Discovery Partners International Reports First Quarter 2005 Results

Discovery Partners International Reports First Quarter 2005
Results 


SAN DIEGO, May 3  /PRNewswire-FirstCall/ -- Discovery Partners International,
Inc. (NASDAQ:DPII) today announced unaudited financial results for the three
months ended March 31, 2005.

Revenues for the three months ended March 31, 2005 were $7.1 million, a
decrease of $4.7 million, or 40 percent, compared to $11.8 million for the same
period in 2004.  The decrease in revenues for the first quarter of 2005 versus
2004 was due to lower revenues in all service categories and lower product
revenues.  The primary driver of the decreased services revenues was the
previously disclosed compound deliveries to Pfizer in 2004 in an amount equal
to the number of compounds scheduled for delivery in the first quarter of 2005,
which resulted in $4.2 million of revenue in the fourth quarter of 2004 that
had been scheduled for the first quarter of 2005.  This decrease in chemistry
services revenue from Pfizer was partially offset by new revenues from the
National Institute of Mental Health (NIH). The reduction in product revenues
was due to the fact that there were no Crystal Farm shipments during the
quarter.

Net loss for the three months ended March 31, 2005 was $4.5 million, or $0.18
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 $1.0 million, or $0.04 per share, for the
same period in 2004.

Gross margin as a percentage of revenues for the first quarter of 2005 was 23
percent, down from the 45 percent result in the first quarter of 2004, due to
lower service and product margins caused by lower volumes.  Exercising our
right under our agreement with Pfizer to deliver additional compounds in 2004
resulted in gross margin of $3.1 million in the fourth quarter of 2004 that was
not recognized in the first quarter of 2005.

Research and development costs for the first quarter of 2005 were $1.3 million,
compared to $0.9 million in the first quarter of 2004.  The increase in
research and development costs resulted 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 Crystal
Farm product, compound storage solutions, in silico tools and assays and drug
discovery process development.

Selling, general and administrative costs for the first quarter of 2005 were
$4.1 million, up from $3.6 million in the first quarter of 2004.  The increase
in selling, general and administrative costs for the quarter resulted primarily
from costs related to the separation agreement with the Company's former Chief
Operating Officer as well as increased business development activities, which
were offset by lower incentive compensation accruals.

Cash, cash equivalents and short-term investments at March 31, 2005 were $84.9
million, an increase of $4.9 million from the balance at December 31, 2004 due
primarily to positive net cash flow provided by operations caused by the
significant reduction in working capital requirements, which more than offset
the net loss.

Since our fourth quarter 2004 earnings report, Discovery Partners has achieved
several milestones:

    *  On March 21st, the Company announced a co-marketing agreement with
       NascaCell IP GmbH.  Under the agreement, DPI and NascaCell will
       jointly provide aptamer-based drug-discovery services to the life
       sciences industry.

    *  On March 29th, the Company announced a collaboration focused on the
       discovery of potential new lead compounds against several selected
       targets with Chroma Therapeutics Ltd.  Chroma will provide the
       targets and DPI will use its comprehensive compound collection and
       its proprietary discovery processes and data management tools to
       identify potential lead compounds or potential lead series.

    *  On April 6th, the Company announced the appointment of Michael C.
       Venuti, Ph.D. as its Chief Scientific Officer.  Dr. Venuti, currently
       a member of Discovery Partners' Board of Directors, will have overall
       scientific responsibility for the Company's integrated drug discovery
       platform and partnerships, and will also continue to serve as a
       member of the Board.

    *  On April 22nd, the Company completed the acquisition of the assets of
       Biofrontera Discovery GmbH, a natural products based drug discovery
       company in Heidelberg, Germany.



"As expected, our financial performance in the first quarter was negatively
impacted by the lack of Pfizer compound shipments," commented Riccardo
Pigliucci, CEO and Chairman of Discovery Partners.  "Nevertheless, this quarter
has been an exceptionally eventful one for our Company.  In April, we recruited
a world-class scientist as our Chief Scientific Officer and completed the
acquisition of the assets of Biofrontera Discovery GmbH. These two events will
substantially enhance the effectiveness of our drug discovery platform, which
will enable the Company to focus its strategy on more significant value added
integrated drug discovery collaborations with biopharmaceutical companies,"
continued Pigliucci.

"Looking at the remainder of 2005, we expect to see some improvement in
financial results driven by higher levels of Pfizer compound shipments and
increased NIH revenue.  Our current 12 month backlog of $31.0 million is
approximately $2.0 million lower than what we reported at year end due to the
expiration of our Pfizer contract at the end of this year.  Based on our
current new business visibility, excluding any further M&A transactions, we now
estimate that 2005 revenues will be between $42.0 million and $48.0 million. 
This revenue amount does not include the revenues 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, nor any significant contribution from the
Biofrontera Discovery acquisition.  As previously mentioned, during 2005, we
expect to invest an amount in excess of our 2004 earnings of $4.0 million to
more effectively execute the Company's strategy and to absorb the current burn
rate of Biofrontera Discovery.  As a result our current earnings estimate for
2005, reflecting the lower revenue volume, the hiring of our CSO, the
Biofrontera Discovery acquisition, and the impairment charge taken this
quarter, is a net loss between $6.0 million and $9.0 million, absent any
further M&A transactions, or any restructuring activity that could be
considered in the absence of any upturn in business. We estimate that cash at
the end of 2005 will be between $75.0 million and $78.0 million, inclusive of
the Biofrontera Discovery acquisition but absent any further M&A activities,
restructuring activities or stock repurchases under our current authorization,"
concluded Pigliucci.

