Corrections or additions?
This article was published in U.S. 1 Newspaper on December 8,
1999. All rights reserved.
Biotech Kids in a Shoe
Wall Street pays no attention to us!" moan the small
biotech companies. And with good reason. Biotechs are like the progeny
of the old woman in the shoe. She had so many children that she didn’t
know what to do.
For lots of reasons, Wall Street analysts are ignoring some of the
hottest young biotechs. Their only recourse, say the experts, is to
consolidate. The bigger the company, the more attention Wall Street
The experts who give this advice are Robert Esposito, national
director of biotechnology & life sciences at KPMH LLP on Lenox Drive,
and Gordon V. Ramseier of the Sage Group in Bridgewater. They
presented their annual report, "Rationale for Strategic
among Small Biotech Companies: the State of the New Jersey
Industry in 1999," at last week’s meeting of the Biotechnology
Council of New Jersey at Jasna Polana.
Esposito and Ramseier encourage biotechs to consolidate for a host
of reasons. To get better access to capital, put more products in
the pipeline, get stronger management, display a more credible
model, and demonstrate good earnings management — any and all
of these motivations could spur biotechs to consolidate.
They report that microcap and small biotech companies will find it
difficult to create growing, profitable enterprises in today’s market.
Future access to the capital necessary to fuel growth is too unlikely
for stand-alone $10-200 million companies to be viable.
must occur," says Esposito.
Such advice is a cautionary tale for Princeton-area investors who
think they want to include a small Princeton biotech in their
Just how small is small in this market? Assuming the definition of
biotech is any drug or device company too small to be called a
the national biotech industry, worth $150 billion, consists of 1,300
companies with a total of 350 products in clinical trials. In
one big pharmaceutical such as Merck has just 24 products in clinical
trials but is worth more than all the biotechs put together —
To put it another way, 76 percent of the biotechs nationally have
market capitalizations (the price of the stock times the number of
shares outstanding) of less than $200 million. In New Jersey 10 of
the 22 companies on the KPMG/Sage index are in this category of less
than $200 million.
In the $100 million basket are Palatin Technologies (at 214
Carnegie Center) and Integra Life Sciences on Morgan Lane. This
year Integra grew its market cap by 38 percent, going from $71 to
$98 million. Palatin lost some of its value, going from $26 million
to $25 million.
Going up the scale, College-Road based Cytogen grew from $67
to $97 million, a 45 percent increase, and I-Stat, which moved
this year to Windsor Center Drive, grew from $106 to $207 million,
a 95 percent increase.
In the more than $250 million category, Medarex on State Road
was one of the big winners, growing from $130 million to $339 million,
a gain of 161 percent (U.S. 1. November 17). Thanks to demonstrated
profits, the stock of Pharmacopeia on Eastpark Boulevard
in price by 83 percent, from $163 to $299 million. On Research Way,
Liposome — despite its up-and-down rides — grew 46 percent,
from $352 to $515 million.
Celgene in north Jersey was the biggest winner, growing from $140
million to $1,065 million this year, a gain of 661 percent. It grew
so much so fast that one of its spin-offs, Celgro, had to move out
and is now a tenant at the New Jersey Technology Center in North
Two companies — Anthra Pharmaceuticals and Phytotech at Carnegie
Center and Princeton Corporate Plaza, respectively — abandoned
IPOs in 1999. Two private companies, for which figures are not
achieved significant milestones, Ramseier noted. Both are Sarnoff
spinoffs, Orchid Biocomputer on College Road (see page 14) and Delsys
on Vaughn Drive and Deer Park Drive.
Three firms made big purchases: Nycomed Amersham at Carnegie 101
Molecular Dynamics for $194 million, Palatin Technologies, also at
the Carnegie Center, bought Molecular Bio for $425 million.
Large funds play favorites according to size. They tend
to invest only in the large companies, and most of this institutional
money is going to companies worth more than $1 billion.
Does Wall Street treats biotechs as step children because most are
so small? Or are biotechs so small because they are not supported
by Wall Street. It’s a chicken and egg question that involves several
Portfolio managers don’t like to put their institution’s money in
small biotech partly because the odds of striking gold — finding
the next Amgen — are low, and the odds of failure are high. Plus
the learning curve is steep. Biotech "stories," what the
tells investors, are more complex than those told by an
It’s up to the biotech analyst to try to tell these stories. The
"cover" the stock of a particular company by writing about
it and giving buy or sell advice to investors. By Esposito’s estimate,
one analyst can influence 30 salespeople, who in turn can affect the
purchases of 600 portfolio managers.
But because banks are consolidating, the total number of analysts
is dwindling. If bank A and bank B each have a biotech analyst, and
A and B merge, only one analyst will survive. Even the surviving
find it discouraging to cover biotech because the field is so
No sooner does one go out on a limb for a "buy" recommendation
than a product flunks an FDA test and the analyst is left with egg
on his face.
Ramseier offers the dismaying figures: Only 26 analysts cover biotech
in the nation. Each analyst can cover 18 companies, so there are 468
slots available. But the analysts elbow each other aside in the rush
to cover the biggies, so the top 25 companies get 59 percent of the
coverage, leaving only 191 slots for the remaining 272 companies.
Then the next 31 companies (those with market caps worth $200 to $450
million) get the lion’s share of the rest of the slots. Thus the small
companies must fight to share the dregs. Only 75 slots remain for
these 241 companies that are worth $200 million or less.
If "consolidate" is the watchword, certain kinds of small
biotechs should lead the way in hungrily looking for buyers or
They are the companies that have:
companies to achieve a critical mass.
in the shoe feeds her brood "broth without any bread" and
(contrary to today’s parenting custom) she whips them all soundly
and sends them to bed. The Esposito/Ramseier message was not quite
as painful as a no-bread dinner and a licking, but it was plenty stern
"Some companies have a false sense of security that if they just
hang in, everything will work out," says Esposito. "That’s
not necessarily true. It is so difficult for any one biotechnology
company to succeed, that to try to do it on your own is a very risky
— Barbara Fox
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