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In January 2001, Origenix Technologies Inc. announced it completed a second round of financing that brought the total amount of capital invested to $16 million. But when the Montreal-based biotech, which was testing a sexually transmitted disease treatment it had licensed, couldn’t raise cash, it found itself in bankruptcy. In early September, Vancouver, British Columbia-based Micrologix Biotech Inc. bought the company’s portfolio of 20 patent applications for $320,000, or about 2 cents for every dollar invested in Origenix. “Origenix was trying to find funding in a challenging environment,” said a source. “That creates opportunity for people with cash to move quickly and buy up assets at significantly less than their replacement value.” The Origenix-Micrologix case underscores a growing problem in biotechnology: How do you place a value on assets that have little or no revenue associated with them? A host of struggling, cash-strapped biotech and medical device firms are filing for court protection, preparing to liquidate. American Biogenetic Sciences Inc. of Copiague, N.Y., and Gliatech Inc. of Cleveland recently announced they would liquidate after failing to find more financing or an outright buyer. Phase-1 Molecular Toxicology Inc. of Santa Fe, N.M., and Organogenesis of Canton, Mass., have filed for bankruptcy. Attorneys, executives and investment bankers say these companies, such as Origenix, can only recoup pennies on the dollar for their assets, constituting a remarkable destruction of wealth. Organogenesis, for example, raised almost $95 million over the past 15 years. “There’s a shakeout going on,” says Charles Guttman, an intellectual property lawyer at Proskauer Rose in New York who has worked with pharmaceutical firms. “Many of these companies stayed in business only because of the investor capital they received. There’s a lot of valuable technology, but a lot of it was sold on hype and speculation.” As the bubble of the late ’90s swelled, money poured into many companies, some of which were little more than a group of university researchers working on what they hoped would be breakthrough technology. With patents in hand, many secured financing from venture capitalists and other private investors. Unlike Big Pharma companies, with huge laboratories, production facilities and marketing-and-distribution arms, smaller firms were often little more than scientific think-tanks. If they fail, lawyers and investment bankers say valuing the assets — the ideas behind their science — is inexact at best. The most widely employed methods are commonsensical: the investment made, the value of similar technology developed elsewhere and how much it would take to develop an alternative. For companies with products on the market, valuations commonly parallel those used in M&A. “Especially in the early stages of a liquidation, a multiple of sales helps in providing valuation and gives some idea as to what sort of money will likely be involved for companies with products on the market,” says Richard Kaufman, a life sciences attorney with Heller Ehrman White & McAuliffe. Potential buyers, he adds, should use alternate valuation methods as well, such as net current value of future revenue streams, based on assumptions regarding interest rates, inflation and the business itself. Discussions for the assets of Gliatech, which makes Adcon dissolvable gel used to prevent scarring in surgery, are likely to begin with calculations based on sales multiples. The company, which fell on hard times after a product recall and difficulties with the U.S. Food and Drug Administration, said Sept. 23 it was liquidating after being in bankruptcy protection. Gliatech hired Boston’s Adams Harkness & Hill Inc. to run the auction. Jonathan Gertler, a principal at Adams Harkness, said several companies expressed interest in the products, which had seen growing sales until the company ran into problems. Gertler estimated that had the run rate held, Adcon products could have had annualized revenue of about $30 million in 1999-2000. Gliatech posted a net loss of $12.9 million in 2000. He declined to comment on how Adcon technology would be valued but said “the run rate at its peak is certainly an important factor in establishing a value for the company’s assets.” Using a generally accepted industry benchmark of a price-to-sales multiple of between one and two times revenue, initial discussions would start between $30 million and $60 million. The company had a market capitalization of $300 million at its peak. The bankruptcy process adds its own dynamic. Aware of the risks and knowing a company is in financial distress, potential buyers often offer low-ball bids. Creditors, on the other hand, worried they might get nothing back, push for bids to be accepted. Bankruptcy judges seek resolutions that will close cases quickly. Sometimes, an insolvent company will sidestep bankruptcy altogether and look to its clients to buy its technology. That’s what 5-year-old DoubleTwist Inc., an Oakland, Calif.-based bioinformatics company that tried to develop a Web-based human gene database, did when it closed its doors earlier this year, using a technique known as assignment for the benefit of creditors. An ABC eliminates legal fees associated with bankruptcy, leaving a larger pool of assets for creditors. The assets are turned over to a third party, which sells them. In its short life, DoubleTwist raised $76 million from VCs that included Kleiner, Perkins, Caufield & Byers and Institutional Venture Partners. While he doesn’t know the exact figures, DoubleTwist didn’t do much better than most others, the company’s former CFO and general counsel Gregory Thayer estimates, getting just a few cents on each dollar invested. �Copyright 2002, The Deal, LLC. All rights reserved.

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