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May 15, 2007 | Inside most entrepreneurs is an insistent voice urging that the route to appropriate valuation for the company, to increased value for customers, and to personal riches for themselves is going public. I caught that bug once myself but didn’t succeed.

Systems biology pioneer Entelos took the public plunge a year ago on the Alternative Investment Market in the London Stock Exchange (ENTL) raising roughly $20 million, a fair portion of which went to pay down debt. Late last month Entelos issued financial results for 2006 as required by its new public status.

Now is a good time to ask, “Was going public worth the effort?”

Entelos reported revenues of $21.6 million, a huge jump from $2.8 million in 2005, with net loss of $740,000 versus $13.8 million in 2005, again, an impressive performance. CEO James Karis quickly points out the big revenue jump was due, at least in part, to accounting rules which prevented Entelos from recognizing funds it had already received until certain criteria were met. Still it’s a big number.

A few other numbers also jumped. General and administrative costs more than doubled from $1,965,000 in 2005 to $4,266,000 in 2006. Karis attributes that to a necessary beefing up of accounting capabilities; changes in the way board of directors are compensated; and increased auditor fees: “Auditors charge you more than double once you go public,” he says.

If these financial gulps represent necessary one-time shifts, the company also encountered some of the less predictable bumps. When two of its major clients “reprioritized” internal programs, the ripple effect was to delay expected revenue to Entelos. The company was forced to issue a “Trading Statement” indicating the company’s revenue projections could be adversely impacted.

Karis declines to name the two clients, expects the work to continue eventually, and says candidly, “I think we are always concerned that they’re (clients) going through reprioritization. Any small company that serves big pharmas runs a risk.”

Nevertheless, the company has tightened its cost controls — something Karis says it has always done and is simply doing more so now — and headcount is down from somewhere in the 90s to the mid-80s.

Also disclosed in the results report is a $1.37 million write-down of goodwill associated with its acquisition of Discovery Innovations a year or so ago. Sales and marketing costs also rose from $1.97 million to $2.2 million, driven by an increasing number of independent sales reps used.

Growing PainsThe financial numbers cited here are from Entelos’ “preliminary report.” The final version is expected soon and company spokesmen say there will be few changes, but possibly a bit more detail.

On balance, Karis says going public was a positive for Entelos. “Granted, it’s been painful, and it’s been expensive in some cases. But in terms of raising our visibility in an area that there is a lot of confusion [it’s] been effective. It’s been helpful to us at least in having dialogues with companies, and I think it has helped generate business.”

Entelos’ guidance for 2007 is more of the same — $21 million in revenue with a loss of perhaps $500,000-plus. Given that the company actually beat the consensus $18 million projected for 2006, the financial community probably has a fair amount of confidence in Entelos projections.  

Entelos — like all technology providers in the life sciences — is in a tough business. Moreover, its computational models of diseases aren’t easy to build, to use, and perhaps to sell.

Look for my full interview with Karis online, in which he discusses going public and Entelos’ strategy for success.

Email John Russell. 

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