Income (loss) from operations (1,817) 547 (6,900) 1,184 Interest income, net 413 296 878 633 Foreign currency transaction gain, net 2 (97) 50 (49) Other income, net 25 31 58 60 Income (loss) from operations before income taxes (1,377) 777 (5,914) 1,828 Income tax (9) 37 3 42 Net income (loss) $(1,368) $740 $(5,917) $1,786 Net income (loss) per share, basic $(0.05) $0.03 $(0.23) $0.07 Weighted average shares outstanding, basic 25,853 25,169 25,848 24,851 Net income (loss) per share, diluted $(0.05) $0.03 $(0.23) $0.07 Weighted average shares outstanding, diluted 25,853 26,031 25,848 25,878 Summary Consolidated Balance Sheets June 30, December 31, 2005 2004 (Unaudited) Assets Current assets: Cash and cash equivalents $28,915 $13,148 Short-term investments 51,059 66,870 Accounts receivable, net 9,825 14,334 Inventories, net 2,665 2,842 Prepaid and other current assets 2,074 2,748 Total current assets 94,538 99,942 Restricted cash 1,165 1,120 Property and equipment, net 9,106 7,206 Prepaid royalty, net 4,224 4,828 Patents and license rights, net 1,131 2,287 Other assets, net 177 260 Total assets $110,341 $115,643 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $2,565 $3,198 Accrued compensation 1,828 2,517 Deferred revenue 2,616 1,072 Restructuring accrual 148 294 Obligations under capital leases, less non-current portion 104 -- Total current liabilities 7,261 7,081 Deferred rent 294 155 Obligations under capital leases, less current portion 116 -- Stockholders' Equity: Common stock 26 26 Common stock issuable 2,849 2,657 Treasury stock (917) (794) Additional paid-in-capital 208,145 207,804 Deferred compensation (1,874) (2,187) Accumulated other comprehensive income 86 630 Accumulated deficit (105,645) (99,729) Total stockholders' equity 102,670 108,407 Total liabilities and stockholders' equity $110,341 $115,643 Summary Consolidated Statement of Cash Flows Three Months Ended Six Months Ended June 30, 2005 June 30, 2005 (Unaudited) (Unaudited) Net Loss $(1,368) $(5,917) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 1,390 2,728 Amortization of stock-based compensation 314 598 Restructuring expense -- 130 Realized loss on investments 49 126 Loss on disposal of fixed assets 21 22 Impairment of intangible assets -- 1,000 Change in operating assets and liabilities: Accounts receivable (4,342) 4,049 Inventories 1,160 150 Other current assets 62 588 Accounts payable and accrued expenses 964 (1,262) Restructuring accrual (182) (276) Deferred revenue (516) 1,635 Deferred rent 138 139 Restricted cash (47) (47) Net cash (used in) provided by operating activities (2,357) 3,663 Investing activities: Net cash paid for business (1,509) (1,509) Purchases of property and equipment (1,744) (2,267) Other assets 578 1 Purchases of patents, license rights and other intangible assets -- (2) Purchases of short-term investments, net (1,741) 15,703 Net cash (used in) provided by investing activities (4,416) 11,926 Financing activities: Net proceeds from issuance of common stock 68 221 Payments on debt (70) (70) Net cash (used in) provided by financing activities (2) 151 Effect of exchange rate changes 30 27 Net (decrease) increase in cash and cash equivalents (6,745) 15,767 Cash and cash equivalents at beginning of period 35,660 13,148 Cash and cash equivalents at end of period $28,915 $28,915 DATASOURCE: Discovery Partners International, Inc. CONTACT: Riccardo Pigliucci, Chief Executive Officer, , or Craig Kussman, Chief Financial Officer, both of Discovery Partners International, +1-858-228-4113 Web site: http://www.discoverypartners.com/

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