Staff Writer

The cutbacks just keep coming at biotechnology companies.

On Friday, DeCode genetics Inc. said it is eliminating nearly a third of its work force, or about 200 employees, as part of a plan to achieve positive cash flow in the next year. The Reykjavik, Iceland-based firm said the move would allow it to fund operations solely through revenue generated by its product-driven genetics research and service businesses, which includes contract chemistry services, pharmacogenomics and informatics.

DeCode also should earn some extra funds from a newly reported deal with Merck & Co. Inc., an alliance disclosed the same day aimed at developing treatments for obesity. DeCode said it would receive "substantial" research funding, technology access and license fees, milestone payments as compounds developed under the alliance advance in the development process, and royalties on successfully marketed alliance drugs. Exclusive of royalties, the agreement has a potential to generate more than $90 million for DeCode if Merck were to develop and market more than one resulting product. Specifics were not disclosed.

But the company's near-term financial picture is more pressing. The reductions are concentrated in DeCode's Reykjavik genetics research operation.

"There are two major reasons for the cutbacks," CEO Kari Stefansson said. "First, we feel that given the miserable state of the capital markets, the responsible measure to be taken is to make sure that we can run our company off revenue alone to break even. The big question now is who are the companies that will be around long enough to reap the benefits of their products."

He said DeCode's cash reserves - reported at $121 million - coupled with the cutbacks would give DeCode some financial breathing room before it begins to generate income from internally developed products.

"Another reason we could do this is that over the past two years we have developed software systems and robotics that allow us to do our population genetics work in a more automatic manner with fewer people," Stefansson said.

He added that work needed to begin new projects on disease is far less than before as DeCode has developed a database on the genotypes of 80,000 Icelanders - a population said to have a genetic heritage relatively stable since Vikings first settled the North Atlantic island more than 1,000 years ago.

"I believe we will be at least as effective an operation with a smaller headcount than we were before," Stefansson said.

DeCode expects to take an unspecified restructuring charge in the third quarter, though the cuts are aimed at getting the company at break-even a year earlier than originally scheduled.

"I'm somewhat surprised that people haven't responded more to difficult market conditions by looking to break even earlier," Stefansson said. "The reality is that the miserable market conditions are not only impacting the market cap of companies, but they are also impacting the way this business is being done. That applies not only to biotech, but also our customers in big pharma."

The company added that is undergoing a review of its long-lived assets, including goodwill related to its acquisition of MediChem Life Sciences Inc. DeCode, which completed the acquisition of the Woodbridge, Ill.-based firm in March for stock then valued at $84 million, may record further non-cash charges in the third quarter related to the merger.

Going forward, DeCode said it would focus on using ongoing process automation and increased productivity in its gene research operations. The company's lead series, still in preclinical development, involve genes associated with schizophrenia, stroke and PAOD (peripheral arterial occlusive disease). While DeCode is involved in a number of other agreements, it has always planned to develop targets internally.

But collaborations such as the agreement with Whitehouse Station, N.J.-based Merck remain an important component of DeCode's business structure.

"It is focused on one disease, so it is not very broad in scope but it is very deep," Stefansson said.

The companies will use the Clinical Genome Miner, which combines genealogical, genotypic and disease data, to develop an understanding of the role of Merck targets in obesity, and to establish targets from which to develop drugs. The companies also plan to begin a genetic research program based on the analysis of tissue samples from obese individuals.

"This is ideal for a company like us that also has internal drug development programs," Stefansson said. "We don't have to sacrifice more than one indication for this particular deal."

DeCode's other alliances include deals with Roche and Roche Diagnostics, both units of Basel, Switzerland-based F. Hoffmann-La Roche Ltd.; Pharmacia Corp., of Peapack, N.J.; Santa Clara, Calif.-based Affymetrix Inc.; and the Applied Biosystems Group, of Foster City, Calif.

Its business model includes the use of alliances to both distribute product development risk and generate short- and medium-term revenue to fund internal programs, for which DeCode would assume all risk but also reap all benefits.

DeCode's stock (NASDAQ:DCGN) on Friday jumped 30 cents, or 16.5 percent, to close at $2.12.