DPII Discovery Partners

SAN DIEGO, Nov. 1 /PRNewswire-FirstCall/ -- Discovery Partners International, Inc. (NASDAQ:DPII) today announced unaudited financial results for the three and nine months ended September 30, 2005. Revenue for the three months ended September 30, 2005 was $11.1 million, a decrease of $1.5 million, or 12 percent, compared to $12.6 million for the same period in 2004. The decrease in revenue for the third quarter of 2005 versus 2004 was due to lower volumes in all service and product categories. The reduction in screening service revenue was due to a lower level of screening service activity. The reduction in chemistry service revenue was due to lower chemistry service activity caused by the completion of two chemistry service contracts and lower revenue from Pfizer, which more than offset new revenue from the National Institute of Mental Health (NIH). The reduction in product revenue was caused by lower Crystal Farm shipments to our distributors during the quarter due to their inventory levels. As a result of our previously announced sale of our Discovery Systems product lines to Nexus Biosystems, in future periods, the Company will not report any product revenues or related expenses, and historical operating results related to the net assets sold will be reported as discontinued operations. The financial tables included herein show the proforma impact of the discontinued operations on the results of the Company. Revenue for the nine months ended September 30, 2005 was $29.5 million, a decrease of $7.9 million, or 21 percent, compared to $37.4 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 lower Crystal Farm shipments to our distributors during the period due to their inventory levels. Net loss for the three months ended September 30, 2005 was $0.3 million, or $0.01 per share, compared to net income of $0.8 million, or $0.03 per share, for the same period in 2004. Net loss for the nine months ended September 30, 2005 was $6.3 million, or $0.24 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 $2.5 million, or $0.10 per share, for the same period in 2004. Gross margin as a percentage of revenue for the third quarter of 2005 was 41 percent, down from the 46 percent result in the third quarter of 2004, due to lower service and product margins caused by lower volumes. Gross margin as a percentage of revenue for the first nine months of 2005 was 34 percent, down from the 43 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 third quarter of 2005 were $1.8 million, compared to $1.2 million in the third quarter of 2004. Research and development costs for the first nine months of 2005 were $4.6 million, compared to $3.0 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, screening assays and drug discovery process development. These increases offset lower R&D costs in our Discovery Systems unit. Selling, general and administrative costs for the third quarter of 2005 were $3.5 million, down from $3.7 million in the third quarter of 2004 due to reductions in business development and administrative staffing levels combined with lower incentive compensation costs. Selling, general and administrative costs for the first nine months of 2005 were $11.2 million, compared to $10.9 million in the same period of 2004. The increase in selling, general and administrative costs for the first nine months resulted primarily from costs related to separation agreements with former executives. Cash, cash equivalents and short-term investments at September 30, 2005 were $80.7 million, an increase of $0.7 million from the balance at June 30, 2005 due primarily to a reduction in working capital and net fixed asset requirements, which more than offset the net loss. Since our second quarter 2005 earnings report, Discovery Partners has achieved several milestones: * In October, the Company announced the sale of certain assets related to its legacy Discovery Systems business to Nexus Biosystems, Inc., which will allow the Company to increase its focus on value added integrated drug discovery collaborations. * In October, the Company announced a collaboration with Ono Pharmaceutical Co., Ltd. that will focus on multiple hit-to-lead and lead optimization projects. * In August, the Company received a milestone payment from Allergan, Inc. for the identification of lead compounds from an on-going multi-target drug discovery collaboration. * In September, the Company entered into a new drug discovery collaboration with Mitsubishi Pharma Corporation (Mitsubishi) to discover lead compounds for a therapeutic target selected by Mitsubishi. In this collaboration, the Company will make use of its comprehensive drug-like compound