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FEATURE: For Public Genomics Firms, Cash is King in Post-Enron Twilight

LOS ANGELES, March 22 - If there's one thing that publicly traded genomics companies may count on After Enron it is that cash is the new king.

Wall Street, spooked by the widening fallout that followed the Enron collapse, may now likely view cash, and not profit or losses, as the better performance benchmark. As one genomic-company analyst put it: "You can't fudge cash." And considering that nearly all genomic tool and tech shops burn more cash than they earn, the new standard presents novel challenges.


"Most genomic companies that have existed only on technology platforms and have not been able to put together a pipeline of drugs have to be concerned about cash position," said Gene Mack, an analyst with Gruntal & Co. "Those with unsustainable business models are having a light shined on them through their cash position."


Many genomic companies that raised cash in the heady days of the last decade are now finding the markets less receptive to raising money through secondary offerings.


"Genomic companies in general are typically early stage and most of them know the importance of keeping a clean capital structure," Mack said in an interview with GenomeWeb. "They need cash. They constantly have bankers looking at their balance sheet."


This theory has is a strong consensus: "It's a cash-intensive business," agreed Thomas Hancock, an analyst with US Bancorp Piper Jaffray, while Scott Jones, of AG Edwards & Sons, cautions that "people are looking at cash on all companies. I think it's always been a benchmark, but it's receiving more attention" now than traditional measurements.

Cash, in the eyes of the US Securities and Exchange Commission and what public firms reflect in their balance sheets every three months, includes currency on hand, bank balances, negotiable money orders, and checks. Cash equivalents, meanwhile, comprise short-term, safe investments--US Treasury Bills and money-market funds--that can easily be converted into liquid.

To get their hands on more cash, many companies now have begun borrowing cheap money. Fearing that interest rates may have hit bottom--and may soon be headed up--finance executives are issuing convertible debt, which gives holders the option to convert all or part of their holdings into stock at a certain price.

San Diego-based Invitrogen, for example, raised $500 million last December through the sale of convertible subordinated notes. When added to what it already had in the bank, Invitrogen's balance sheet stood at about $1.09 billion.


"It's the most amount of cash the company has ever had," said Paul Goodson, Invitrogen's vice president of investment relations.


According to Invitrogen, those notes may be converted at any time into shares of its common stock at a cost of $86.10 per share. The notes, which will accrue 2.25 percent interest per year payable semiannually, will mature in five years and will be callable after Dec. 20.


Why borrow so much money? "We want to continue to build a war chest for making acquisitions," Goodson said, reaffirming the company's modus operandi of growth through M&A. "Lower interest rates made it attractive to raise the cash."


Then there are the genomics cash rarities, like Bruker Daltonics, that can boast net earnings if not particulalry stellar bank accounts. "We're not burning cash, we're generating cash," Michael Willett, investor relations officer for Billerica, Mass.-based Bruker likes to say. (Bruker's fourth-quarter 2001 net income was $934,000, or $0.02 per diluted share, compared with $1.2 million, or $0.02 per diluted share, one year ago. It had just over $70 million  in cash, cash equivalents, and short-term investments as of Dec. 31, 2001.)


Additionally, companies are being bought and sold simply for the cash. Boldly, Exelixis snatched up Genomica late last year in a stock-for-stock transaction valued at $110 million. Exelixis CEO George Scangos said at the time that although his company intends to use Genomica's software for its internal drug development activities, the firm will not continue to sell Genomica's products. Frankly, he said, he is more interested in Genomica's assets, which at the time of the acquisition announcement comprised $110.8 million in cash, cash equivalents, and investments.


"We do not intend to get into the software business," Scangos said in a conference call in mid-November. "We believe that Genomica's substantial cash and investments will significantly enhance our ability to move our drug-discovery programs forward, and that their software will be an important tool to manage human data during the clinical development of our compounds."


To be sure, Exelixis announced its intent to buy Genomica just as Enron was unfolding in the news, but analysts were thrilled with the firms impending cash position. The deal was "one of the best acquisitions of 2001 because Exelixis effectively did a secondary offering," said Edward Tenthoff, an analyst with Robertson Stephens.


Overall, though, the genomics sector has been "very washed out," Tenthoff said. "The biggest issue clearly is cash."


Not everyone is convinced. "Cash is part of the mix, but I don't think it's the whole picture," said Joel Seligman, dean of the Washington University School of Law, in St. Louis. Seligman, who has been studying Enron, pointed out that just because a company has cash on the books doesn't mean it can't crumble.


"Enron was a corporation that reported $65 billion in assets and was consistently reporting earnings," Seligman said. By comparison, "most genomic corporations are not reporting earnings."


In genomics, "investors are making a bet on a new scientific breakthrough. It's risky." But then again, he said, "in retrospect, Enron looked pretty risky, too."

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