Global Policy Forum

By Andrew Pollack

Many analysts have predicted a wave of mergers in the biotechnology industry. After all, many companies with promising technology now have low stock prices and are running out of money, making them takeover candidates.

But while a wave of mergers appears to be starting, many of the companies being taken over recently are the opposite of what has been predicted. They have money and are being acquired for their cash rather than for their technology.

With investors souring on biotechnology, 22 percent of the industry's publicly traded biotechnology companies now have market values lower than their cash levels, according to Merrill Lynch. That makes it tempting for others to acquire them.

"I think everybody trading below cash is a takeover-merger candidate," said Vivek Jain of J. P. Morgan.

Last week, Dendreon said it would pay $73 million in stock for Corvas International, which had $90.5 million in cash at the end of December. In Britain, Cambridge Antibody Technology and Celltech are bidding against each other to acquire Oxford GlycoSciences, with both companies offering less than the cash Oxford has.

In November 2001, Exelixis agreed to acquire Genomica, a genomics software company, for $110 million in stock, about the same level of Genomica's cash. It later shut down Genomica's operations. And Hyseq acquired Variagenics last month, largely for its $50 million in cash.

Two weeks ago, NPS Pharmaceuticals said it would merge with Enzon Pharmaceuticals, in part to obtain the cash Enzon generates. Enzon, which is profitable, was not trading below its cash value.

But such deals are now starting to raise some shareholder concern. Shareholders reacted negatively to the NPS-Enzon deal, which they saw as having little synergy, a reaction that bankers say could discourage other companies from merging. Exelixis's stock has declined since it acquired Genomica, raising questions whether Genomica shareholders would have been better off getting their money back to invest themselves than having it go to Exelixis.

The Biotechnology Value Fund, the largest shareholder of Corvas, with a 19.8 percent stake, is opposing the proposed acquisition by Dendreon and says there is enough opposition to the deal from other shareholders to block it. The fund is arguing, in effect, that Corvas committed its shareholders' cash to backing Dendreon's experimental cancer vaccines, a decision the Corvas shareholders might not have made by themselves.

"We believe Corvas shareholders should be empowered to decide for themselves how they wish to redeploy their share of Corvas's substantial cash balance," Mark N. Lampert, president of the fund, said in the letter sent Friday to the Corvas board. "We believe the Corvas board should return as much cash as possible, as soon as possible, to its rightful owner — shareholders."

Another shareholder, Asset Value Fund of Far Hills, N.J., sued Corvas directors yesterday to block the merger, making similar arguments.

Randall E. Woods, chief executive of Corvas, which is based in San Diego, said the deal was done for strategic reasons, that Dendreon has a product close to market and expertise that could help Corvas develop its own drugs. Mitchell H. Gold, chief executive of Dendreon, based in Seattle, said that "the cash was an important part of the deal" but that Corvas also has a cancer program that fits with Dendreon's. Both executives said that Dendreon was paying more than the cash that Corvas will have by the time the deal closes in the second quarter.

The situation now results from the genomics frenzy of 2000, when companies raised billions of dollars in stock offerings. But investors soon realized that prospects for many of these companies were limited, particularly for those selling tools and services for analyzing genes.

"Never before have we had so many companies that have raised so much money and failed so rapidly in the eyes of investors," said Stelios Papadopoulos, a health care investment banker at SG Cowen.

Companies selling below their cash levels include the genomics leaders Celera, Incyte, Human Genome Sciences and CuraGen. Others include the gene and cell therapy companies Vical, Avigen and Diacrin and the drug developers Transkaryotic Therapies and Pharmacyclics.

It might seem illogical that investors would value a company at less than the cash it has. But that is possible if investors think the cash is being spent without hope of a business success. "Cash really isn't worth as much because I know in six months a lot of it won't be there," said Stefan D. Loren, an analyst at Legg Mason Wood Walker.

Caliper Technologies has received two takeover offers from Little Bear Investments of New York, both worth more than Caliper's market value but less than its cash level. Caliper, which develops chips for laboratory analyses and is based in Mountain View, Calif., rejected both offers.

Analysts and investment bankers say it would be difficult for a corporate raider to buy a company for less than its cash, take the money and shut down the company. The board would be unable to justify that to shareholders compared with shutting down the company themselves.

But if the company is being exchanged for shares in another biotechnology company, the shareholders still have a chance to participate in any share value appreciation in the future, making it easier to justify such deals. For the acquiring company, such deals are an alternative to raising money on the stock market, which is extremely difficult now.

There have been at least a couple of cases in which boards decided to liquidate and give money back to shareholders, like ImmuLogic and Advanced Tissue Sciences. But some analysts and executives say they expect few such deals. Liquidation might not be that lucrative for shareholders after the costs of shutting down operations are factored in, they said. And it is not in the nature of biotechnology entrepreneurs, who are shooting for the moon, to give up.

"Managements just may be reluctant to throw in the towel," said Eric Roberts, co-head of the global health care group at Lehman Brothers.

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