Description

GNOM is an evolving liquidation story. Potential value is >$4.50-4.70/share, offering at least 70-80% of upside from current price.

GNOM is a provider of software products and services that are designed to enable pharmaceutical and biotechnology researchers to accelerate the drug discovery process. Their first product, Discovery Manager, offers “the broadest set of software tools for genomics researchers of any commercially available product.” Current customers include AstraZeneca, Glaxo, Pfizer, and the National Cancer Institute. The company has strategic alliances with Applied Biosystems and Celera Genomics.

GNOM held its IPO in October of 2000, raising $113mm with the help of CIBC. The stock was priced at $19 and hit an intraday high of $23. It has been all down hill since then, with the stock going as low as $2.22 earlier this month.

The problem has been that GNOM is the “leader” in a new and very slowly developing market. Despite listing some of the leading pharma companies in the world among its customers, GNOM has generated minimal revenues.

Vital stats:

Price $2.60
Shares 23mm
Mkt cap $60mm

Net cash (6/30/01) $115mm

Management has come to the realization that the business model is flawed and recently (10/5/01) announced a major restructuring. The company fired 100 of its 150 employees, ceased marketing of its main product, sharply curtailed new product development, and announced an accelerated review of strategic alternatives. Most importantly, management stated that it would exit 2001 with $107-108mm of cash ($4.65-4.70/share) and that cash burn starting in 1Q02 would be zero. Let me repeat – cash burn will be ZERO starting in 1Q02. Essentially, $1.5mm/Q of interest income will offset operating expenses at that point.

The risk is obviously that management goes out and makes a stupid acquisition and pisses the remaining cash away. More likely, I believe that the company will be 1) sold to a strategic buyer or 2) liquidated, with the technology sold to a strategic buyer. My checks indicate that the CEO, while obviously wrong about the market for the company’s product, is economically rational. She is also motivated by the fact that even at current prices, her options are in-the-money. Furthermore, the Chairman of the Board owns 3mm shares thru Falcon Technology Partners – and all of the money invested by Falcon belongs to his family. (He is related to George Rathmann of Amgen and ICOS fame.) So the Chairman is also motivated to ensure that GNOM does not piss away its loot. Finally, the fact that 2/3 of the employees have been let go and product development curtailed already indicates that management is not a bunch of wild eyed optimists ready to gamble away shareholder money.

Timing for a decision and ultimate wind-down is not certain, but given that GNOM will stop burning cash by the end of the year, this is not too worrisome. This is a very low-risk way to make 50%+ over the next six-nine months.

Catalyst

Company announced it is reviewing strategic alternatives. I believe that the most likely outcomes are sale or liquidation.