Merck Deal Boosts SciQuest's Revenue and Reputation

SAN FRANCISCO -- Business-to-business firm SciQuest.com (SQST Quote) will unveil Thursday a heavy-duty contract with pharmaceutical giant Merck (MRK Quote) that, together with a deal with Dow Chemical (DOW Quote) announced last month, could boost SciQuest's revenue to $5 million in the March quarter, analysts say.

That would be four times the revenue SciQuest posted in the September quarter, the most recently reported data. The company will release its fourth-quarter 1999 results during the week of Jan. 31.

B2B start-ups have been racing to sign up big customers before competitors move in. Commerce One (CMRC Quote) really came of age in the eyes of many investors when it announced a deal in November with General Motors (GM Quote). Since it announced that deal, Commerce One's stock has risen about 125%.

SciQuest.com, which runs an Internet-based marketplace for science-related products used by pharmaceutical, biotech, chemical and educational groups, has signed a three-year agreement with its own blue-chip, Merck. SciQuest.com will build a secure Web site where Merck can do business with suppliers. As part of the arrangement, Merck has agreed to undisclosed minimum-order goals.

On Dec. 20, SciQuest.com signed up Dow Chemical for a multiyear agreement. In the days following that announcement, the stock rose nearly 80% while the Nasdaq rose 6%. The company is also working to sign up DuPont's (DD Quote) pharmaceutical unit.

Mark Gulley, a specialty chemical analyst at Banc of America Securities, expects the deals to boost revenue to $5 million in the first quarter of 2000 and to $50 million for the full year. Losses are expected to be $10 million in the first quarter and $50 million for the year. In the September quarter, the company reported revenue of $1.2 million. By comparison, Chemdex (CMDX Quote), its main competitor, reported $8.5 million in revenue for the same period. Gulley rates SciQuest.com a buy, and his firm has no underwriting relationship with it.

This isn't a winner-take-all space; two companies will likely be successful. But it does "pre-empt a third player from getting in, and establishes a horse race," says Gulley. "It establishes them as one of the two that will be successful."

Including Merck, the company has contracts with 50 customers. That's up 230% from 15 customers at the end of the third quarter.

The company derives its e-commerce revenue from auctions and transactions, advertising and information services such as data mining. About 97% of its revenue is based on transactions. It costs Merck little to use the service. But SciQuest makes money from Merck's suppliers; margins on those transactions range from the high single digits to low double digits, says Jim Scheuer, the company's CFO. Scheuer estimates that Merck spends $50 million to $100 million annually on lab supplies, and SciQuest has the potential to be in the middle of about two-thirds of that spending.

"This will have a significant impact on our business," says Scott Andrews, SciQuest's co-founder and CEO. "This is one of the most far-reaching agreements we have."