Biotechnology
Big is beautiful
Large biotech firms are in fashion. Small ones are more
unpopular than ever
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IN HARSH environments, small, nimble creatures often do
better than their larger rivals. In the unnatural world of
Wall Street, however, such rules do not always apply.
American biotechnology companies are enjoying a surge on
NASDAQ these days, having spent most of 1998 lagging
behind their high-tech peers. But the good fortune is not
shared by all. Large biotechnology companies, with market
capitalisations of $1 billion or more, have seen their shares
rise by 7% since the start of 1999, but firms worth less than
$200m have fallen in value by 12%, according to
Hambrecht and Quist, an investment bank.
This follows a miserable 1998. Over the last nine months of
the year the shares of large firms climbed by 38%, but
those of the smallest plunged by 39%. Such gaps between
big and small are common in many industries, but they are
particularly troublesome in biotechnology, where four-fifths
of companies in the costly business of creating new drugs
and genetically modified organisms have market values of
less than $250m.
Rich biotechnology firms seem to be getting richer mainly
because they offer results that investors can understand:
products on the market and profits right now. Many such
companies, such as Amgen and MedImmune, had their start
in the 1980s and early 1990s, when all it took to catch a
punter's eye was a bright idea and a lot of energy. But
investors have become more demanding, according to
Hollings Renton, chief executive of Onyx, a Californian
firm that is developing anti-cancer drugs.
Thus, investors no longer lavish rewards for the
slow-but-steady progress that goes into building a
biotechnology company, such as promising results from
early clinical trials, or new partnerships with drug
companies. And they are quick to punish stumbles: an
announcement by PathoGenesis Corp, a Seattle firm, of
lower-than-expected first-quarter sales of its new cystic
fibrosis drug sent its shares tumbling by almost two-thirds
on March 23rd.
Investors have good reason to be wary. They have learned
about the risks of biotechnology. Very few molecules
created in the laboratory will stand up to the rigours of
test-tube evaluation and animal testing. Only one in ten of
these survivors will then make it through clinical trials and
scrutiny by government regulators. This is a crushing
failure rate for small biotechnology firms with only a few
ideas on the boil.
Yet most small biotech firms have little more to offer.
According to Glenn Crocker, a consultant with Ernst and
Young and author of a recent report on American
biotechnology, many such firms had “premature births”:
they were listed during biotech's last hurrah before their
science was fully developed. According to the report,
almost half of the country's 327 public biotech firms have
less than two years-worth of cash left in their coffers.
Small firms can sometimes still catch retail investors'
fancy. Shares in EntreMed quadrupled in a day after a
newspaper article described the cancer firm's early success
with a new drug in mice. But they can fall out of favour
just as dramatically. EntreMed's shares then fell by half
(before recovering) when Bristol Myers Squibb pulled back
from a drug-development partnership with the firm.
The “serious” institutional money, which tends to stay put
a little longer, is no longer directed towards small-cap
biotechnology firms. According to Bill Slattery, a
biotechnology analyst at Amerindo, a New York
investment firm, any fund whose value has grown into the
billions of dollars in the past few years can no longer
“afford” to invest in small-cap firms, because of their
poor returns and low liquidity.
Matters are not helped by consolidation among investment
banks, according to Robert Esposito, director of
biotechnology at KPMG, another consultancy. This has sent
bankers chasing after bigger deals with larger biotech
operations. The number of biotech analysts researching
small companies has fallen by half since 1997.
The envious people in biotechnology also blame the
high-tech industry. Ten years ago, investors with a taste for
risk and new ideas looked to companies such as Amgen or
Biogen for their thrills. Today, the Internet plays that role.
One way for small biotech firms to raise their profile is
through merging. America has roughly 1,500 public and
private biotechnology firms, but few are unique in either
their territory or their technology. Mr Esposito advocates
mergers that consolidate complementary technologies or
build critical mass in particular areas. One example is the
merger of Gilead Sciences, a $1 billion-firm specialising in
anti-viral therapies, with NeXstar, a smaller liposome
company. It has raised both companies' share prices. But
some biotech entrepreneurs wonder if the fat fees that
bankers and management consultants earn from such deals
play a part in their enthusiasm for mergers.
In any case, a company determined to eke out a living can probably
get by. R&D partnerships with pharmaceutical firms (or indeed, with
larger biotech companies) can provide badly needed cash. Private
money, too, is still available; venture-capital financing reached $1.3
billion in 1998, a 50% rise over the previous year. That is why,
despite the frosty climate on Wall Street, a mass-extinction among
small biotechnology firms is not going to happen just yet.
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From The Economist.
Moral: Alls we gotta do is get this turkey to $12 and we'll be home free!!! At that point it would have a mkt. cap. > $200 mm. |
