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"It turns out that chemistry is a cottage industry in Cornwall," says John P. McAlister III, chief executive officer of Tripos.
Gazing from the atrium window at the firm's drug discovery research center in Bude, England, McAlister explains that chemists from Maybridge Chemical, down the road in Tintagel, have for decades been bitten by "the entrepreneurial bug" and left to start small chemistry companies in the area.
Tripos purchased one such company, called Receptor Research, in 1997. With the completion last year of a $25 million expansion, Tripos Discovery Research (TDR) now rises well above the local cottage operations, adding a research chemistry wing to St. Louis-based Tripos' original business in computational chemistry software and informatics.
Drug research software companies frequently link up with chemistry-based discovery operations, but the link is often tenuous. Tripos' close competitor Accelrys, for example, recently spun off its drug discovery business, Pharmacopeia Drug Discovery. In 2002, Lion Bioscience discontinued a drug discovery business, closing sites in Heidelberg, Germany, and San Diego that employed 86.
At Tripos, however, McAlister says a strong mesh of systems and research is integral to the company's business model and growth strategy. Software and services, each accounting for roughly half of Tripos' 2003 sales of about $54 million, have developed in tandem over the past seven years into a knowledge-based methodology for drug discovery that Tripos sees as its key differentiating factor in a highly competitive market.
McAlister points to contracts with Schering AG, Bristol-Myers Squibb, Aventis, and Pfizer as indications that its approach of wrapping research around information tools "has legs." The Pfizer deal--a $100 million contract bringing Tripos into the drug company's file enrichment program--has contributed significantly to achievement of critical mass in Bude, he says. The project, which places Tripos alongside Discovery Partners, ChemBridge, and ArQule in Pfizer's quest to enhance and rationalize its compound-screening regime, currently accounts for about half of Tripos' revenue.
With Andrew, Duke of York, officiating at a ceremonial opening of the TDR facility last Monday, Tripos can claim it has achieved significant milestones this year. The expanded Bude facility has been up and running since January with a staff of 170 working on contracts with several top drug and biotech companies. Having reached all of its milestones with Pfizer for the first year of the contract, Tripos renegotiated the deal this year, shifting some of its work to more lucrative lead follow-up. While the overall value of the deal dropped to $90 million, the follow-up component will be paid in British pounds, a change that has led to improved profit margins, according to McAlister. Last month, the firm was tapped for discovery research services by the European Molecular Biology Laboratory and the German Cancer Research Center, which are building a new research venture in Heidelberg.
Tripos, however, has experienced a particularly tough year as well. The firm was prompted to restate earnings based on changes in the structure of its software licensing agreements and changes in reporting standards. Separately, a class-action lawsuit is pending on behalf of investors claiming that Tripos misrepresented its potential for growth, failing to warn the market that it would miss its earnings estimates by about 15% in 2002. Ernst & Young, which is named in the suit, recently closed its St. Louis office and dropped Tripos as a client, McAlister says. Tripos appointed BDO Seidman as its new auditor last month.
McAlister notes that other software vendors, including Lion, have restated earnings for similar reasons and that the class-action suit is a typical occurrence in high-tech industries such as biotech and software. There are no allegations of fraud in the lawsuit or earnings restatement, he maintains. Major institutional shareholders such as the State of Wisconsin and Brown Capital Management--each owning more than 15% of Tripos shares--are not part of the suit, according to McAlister.
HE CLAIMS that customers are unfazed by these issues and that the company has not been deterred by red-flag headlines in pursuing its goal of establishing an informatics-based approach to drug discovery. Last year, Tripos' revenues grew by 10%.
McAlister, who has been with Tripos since shortly after it was spun off from Washington University Medical School in 1979, says the firm spent its first 20 years homing in on software applications for computational chemistry. The unique aspects of this field of information technology (IT) became apparent when Tripos was purchased in 1987 by Evans & Sutherland, a computer firm that now specializes in visual simulation systems for aviation applications. "This wasn't a good acquisition because a computer firm and a computational chemistry software firm just didn't have enough in common to make it work," McAlister says. Tripos was spun off to shareholders in 1994.
It was soon evident, however, that computational software alone wouldn't be enough. "That market was small and getting smaller," he says. "We needed to take the intellectual property and core expertise in the chemistry software business and diversify in a way that took advantage of our strengths and added value." The obvious way to do that, he says, was to put Tripos' computational chemistry capabilities to work in an in-house drug discovery and chemistry services business.
This mandate, McAlister says, led to a second false start--a joint venture with Panlabs. "The JV had unique features for the early days, focusing specifically on design of sparse libraries of compounds," he says. It took off rapidly for Tripos but ran into stumbling blocks when it came to manufacturing compounds, he says. The venture was dissolved when Panlabs was purchased by MDS Pharma Services.
