Feeling undervalued
Several biotechs' stocks trade below cash levels
By Jeffrey Krasner, Globe Staff, 11/20/2002
Talk about insulting valuations.
Genome Therapeutics Corp. of Waltham yesterday closed at $1.53, down six cents, or 3.7 percent. The stock is down more than 80 percent from its 52-week high last December.
But the real slap in the face is that the company has $58 million in the bank - or about $2.53 for each of the 23 million shares outstanding. If investors could buy up all the shares and take control of the company, they could conceivably earn a handsome profit just by shutting the doors and distributing the stock.
Not only is the stock market valuing Genome's cash at less than face value, but the market is actually assigning a negative value to Genome's entire product development program. That includes Ramoplanin, a drug in late-stage clinical trials for the prevention of bloodstream infections caused by antibiotic-resistant bacteria.
Steven M. Rauscher, Genome's president and chief executive, accepts the situation stoically. ''We're not exactly alone,'' he said, ''and it's not particularly new terrain. Before the year 2000 biotech boom, there were a lot of companies trading for less than cash.''
But the devaluations caused by the widespread slump in biotech have put more companies under water than ever. According to a survey of Massachusetts biotechnology firms by Feinstein Kean Healthcare, a Cambridge consulting firm, 11 companies are trading at valuations lower than the cash on their balance sheets. Another 11 are trading at prices less than twice their cash. So far, there is no indication any of the companies are considering liquidating and returning their cash to investors.
''It's worse this time around,'' said Dr. Sam Williams, senior biotechnology analyst for Lehman Brothers. ''There are more companies trading below cash, and the discounts to cash are more than we've ever seen.''
Take V.I. Technologies Inc. of Watertown, a firm developing a way to eliminate pathogens from donated blood to make the blood supply safer. It's trading at 55 cents a share, when it has $14 million in the bank, or about 62 cents a share. A more extreme example is GTC Biotherapeutics Inc. of Framingham. For four months, shares in the company, which seeks to produce protein treatments using genetically modified goats, have bounced around $1. Yet the $66 million in cash and equivalents is enough to distribute $2.39 for each share.
Williams said the companies trading below their cash values are not just the ''platform companies'' developing novel technologies. Product companies working to win regulatory approval to sell new drugs - like Genome Therapeutics - are also under water.
There's no shortage of reasons for the swoon in biotech stocks. For two years, President Bush failed to appoint a new head to the Food and Drug Administration, and delays at the agency got worse. Promising drug candidates like ImClone Systems' Erbitux unexpectedly were rejected by regulators after years of development. Institutional investors lost their appetite for biotech, closing down the IPO and follow-on markets and plunging dozens of companies into urgent cash shortages.
But more than anything else, the image of biotech companies selling for less than their liquidation value highlights a fundamental shift in investor's values. Previously, investors in the volatile sector were willing to put a value on any development that promised revenues in the future - sometimes as long as a decade away. Now, investment managers and company executives said, investors are only interested in things that promise revenues now.
''The investor is looking for a company with products on the market for which they can do cash flow models with some kind of certainty,'' said Tom Newberry, vice president of corporate communications for GTC Biotherapeutics.
In response, companies are emphasizing any activities that generate cash. Dyax Corp. of Cambridge is seeking to develop drugs for cancer and inflammatory diseases using a novel way of identifying the compounds on the surface of viruses. But the company's third-quarter report gives equal weight to higher revenues at Biotage Inc., a division that will generate sales of about $23 million this year through its sales of supplies for chromatography devices.
In addition, the company has forged paying research alliances with firms like AstraZeneca PLC, Corvas International Inc., and Human Genome Sciences Inc. - an activity that chief executive Henry E. Blair likes to call ''bringing in laundry'' to help pay the bills. In addition, those contracts are structured to provide as much near-term revenue as possible.
''In an ideal world, we'd spend more resources on bringing in new [drug] targets and taking those to the clinic,'' said Blair. ''In this type of an environment, we're looking to generate cash flow.''
Genome Therapeutics put some long-range projects on the back burner, laying off some employees and reducing its ''burn rate,'' or level of cash consumption, by about $6 million a year. Even so, Rauscher said, the company has two of its own products, including Ramoplanin, in clinical trials, and six product candidates being developed with larger pharmaceutical companies, for a total of ''eight shots on goal.''
Still, Rauscher said, it's frustrating to see the company's stock trading so low.
''We've made a ton of progress in the last several years, and the real underlying value of our firm has gone up substantially, but that's being overwhelmed by the short-term expectations of investors,'' he said. ''Most investors are looking for firms that will have big valuation drivers within a six-month time frame.''
Have any investors clamored for a liquidation to generate a small, quick gain? ''We haven't heard that at all,'' Rauscher said.
Newberry, the GTC Biotherapeutics spokesman, said his company seeks to keep investors informed regardless of the stock's performance. Many Wall Street analysts have dropped coverage of small-cap companies like GTC, and large institutional investors like mutual funds have lost interest in such small companies.
Instead, GTC is holding lunches with small investors, including high-net-worth individuals. While such efforts haven't boosted the company's share price, Newberry said they have helped to maintain higher daily trading volumes, and have kept interest from short sellers - investors who profit when a stock declines in price - at a minimum. ''By staying out there and telling our story in good times and bad, you reduce or minimize the ability for people to play games around a small stock,'' he said.
Another strategy some firms are trying is using their cash to make an acquisition that gives investors what they're looking for. That's what happened last week when Variagenics Inc. said it was merging with Hyseq Inc. of Sunnyvale, Calif.
''There are companies with cash but no businesses, and companies with businesses but no cash,'' said Sam Isaly of Orbimed Advisors Inc., which manages biotech assets including mutual funds. ''Sometimes, they can usefully combine.''
But such mergers are harder to find.
''The competition for things in late-stage Phase 3 trials is extremely intense,'' said Libbe Englander, portfolio manager for the InvestBio Opportunity Fund. ''Everybody with some cash is on the lookout for products that are valuable.''
Jeffrey Krasner can be reached at krasner@globe.com.
This story ran on page D1 of the Boston Globe on 11/20/2002.
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