Bygone Biotech Values
Hinder Today's Deals

When Variagenics Inc. made its debut on the Nasdaq Stock Market in 2000, investors were tantalized by the U.S. biotechnology company's futuristic plans to unlock information about the human body's response to drugs.

Today, the allure is far more old-fashioned: cold hard cash.

Variagenics, which is developing genetic tests for different kinds of cancer, earlier this month announced plans to be acquired by Hyseq Pharmaceuticals Inc. for $55.9 million in stock. Variagenics has $54 million in cash and securities on hand, but just before the pact was announced its market capitalization wasn't even half that amount. That makes the Cambridge, Mass., company one of dozens of biotechnology companies following in the infamous footsteps of slumping technology counterparts, trading at or below the level of their cash and other securities, after subtracting debt.

The low trading prices have set off a flurry of activity at investment banks, but investors shouldn't hold out hope that buyers will swoop in with takeover offers for many of these battered stocks. Thanks to chief executives who don't want to hand over the reins and unwillingness to accept that the sky-high valuations of the 2000 biotech-stock bubble are a thing of the past, deals are harder to put together than they would appear, bankers and executives concede.

The Dow Jones biotechnology-stock index is down 60% from its peak in March 2000. In the most basic sense, the low trading prices mean investors consider some of these companies' actual businesses to have little or no real value. Indeed, with would-be products often in the earliest of development stages, some companies are expected to fairly quickly burn through their cash hoards.

Still, "it's quite remarkable how the public markets are valuing these companies right now," says Dennis Purcell, senior managing partner at Perseus-Soros BioPharmaceutical Fund, a private-equity firm that invests in life-sciences companies. "We have as many companies trading below cash as we've ever had."

Among the companies trading below cash is Celera Genomics Group, which produced a copy of the human genetic code two years ago and has since slashed jobs and shifted its focus to drug discovery.The former stock market darling, which traded for more than $275 a share in 2000, closed at $11.35 Wednesday in New York Stock Exchange trading. The Rockville, Md., biotech firm now has a market value of $811 million, compared with a cash hoard, after subtracting debt, of $881 million. A Celera spokesman says the company is committed to developing new drugs and plans to unveil details of its business strategy in mid-December. "We have some real reasons to move forward," he says.

The list also includes CuraGen Corp., New Haven, Conn., which has $416 million in net cash and a market capitalization of $261 million; and Pharmacyclics Inc., Sunnyvale, Calif., which has about $106 million in net cash and a market capitalization of about $57 million. "We have plenty of cash to execute on our strategy," says David Wurzer, chief financial officer of CuraGen, adding that the company hasn't been approached about a takeover. Pharmacyclics couldn't be reached for comment.

In recent months, deal makers have been poring over the sector's balance sheets and urging prospective buyers to consider transactions. "Everybody agrees that there's got to be more consolidation in this industry," says Stephen Ferruolo, co-chairman of the life-sciences national practice group at law firm Heller Ehrman White & McAuliffe LLP in San Diego.

Adds Peter Reikes, managing director at SG Cowen Securities Corp.: "For some of these buyers, this is very much a financing dressed up as an acquisition. In the absence of any kind of financing, acquiring the cash is easier than issuing stock in a regular public offering."

But as good as deals may look good on paper, only a few have emerged. Last month, Invitrogen Corp. agreed to acquire InforMax Inc., a maker of genetic-analysis software, for about $42 million -- about the same amount of cash InforMax had in the bank. And earlier this year, Exelixis Inc. acquired Genomica Corp. for $110 million, its level of cash. In that case, Exelixis kept the cash, but sold off the gene-searching software it acquired.

Then there is the Hyseq-Variagenics deal. It is aimed at helping Hyseq manage a potential cash crunch; the proposed acquisition is expected to extend its life span through the end of 2004, compared with Hyseq's previous projections that it would run out of cash in the first quarter of 2003. The new company will cut expenses partly by reducing combined employment roughly 40% and by throttling back commitment to various research-and-development projects.

Hyseq, Sunnyvale, Calif., also could end up scuttling some of its own existing programs after a planned review of all research efforts at both companies, although its most advanced drug candidate, a clot-busting medication called alfimeprase, isn't in danger, says Chief Executive Ted Love.

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A big reason for the lack of more deals: "entrenched CEO syndrome," or the unwillingness of biotech chieftains to admit the game is over while they still have money in the bank, say fund managers and industry executives. "Management teams are generally not inclined to admit they're pursuing a failed business model," explains Hyseq's Mr. Love.

Also, many biotechs still cling to the fading memory of their sky-high valuations during the 2000 biotech-stock bubble, and continue to demand unreasonably high premiums, says John McCamant, editor of the Medical Technology Stock Letter, a trade publication.

Skittishness following the implosion of ImClone Systems Inc., the recipient last year of an investment pledge valued at as much as $2 billion from Bristol-Myers Squibb Co., also has damped enthusiasm for deals.

And some would-be acquirers aren't convinced that biotech acquisitions are yet much of a bargain. Given a slowing pace of drug approvals in the industry, "it's still not clear that biotech stocks are cheap," says Arthur Levinson, chief executive of Genentech Inc., the world's second-largest biotechnology company.

Another factor working against deals: Biotech directors, like those in other sectors, are wary of deal-making in the uncertain market environment. And investor skepticism doesn't bode well for future deals. Indeed, the Hyseq-Variagenics deal isn't generating much shareholder enthusiasm. Originally valued at $2.22 a share, the deal now values Variagenics at $1.55 due to a 31% drop in Hyseq's stock price since the deal was announced. Varigenics' current market capitalization: about $31 million.

Write to Robin Sidel at robin.sidel@wsj.com⁴ and David P. Hamilton at david.hamilton@wsj.com⁵

Updated November 29, 2002