About six months ago, J. David Tholen noticed that his phone was starting to ring more. Investment bankers were inquiring about Tholen’s company, Hycor Biomedical Inc., a Garden Grove-based maker of diagnostic products for auto-immune testing and urinalysis products.
“I get calls three to four times a day,” Tholen, Hycor president and CEO, said of the current situation. “They’re very interested in coming to us with money. They say they’ll drive up the stock 500% or more. But we’re not interested. We have cash and why dilute our stock?”
Even without the extra help, Hycor Biomedical’s stock has done splendidly in the past three months, going from less than a dollar to more than $7. And Tholen said he expects to announce soon a “major partnership” with a large diagnostics firm.
Hycor’s story is just one sign of renewed interest by Wall Street in Orange County’s long-ignored biomedical industry,a broad group of companies ranging from medical device makers and pharmaceutical manufacturers to small biotech outfits that engineer genes.
Among industry players, there’s a buzz that things are happening. Companies are talking with each other about the licensing of products or ways to put their services online. There’s talk that dot-com investors, loaded with appreciated stocks, are looking to fund biomedical firms as the next big play. Executives are testing the waters, looking for possible IPOs, or mergers, or privatization of some “undervalued” public companies.
And some biotech companies are getting feelers because of exploding interest in the field of genomics, the mapping of DNA. In January, over 100 people attended a seminar on genomics that was hosted by the Irvine-based Life Science Industry Council.
“A year ago, it was really hard to attract funding,” said council president Ann Rozelle. “Now you have dot-com companies looking at (biomedical) companies in Orange County for a first or second round of funding. There are also VC companies that are entertaining funding life science companies.”
Healthcare is Back
VC investor Don Milder left his post as managing director at the Irvine office of Crosspoint Venture Partners, because it was difficult for his health industry stocks to compete with the firm’s Internet bets. Last fall, he began a fund, Palladium, which was recently renamed Versant Ventures. Based in both Irvine and Silicon Valley, the fund is dedicated exclusively to healthcare (including instrument manufacturers, biotech and healthcare services). Thus far, it has raised $275 million, Milder said.
He’s been joined by six other healthcare specialists, including OCers Barbara Lubash and Bill Link.
“It appears healthcare is coming back,” said Milder.
In Orange County, their fund has thus far invested in Cogent Health Care Systems and is considering another firm, Milder said.
Executives are generally keeping mum about specific deals that are just now in the works. But talks are going on, and some examples of investor interest have been publicized:
- Baxter International is getting ready to spin off by on April 3 its Irvine-based Edwards Lifesciences, which is expected to be one of Orange County’s largest spinoffs ever (see story, page 1).
- Irvine-based NeoTherapeutics, Inc., which is testing a drug to help victims of Alzheimer’s, last week announced it had raised $8 million from two institutional investors.
- BioMEMS Technologies, an Irvine-based startup on the leading edge of “nanotechnol-ogy,” is expecting to announce a large funding within a few weeks to begin operations.
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At least five OC-based biotech public companies have seen their stocks double in the past two months, riding on the wave of national popularity for biotech stocks. (See separate story, page 22.)
Drought Over
Dave Anast, publisher of the Costa Mesa-based Biomedical Newsletter Inc., predicted that the drought is over for instrument-oriented companies.
“When the year ends, the results are going to show a market improvement as far as private financing,” he predicted. “Some of the companies will be taken public that you would not have had a year or two ago. It’s been a revival of sorts, especially for companies that have products approved by the FDA and are sold on a regular basis. The device manufacturers typically have better and larger distribution agreements in place that will provide a steadier flow of revenue. The year 2000 will be quite a nice occurrence.”
Some companies are feeling left out and trying to do something about it. Fred Jager, president at Hunter Wise Financial Group, a Newport Beach-based investment banker that acts as an intermediary for deals generally ranging from $50 million to $100 million, said he has talked to executives at six biomedical companies located in Southern California that are interested in going from the public sector to the private sector.
“They’re getting virtually no analyst coverage on their companies. The companies are not of interest to the investors,” said Jager. “The companies are frantic for capital financing alternatives.”
He said that while it seems counter-intuitive for these companies to go private as a way to raise capital, some investors find it a cheaper way to gain control than it would be to buy a private company.
“If you find any medical company with a market cap of six times EBITDA, you’ll find someone out there interested,” he said. “Investors are looking for bargains.”
Venture Funding Picks Up
One company expecting to announce a large venture funding within a few weeks is BioMEMS.
BioMEMS is involved in nano-technology, the process of miniaturizing instruments. Co-founder Ed Doyle said the technology, used to make products smaller on the Mars Rover, the Space Shuttle and high-performance aircraft, is now being adapted for the medical industry.
“It’s like Star Trek. It sounds sci-fi, but it is happening,” said Doyle. “We’re seeing a major sea change, like the 1960s when the chemistry industry was changed. That’s what is exciting investors. They see the resurgence of new technologies.”
Doyle said he also believes that VC funding in Orange County should increase by the latter part of the year, because a number of technologies are now converging.
Hycor’s Tholen said some of the renewed interest in his company is because relaxed FDA rules have allowed it to roll out products more quickly.
“It’s different than a startup where the cash needs are tremendous. All of my products are through the FDA. That’s why all of a sudden, the valuation has jumped,” he said.
Biomedical companies have long been beaten down by the Street’s focus on the Internet. But biomedical executives are buoyed by the aging baby-boomer generation needing more drugs and the sense that what they are doing is really important.
“I’m not trying to put down Internet stocks,” Tholen said, “but this is major stuff that will fundamentally change people’s lives.” n