collection and leverage its expertise in assay development, high-throughput screening, and computational chemistry. "The most significant event announced by the Company since our last quarterly report is undoubtedly the sale of our legacy system business to Nexus Biosystems," commented Riccardo Pigliucci, CEO and Chairman of Discovery Partners. "At the beginning of this year we announced our intention to focus our resources to expand our collaborative research efforts. To date, we have completed the acquisition of the Natural product operation in Heidelberg, and exited a business that no longer fits our strategy. Discovery Partners started as an instrumentation company but over the years this segment represented a diminishing percentage of our revenue and had to increasingly compete with other investments aimed at sustaining our core business. The sale to Nexus Biosystems does not impair our capability to deliver on our collaborations or contracts and we have retained full access to all transferred technology. Our recently announced collaborations with Ono and Mitsubishi and the achievement of a milestone payment from Allergan are the first tangible evidence of the value our collaborative research strategy. We continue to be encouraged by the receptiveness of several other pharmaceutical companies to our business model and hope to be able to enter into pilot collaborations with some of them in the future," continued Pigliucci. "Our current 12-month backlog is $17 million, lower than what we reported last quarter due to the pending expiration of our Pfizer contract in early January, 2006. 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," concluded Pigliucci. A conference call discussing third 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, November 1, 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: 9353545 through Tuesday, November 8, 2005. About Discovery Partners International, Inc. Discovery Partners International, Inc. offers integrated services 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, and compound management. 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 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. The unaudited pro forma condensed consolidated financial information herein assumes the transaction occurred as of January 1, 2004 and January 1, 2005 adjusting the consolidated statement of operations to exclude the direct operating results of the assets sold for the twelve months ended December 31, 2004 and nine months ended September 30, 2005, respectively. In addition, the unaudited pro forma adjustments are based on the value of the related assets and liabilities on September 30, 2005 where such values may differ from those on the close date of the transaction. The gain on sale of the net assets as presented below are based on estimates of the working capital and cash flow results from the period of September 1, 2005 through the close date of the transaction. Discovery Partners International, Inc. Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended September 30, 2005 (in thousands) Pro Forma Consolidated Adjustments Pro Forma Revenues $11,080 $(1,934)(i) $9,146 Cost of revenues 6,496 (662)(i) 5,834 Gross margin 4,584 (1,272) 3,312 Operating expenses: Research and development 1,795 (488)(j) 1,307 Selling, general & administrative 3,469 (129)(k) 3,340 Restructuring (17) -- (17) Amortization of stock-based compensation 275 (16)(l) 259 Total operating expenses 5,522 (633) 4,889 Income (loss) from operations (938) (639) (1,577) Interest income 614 -- 614 Other income, net 24 -- 24 Foreign currency losses (30) -- (30) Income (loss) from operations before income taxes (330) (639) (969) Income tax 11 -- 11 Net income (loss) $(341) $(639) $(980) Net income (loss) per share, basic and diluted $(0.01) $(0.04) Weighted average shares outstanding, basic and diluted 25,868 25,868 Pro forma adjustments to the statement of operations related to the sale of certain assets and related liabilities to Nexus Biosystems (formerly IRORI Discovery): (i) Represents direct revenues and cost of sales related to the Discovery Systems business. (j) Represents direct cost of research and development activities on behalf of the Discovery Systems business. (k) Represents direct selling, general and administrative expenses related to the Discovery Systems business. (l) Represents stock compensation costs related to an employee of the Discovery Systems business. Discovery Partners International, Inc. Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended September 30, 2004 (in thousands) Pro Forma Consolidated Adjustments Pro Forma Revenues $12,575 $(1,686)(i) $10,889 Cost of revenues 6,820 (979)(i) 5,841 Gross margin 5,755 (707) 5,048 Operating expenses: Research and development 1,233 (664)(j) 569 Selling, general & administrative 3,723 (97)(k) 3,626 Amortization of stock-based compensation 340 (45)(l) 295 Total operating expenses 5,296 (806) 4,490 Income from operations 459 99 558 Interest income, net 372 -- 372 Other income (loss), net (44) -- (44) Foreign currency losses (35) -- (35) Income from operations before income taxes 752 99 851 Income tax 2 -- 2 Net income $750 $99 $849 Net income per share, basic $0.03 $0.03 Weighted average shares outstanding, basic 25,800 25,800 Net income per share, diluted $0.03 $0.03 Weighted average shares outstanding, diluted 26,863 26,863 Pro forma adjustments to the statement of operations related to the sale of certain assets and related liabilities to Nexus Biosystems (formerly IRORI Discovery): (i) Represents direct revenues and cost of sales related to the Discovery Systems business. (j) Represents direct cost of research and development activities on behalf of the Discovery Systems business. (k) Represents direct selling, general and administrative expenses related to the Discovery Systems business. (l) Represents stock compensation costs related to an employee of the Discovery Systems business. Discovery Partners International, Inc. Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Nine Months Ended September 30, 2005 (in thousands) Pro Forma Consolidated Adjustments Pro Forma Revenues $29,509 $(2,625)(i) $26,884 Cost of revenues 19,570 (1,118)(i) 18,452 Gross margin 9,939 (1,507) 8,433 Operating expenses: Research and development 4,630 (1,446)(j) 3,184 Selling, general & administrative 11,160 (454)(k) 10,706 Restructuring 112 -- 112 Amortization of stock-based compensation 874 (54)(l) 820 Impairment of goodwill and other intangibles 1,000 -- 1,000 Total operating expenses 17,776 (1,954) 15,822 Income (loss) from operations (7,837) 447 (7,390) Interest income 1,492 -- 1,492 Other income, net 82 -- 82 Foreign currency gains 20 -- 20 Income (loss) from operations before income taxes (6,242) 447 (5,796) Income tax 14 -- 14 Net income (loss) $(6,256) $447 $(5,810) Net income (loss) per share, basic and diluted $(0.24) $(0.22) Weighted average shares outstanding, basic and diluted 25,871 25,871 Pro forma adjustments to the statement of operations related to the sale of certain assets and related liabilities to Nexus Biosystems (formerly IRORI Discovery): (i) Represents direct revenues and cost of sales related to the Discovery Systems business. (j) Represents direct cost of research and development activities on behalf of the Discovery Systems business. (k) Represents direct selling, general and administrative expenses related to the Discovery Systems business. (l) Represents stock compensation costs related to an employee of the Discovery Systems business. Discovery Partners International, Inc. Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Nine Months Ended September 30, 2004 (in thousands) Pro Forma Consolidated Adjustments Pro Forma Revenues $37,382 $(5,432)(i) $31,950 Cost of revenues 21,178 (2,988)(i) 18,190 Gross margin 16,204 (2,444) 13,760 Operating expenses: Research and development 3,026 (1,722)(j) 1,304 Selling, general & administrative 10,882 (423)(k) 10,459 Amortization of stock-based compensation 644 (34)(l) 610 Total operating expenses 14,552 (2,179) 12,372 Income (loss) from operations 1,652 (265) 1,387 Interest income, net 1,006 -- 1,006 Other income, net 6 -- 6 Foreign currency losses (84) -- (84) Income (loss) from operations before income taxes 2,580 (265) 2,315 Income tax 56 -- 56 Net income (loss) $2,524 $(265) $2,259 Net income per share, basic $0.10 $0.09 Weighted average shares outstanding, basic 25,170 25,170 Net income per share, diluted $0.10 $0.09 Weighted average shares outstanding, diluted 26,153 26,153 Pro forma adjustments to the statement of operations related to the sale of certain assets and related liabilities to Nexus Biosystems (formerly IRORI Discovery): (i) Represents direct revenues and cost of sales related to the Discovery Systems business. (j) Represents direct cost of research and development activities on behalf of the Discovery Systems business. (k) Represents direct selling, general and administrative expenses related to the Discovery Systems business. (l) Represents stock compensation costs related to an employee of the Discovery Systems business. Discovery Partners International, Inc. Unaudited Pro Forma Condensed Consolidated Balance Sheets As of September 30, 2005 (in thousands) Pro Forma Consolidated Adjustments Pro Forma ASSETS Current assets: Cash and cash equivalents $34,382 $1,785 (a) $36,167 Short-term investments 