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

will pay.

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 —

$190 billion.

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


(page tk).

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:

Products needing significant cash for production.

Inflated stock prices.

Potential for "roll-ups," the grouping of similar

companies to achieve a critical mass.

Products close to launch..

Less than $300 million valuation, so-called



Less than 18 months cash, another kind of "tired"


Tool-kit technologies but no sustainable products.

Lack of overseas capital markets, particularly in Canada

and Europe.

At the close of the old woman in the shoe rhyme, the old woman

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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