A conference call discussing first 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, May 3, 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:
2014511  through Tuesday, May 10, 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 revenues 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.

                   DISCOVERY PARTNERS INTERNATIONAL, INC.
                    Selected Consolidated Financial Data
                  (In Thousands, Except Per Share Amounts)

  Consolidated Statements of Operations             Three Months Ended
                                                         March 31
                                                   2005             2004
                                                        (Unaudited)

  Revenues:
    Services                                      $6,846           $10,271
    Products                                         222             1,536
       Total revenues                              7,068            11,807
  Cost of revenues:
    Services                                       5,224             5,461
    Products                                         189             1,090
       Total cost of revenues                      5,413             6,551
         Gross margin                              1,655             5,256

  Operating expenses:
    Research and development                       1,252               893
    Selling, general and administrative            4,080             3,562
    Amortization of stock-based compensation         284               170
    Restructuring                                    130                --
    Impairment of intangible assets                1,000                --

       Total operating expenses                    6,746             4,625

  Income (loss) from operations                   (5,091)              631

  Interest income, net                               465               344
  Foreign currency transaction gain, net              49                48
  Other income, net                                   33                27

  Income (loss) from operations before
   income taxes                                   (4,544)            1,050

  Income tax                                           4                 5

  Net income (loss)                              $(4,548)           $1,045

  Net income (loss) per share, basic              $(0.18)            $0.04

  Weighted average shares outstanding, basic      25,843            24,533

  Net income (loss) per share, diluted            $(0.18)            $0.04

  Weighted average shares outstanding, diluted    25,843            25,613



  Summary Consolidated Balance Sheets           March 31,       December 31,
                                                  2005              2004
                                              (Unaudited)

  Assets
  Current assets:
  Cash and cash equivalents                      $35,662           $13,148
  Short-term investments                          49,241            66,870
  Accounts receivable, net                         5,714            14,334
  Inventories, net                                 3,835             2,842
  Prepaid and other current assets                 2,167             2,748
       Total current assets                       96,619            99,942

  Restricted cash                                  1,120             1,120
  Property and equipment, net                      6,715             7,206
  Prepaid royalty, net                             4,526             4,828
  Patents and license rights, net                  1,189             2,287
  Other assets, net                                  781               260
       Total assets                             $110,950          $115,643

  Liabilities and Stockholders' Equity
  Current liabilities:
  Accounts payable and accrued expenses           $3,428            $5,714
  Restructuring accrual                              330               294
  Deferred revenue                                 3,157             1,072
       Total current liabilities                   6,915             7,080

  Deferred rent                                      156               155

  Stockholders' Equity:
  Common stock                                        26                26
  Common stock issuable                            2,205             2,657
  Treasury stock                                    (831)             (794)
  Additional paid-in-capital                     208,123           207,804
  Deferred compensation                           (1,623)           (2,187)
  Accumulated other comprehensive income             256               630
  Accumulated deficit                           (104,277)          (99,728)
       Total stockholders' equity                103,879           108,408
  Total liabilities and stockholders' equity    $110,950          $115,643



  Summary Consolidated Statement of Cash Flows

                                                       Three Months Ended
                                                         March 31, 2005
                                                           (Unaudited)

  Net Loss                                                   $(4,548)

  Adjustments to reconcile net loss to cash
   provided by operating activities:
      Depreciation and amortization                            1,339
      Restructuring expense                                      130
      Amortization of stock-based compensation                   283
      Realized loss on investments                                54
      Impairment of intangible assets                          1,000
  Change in operating assets and liabilities:
  Accounts receivable                                          8,392
  Inventories                                                 (1,010)
  Other current assets                                           527
  Accounts payable and accrued expenses                       (2,226)
  Restructuring accrual                                          (94)
  Deferred revenue                                             2,151
  Deferred rent                                                    1
  Net cash provided by operating activities                    5,999

  Investing activities:
  Purchases of property and equipment                           (523)
  Other assets                                                  (577)
  Purchases of patents, license rights
   and other intangible assets                                    (2)
  Purchases of short-term investments, net                    17,444
  Net cash provided by investing activities                   16,342

  Financing activities:
  Net proceeds from issuance of common stock                     153
  Net cash provided by financing activities                      153
  Effect of exchange rate changes                                 21

  Net increase in cash and cash equivalents                   22,515

  Cash and cash equivalents at beginning of period            13,148
  Cash and cash equivalents at end of period                 $35,662


DATASOURCE: Discovery Partners International, Inc.



CONTACT:  Riccardo Pigliucci, Chief Executive Officer, or Craig Kussman,

Chief Financial Officer, both of Discovery Partners International, Inc.,

[phone], 



Web site:  http://www.discoverypartners.com/ 

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