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DJ IN THE MONEY: Keeping The Faith On Igen Intl
Stock
By Michael Rapoport
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Igen International Inc. (IGEN) hasn't reported a profit since 1994, and
it has missed analysts' consensus estimates for the past six quarters. The company is battling one of
the world's biggest drug companies in court. And its stockholders' equity is barely on the right side of
zero.
So why do some analysts and institutional shareholders think the company's stock - currently mired in
the mid-20s - is a steal?
It comes down to faith, they say - faith that Igen's diagnostic technology, used for finding new drug
candidates and medical and environmental testing, will start paying off on its promise. Some of the
company's fans have stuck with it a long time, waiting for that faith to be rewarded as the stock has
languished.
But they insist they haven't been wrong - just early. Despite the losses and a few other red flags in the
company's fundamentals, the fans contend the stock is now poised to take off, amid signs that Igen's
latest rollout of its technology is going well and that new markets for it are opening up. They also
hope the company will soon reach a major settlement in its lawsuit against a unit of Roche Holding
AG's (Z.ROC) F. Hoffman LaRoche Ltd.
And when Igen finally makes its long-awaited surge, believers say, they want to make sure they're
along for the ride.
"I think this is one that tests your patience sometimes ... but this is a gun that must be loaded," said
Joseph Besecker, head of Emerald Asset Management in Lancaster, Pa., which owns about 271,000
Igen shares, a stake of about 1.8%.
John Putnam, a Gruntal & Co. analyst, agrees. In a research note last week, he called Igen's
technology "one of the most original and dynamic advances in the diagnostic and testing industry in
the past decade." His long-term price target for Igen is 68 - nearly triple the current price.
Igen's technology is called electrochemiluminescence, or ECL, in which light is generated through
applying electricity to a chemical compound and then used to detect viruses, bacteria or other
microscopic substances. The company and its fans say ECL is a faster, more sensitive, more accurate
method of detection than others out there, with applications ranging from drug research and
development to medical diagnostic tests to checking for bacterial contamination in food and water.
At the moment, Igen's most prominent effort to exploit ECL is its High Throughput Screening system,
a way to speed up an early stage in the drug-discovery process. The system allows drug companies
to more quickly test large numbers of chemical compounds to determine which have potential for
fighting a particular disease.
Igen has sold High Throughput Screening machines to a number of large drug companies, including
Bristol-Myers Squibb Co. (BMY), Merck & Co. (MRK) and Schering-Plough Corp. (SGP). That
will also provide Igen with a continuing stream of revenue, by selling the companies the chemicals
they need to operate the machines - the classic kind of model in which you pull in the real money by
selling the razor blades, not the razors themselves.
"I think they've built themselves a very credible business," Besecker said.
Paul Kelly, an analyst for ING Barings LLC, said Igen could see $75 million in annual sales from
High Throughput Screening within three years - this at a company that had less than $15 million in
revenue in the fiscal year that ended in March.
In addition, Igen is working on exploiting the technology in other ways. A test using Igen's technology
to detect E. coli bacteria is set to be launched in late October. And ECL-based tests are being
developed to detect cancer cells and the human immunodeficiency virus, or HIV.
"Either of those tests could be worth more than the entire market cap of the company," said Joe
Barton of White Rock Capital Management LP, a Dallas firm backed by billionaire investor George
Soros that owns a stake of about 13% in Igen. (Igen's current market capitalization is about $370
million.)
But only one subject seems to interest many investors about Igen - its lawsuit against Roche
Diagnostics, in which Igen alleges that Roche has shortchanged it on royalties due under a licensing
pact. Igen also alleges that Roche went beyond what it was licensed to do by selling machines with
Igen technology to doctors' offices and other "point of care" facilities that have direct contact with
patients - a market Igen wants for itself.
A Roche spokesman declined comment on the suit; the company has contended that Igen's claims
are unfounded. But last year, Igen won a round when a federal judge in Maryland granted it a
preliminary injunction barring Roche from selling ECL-based machines to doctors' offices.
Roche has appealed. But the injunction, as well as a feeling that Roche needs Igen's technology, has
some observers predicting that Roche will ultimately have to agree to a significant out-of-court
settlement for Igen. "I think there's only upside potential in that Roche situation," said analyst Kelly.
Igen has said it is in settlement talks. "There are ongoing discussions with senior management of
Roche to look for a way out of the lawsuit," said George Migausky, Igen's chief financial officer.
Unless there is a settlement, the case is expected to go to trial late next year.
Igen's position in pressing the lawsuit was further bolstered in March, when it obtained $30 million in
debt financing from John Hancock Mutual Life Insurance. Although Migausky says the company
didn't obtain the financing because of the lawsuit and that any effect it has on the litigation is
"peripheral," it certainly served notice that Roche wouldn't be able to use its superior resources to
simply wear Igen down quickly for lack of money.
"It would not have escaped Roche if Igen had not gotten some additional cash," Kelly said.
Even Igen's balance sheet doesn't look bad, the years of losses and the puny $47,000 in
stockholders' equity notwithstanding. Total current assets ($35.1 million) exceed total current
liabilities ($8 million) by a healthy margin. And with the exception of the Hancock financing, which is
counted as a noncurrent liability, the company appears to have very little debt.
So why is Igen stock stuck in a groove around 24? Well, besides the losses, there are a few other
things that might make investors want to think twice about Igen's prospects.
The company's losses have exceeded its revenue in two of the last four quarters, including $5.1
million in losses versus $3.9 million in revenue in its first quarter ended in June. If Igen continues
burning cash at the rate it did during that quarter, the most recent period for which figures are
available, the company will be out of cash around the fall of 2000 unless it's able to get more. And
Nasdaq short interest figures show it would take 10.24 days of trading at the stock's average daily
volume to cover the short interest in Igen - a relatively high ratio that indicates at least some investors
are betting the stock will fall, although that ratio is now the lowest it's been in months.
But for many potential investors, the looming concern is apparently the uncertainty surrounding the
Roche lawsuit. Those who like the company say anyone scared off by the suit is neglecting the fact
that Igen has been building a strong business quite apart from the litigation.
In fact, many analysts and investors say a big settlement with Roche would be just icing on the cake -
and that they would still be fans even if Igen loses the Roche case. "People get fixated on one aspect
of the company and they tend to overlook the change in the company's prospects," Kelly said.
In addition, Igen may simply be flying under the radar of a lot of potential investors. Small-caps are
out of favor, and most top-tier securities firms don't have analysts following Igen.
"I don't think a lot of people know the company well enough to be buying it," said Spence Tobias, a
health-care analyst with Circle T Partners in New York, which owns about 70,000 Igen shares.
But even if Igen's future looks bright, how much longer are investors going to be willing to wait for it?
Stay tuned, Igen's fans say: The consensus seems to be that the company will start turning a profit in
about a year - and a settlement with Roche, if it happens, could come sooner than that.
"I believe at the end of the rainbow is that pot of gold," Emerald's Besecker said.
- Michael Rapoport, Dow Jones Newswires, 201-938-5976;
michael.rapoport@dowjones.com
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