46,358 -- 46,358 Accounts receivable, net 9,116 (302) (b) 8,814 Inventories, net 1,886 (673) (b) 1,214 Prepaid and other current assets 2,513 (167) (c) 2,346 Total current assets 94,256 643 94,899 Property and equipment, net 8,702 (111) (c) 8,592 Restricted cash 1,184 -- 1,184 Prepaid royalty 3,923 -- 3,923 Patent and license rights, net 1,047 (321) (d) 726 Other assets, net 355 -- 355 Total assets $109,467 $212 $109,679 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable & accrued expenses 4,331 (312) (e) 4,019 Deferred revenue 2,174 (10) (f) 2,164 Total current liabilities 6,506 (322) 6,184 Deferred rent 284 -- 284 Stockholders' equity: Common stock 26 -- 26 Common stock issuable 2,791 (202) (g) 2,590 Treasury Stock (979) -- (979) Additional paid-in capital 208,270 -- 208,270 Deferred compensation (1,501) 202 (g) (1,299) Accumulated other comprehensive income 54 -- 54 Accumulated deficit (105,986) 534 (h) (105,452) Total stockholders' equity 102,676 534 103,211 Total liabilities and stockholders' equity $109,467 $212 $109,679 Pro forma adjustments to the consolidated balance sheet relate to the sale of certain assets and related liabilities to Nexus Biosystems (formerly IRORI Discovery): (a) Cash paid for net assets of $1.5M plus an estimated additional $285,000 of cash consideration related to a purchase price adjustment. (b) Represents accounts receivable and inventories related to the Discovery Systems business. (c) Represents prepaid balances and fixed assets related to the Discovery Systems business. (d) Represents capitalized patent costs related to the product lines of the Discovery Systems business. (e) Represents accounts payable, accrued liabilities and warranty obligations related to the Discovery Systems business offset by an accrual of an additional $65,000 of estimated costs directly related to the sale transaction. (f) Represents unearned revenues related to product lines of the Discovery Systems business. (g) Represents deferred compensation related to unvested rights to purchase common stock of a terminated employee of the Discovery Systems business. (h) Represents the estimated gain on the sale of the net assets of the Discovery Systems business. The following table reconciles the accumulated deficit as originally reported as of September 30, 2005 for Discovery Partners International to the pro forma accumulated deficit: Accumulated Deficit Reconciliation Accumulated Deficit as reported at September 30, 2005 $(105,986) Disposition of Discovery Systems business: Cash consideration (inclusive of estimated working capital adjustment) 1,785 Less assets sold net of liabilities assumed by buyer (1,096) Less estimated expenses related to sale (150) Net gain on sale of Discovery Systems business 534 Pro forma Accumulated Deficit as of September 30, 2005 $(105,452) Discovery Partners International, Inc. Condensed Consolidated Statement of Cash Flows (in thousands) Three Months Ended Nine Months Ended September 30, 2005 September 30, 2005 (Unaudited) (Unaudited) Net Loss $(341) $(6,257) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 1,405 4,130 Amortization of stock-based compensation 275 874 Restructuring expense (17) 112 Realized loss on investments 8 134 Loss on disposal of fixed assets 37 60 Impairment of intangible assets -- 1,000 Change in operating assets and liabilities: Accounts receivable 731 4,781 Inventories 777 926 Other current assets (651) (94) Accounts payable and accrued expenses (41) (1,303) Restructuring accrual (130) (406) Deferred revenue (409) 1,226 Deferred rent (10) 129 Restricted cash (20) (67) Net cash provided by operating activities 1,614 5,245 Investing activities: Net cash paid for business -- (1,477) Purchases of property and equipment (663) (2,930) Other assets (18) (17) Purchases of patents, license rights and other intangible assets -- (2) Purchases of short-term investments, net 4,611 20,314 Net cash provided by investing activities 3,931 15,887 Financing activities: Net proceeds from issuance of common stock 120 341 Payments on debt (171) (241) Purchases of treasury stock (9) (9) Net cash (used in) provided by financing activities (60) 91 Effect of exchange rate changes (18) 11 Net increase in cash and cash equivalents 5,467 21,234 Cash and cash equivalents at beginning of period 28,915 13,148 Cash and cash equivalents at end of period $34,382 $34,382 DATASOURCE: Discovery Partners International, Inc. CONTACT: Riccardo Pigliucci, Chief Executive Officer, +1-858-228-4113, or Craig Kussman, Chief Financial Officer, +1-858-228-4113, both of Discovery Partners International, Inc., Web site: http://www.discoverypartners.com/

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