Tripos, though, was still interested in pursuing chemistry. When a customer, Millennium Pharmaceuticals, recommended Receptor Research as a good specialty synthesis firm, McAlister saw an opportunity to build a drug discovery research organization in such a way as to integrate chemistry with informatics.
Tripos began making investments in Bude shortly after acquiring the site. The company received a $5.5 million grant from the British government and funded the rest of the expansion through cash flow and the sale of stock that Tripos held in Arena Pharmaceutical, a drug discovery firm focused on G-protein-coupled receptors that went public in 2000.
Tripos was profitable for its first three years after being spun off. It went into the red following the purchase of Receptor Research, then returned to making a profit in 2001. Last year, the company achieved $2.1 million in earnings on sales of $54 million, thanks in part to the sale of Arena stock and to currency adjustments. The firm reported an operating loss of $5 million.
Last week, however, Tripos reported a second-quarter operating profit of $893,000, with revenue up 14% over second-quarter 2003 to $15.9 million.
The setup at TDR is a direct result of Tripos' effort to meld its informatics and research businesses, McAlister says. "We believe very strongly in the tight integration of informatics and experimental procedures," he says.
McAlister says Tripos was careful not to impose its informatics system on the fledgling research operation at the start. "We didn't just come in and say, 'You will do things the way our informatitions say they must be done,'" McAlister says. "We came here and listened to how chemists need to work. Chemists have been doing chemistry for lo these many centuries, and there is a reason for the way they do things."
Designing a knowledge management system for TDR researchers led software development at Tripos in a new direction, according to Trevor W. Heritage, senior vice president for discovery informatics. "Prior to Bude, Tripos was a computational chemistry software supplier," Heritage says. Now, it is working on developing knowledge management IT infrastructures for clients such as Schering AG.
"We have taken some standard design principles in computer science and modified them to meet the needs of drug discovery," Heritage says. At TDR, Tripos developed a research process and logistics management program called ChemCore as well as a compound design program called ChemSpace.
ChemCore is now commercially available, while ChemSpace is a proprietary TDR application. The firm also markets several off-the-shelf research software products such as Sybyl, for modeling; Lithium, for collaborative research and three-dimensional visualization; and SARNavigator, for high-throughput screening data analysis.
Heritage says ChemCore generates diagnostic analyses, mapping work flow toward achieving research goals. It is useful not only to researchers, but also to drug company management, he says, which is generally averse to major investment in knowledge management software unless there are guidelines for determining the return on investment (ROI) reaped from it.
From the researcher's point of view, ChemCore employs an iterative knowledge management process that progressively archives results from experiments, according to Peter Hecht, Tripos' senior vice president for discovery research. "The basic concept is to capture what a company knows about chemistry and translate it into final structures," Hecht says. "You annotate each structure by what you learn in the laboratory."
Hecht says Tripos researchers use structure-activity relationship methods to determine which molecules to synthesize, drawing from a pool of over 50 trillion "virtual" compounds on a computer. "It is an in silico process that is constantly updated by results in the laboratory."
Hecht likens TDR's research operation to a powerful automobile with a high-tech navigation system. The Pfizer project, he says, has added a critical third dimension--a destination to drive to.
Edward Hodgkin, vice president for marketing and business development at Tripos, says the ability to generate ROI data and forecasts is an increasingly important feature in the market. Just as ChemCore fleshes out the virtual compound library over time, ROI guidance is supported by data that ChemCore collects on successive projects, Hodgkin says.
"WE HAVE shown we can do drug discovery more efficiently than the industry standard," he says. "When customers consider how best to spend their money, one of the biggest problems they face is the management of attrition in the pipeline. They are interested in seeing evidence that we can add value in this regard."
While it is hard to pinpoint efficiency gains attributable strictly to IT, Tripos is working on it. "What we've done on ROI in discovery research is the tip of the iceberg," Heritage says. "We are working to develop an ROI model for specific IT and software."
Joe D. Lewis, head of chemical genomics for the new laboratory being established by the European Molecular Biology Laboratory and the German Cancer Research Center, says his group's main criteria in selecting a research chemistry partner was to find a lab with a strong informatics support system for its research. "We looked at several companies, all of which employ informatics to some extent," he says. "We felt Tripos was the leader."
Of the U.S. and European companies that Lewis' group investigated, he says Tripos has an IT infrastructure that allows the most access to information on screening libraries and chemistry research processes.
"The way it is set up is incredibly transparent," Lewis says. "We visited companies where you have medicinal chemists who are obviously very bright, but when you ask them why they synthesize this set of molecules instead of another set, the information is sitting in their head. At Tripos, there are a lot of things in their heads, but it's also there in their informatics support."
Lewis says his organization sees no real deterrent in doing business with Tripos given the pending lawsuit and recent restatement of earnings. "Of course it's a consideration. It's something that's very important," he says. "But we are convinced Tripos has the stability to be around long term. On the scientific side of things, we are very convinced of the management. It's second to none among the companies we visited and spoke to in depth."
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