Synbiotics Sales Are Up, but Profits Still Elude It

Synbiotics, which six months ago embarked on a restructuring plan after suffering some major setbacks, said third-quarter product sales will rise to $1.9 million, more than double the previous quarter.

However, the Rancho Bernardo-based biotechnology firm said it will still fall far short of making a profit.

A new leukemia vaccine for cats introduced last year is expected to increase Synbiotics’ product sales by 140% over the previous quarter and 160% over last year’s third quarter, but those gains were not enough to offset the company’s research and development expenses. Synbiotics expects to report a $550,000 loss for the three-month period ending Dec 31.

While the projected loss represents an improvement over the previous quarter, the company is still lagging far behind its previously projected schedule to become profitable, according to Norman White, Synbiotics’ vice president of finance.

Synbiotics President Edward T. Maggio released the projections at a meeting Wednesday at an investment conference in San Francisco.

Six months ago, Maggio announced at the annual shareholders meeting that the company would engage in an aggressive restructuring plan after posting a $3.6 million net loss for fiscal year ended March 31, 1989. That contrasted with a $239,000 profit for fiscal 1988.

The restructuring plan called for the layoffs of more than 20 research employees, most of whom were working on projects that didn’t pan out, and the spinning off of two research oriented subsidiaries, UniSyn-Fibretec and ImmunoPharmaceutics, with the aim of reducing Synbiotics’ research expenses.

By focusing Synbiotics’ attention on the animal health products that make up its core business, Maggio predicted Wednesday, the company would succeed in making a profit by June of this year. But the turnaround largely depends on whether Synbiotics can find funding for the two subsidiaries. He is hoping to win several million dollars in venture capital to get UniSyn-Fibretec off the ground, and an undisclosed amount in corporate joint venture partnership funds to seed ImmunoPharmaceutics.

“I’m not saying it would be impossible to make a profit without these things happening, just unlikely,” White said.

Synbiotics’ restructuring was necessitated by the changing sources of its revenue, a reflection of the fact that Synbiotics is trying to focus on product sales rather than contract research.

In fiscal 1988, the bulk of Synbiotics’ revenue came from research contracts amounting to $3.1 million, while product revenue was $2.1 million. Two years later, the two revenue sources are reversed. In fiscal 1990, contract revenues are expected to bring in no more than $1.1 million, while product revenue should top $6.3 million.

Maggio said he expects two recently signed licensing agreements to add to Synbiotics’ stream of products for the prevention, diagnosis and treatment of animal diseases.

An agreement with the Wistar Institute, a Pennsylvania-based biomedical research institution, gives Synbiotics the exclusive right to use and market certain anti-tumor antibodies in its development of animal health products. A treatment for a fatal cancer in dogs that may be on the market later this year is among the products included under the Wistar agreement.

Synbiotics also won a licensing agreement with Telios Pharmaceuticals in La Jolla to develop and market a treatment for dry eye syndrome in dogs, a painful condition that causes extreme redness and infection. A drug to treat the syndrome, which afflicts more than 2 million dogs annually, is still several years away.

The collapse of two major research projects last year was largely responsible for Synbiotics’ previous financial woes. A proposed vaccine for heartworm in dogs was jettisoned when a competitor came out with a drug to treat the parasite. And a proposed vaccine for cats was scuttled when researchers discovered that animals injected with the chemical died from a secondary disease.

When it became clear that the two projects were not working out in May, 1989, Synbiotics’ largest group of investors, PruTech Research & Development Partnership, which had already invested about $7.5 million of a $9.6-million commitment in the biotechnology company, decided to put on hold the remaining $2.1 million.

It wasn’t until last week, after Synbiotics agreed to redirect its research activity, that PruTech had a change of heart and committed $1.4 million to the company for existing and future research work. About $800,000 of that funding went toward research services already performed on PruTech-funded products. The remaining $570,000 is expected to be paid in fiscal 1991.

The recent payment “was in fact a positive indication,” said Richard Moser, president of PruTech’s general partner, R & D Funding Corp. “There had been some analysts’ reports talking about some of the problems Synbiotics had run into on some of their projects. So what this says to them is, ‘Hey, we encountered some technical difficulties, but there’s plenty of opportunities we are going ahead on.’ ”