Investment bank's woes shouldn't sink Guilford Pharmaceutical, analyst says

September 24, 1994|By Ross Hetrick | Ross Hetrick,Sun Staff Writer

The collapse of a major biotechnology investment banking firm should not have a lasting effect on Baltimore-based Guilford Pharmaceuticals Inc., say the company and an industry analyst, even though it sent Guilford's stock spiraling down 46 percent in the last two days.

"This is more a function of Wall Street folly than it is a reflection on the fundamentals of the company," said Charles H. Noland, senior analyst for health care and technology for Dakin Securities Inc., an investment banking firm in San Francisco.

But the increased volatility of the biotechnology market -- as evidenced by this week's experience -- could make it more difficult for companies like Guilford to raise capital, according to Charles B. Engelberg, senior biotechnology analyst at Montgomery Securities, a San Francisco investment banking company.

"If you have a stock that is very volatile, going up and down, in this case particularly down -- investors will discount [that stock]," Mr. Engelberg said.

"They will require higher return to own such a stock, because investors are generally risk-averse."

The stock of Guilford and several other biotechnology companies went into a tailspin Thursday after D. Blech & Co., a leading trader, or market maker, of small biotechnology firms suspended securities operations because of regulatory problems.

D. Blech had taken Guilford public in June and was a major supporter of its stock.

On Thursday, Guilford's stock dropped 38 percent, to $4.75 a share. Yesterday, the stock slid an additional 62.5 cents, to $4.125.

However, the situation appeared to stabilize yesterday when Josephthal, Lyon & Ross Inc., a New York investment banking firm, agreed to acquire all customer accounts and brokers of D. Blech -- once again giving Guilford needed support in the market.

Terms of the sale were not disclosed.

With $13.8 million already raised in its June stock offering, Guilford should not be significantly hurt by D. Blech's problems, Mr. Noland said.

"They brought the deal, they got enough money, they're funded for a while until their next set of milestones," he said. "In six months everybody will have forgotten about this."

But an over-allotment sale of stock, which would have raised an additional $2.1 million for Guilford, has probably been doomed by the D. Blech demise.

But Guilford is not in critical need of that money, the head of the company said.

"It was not critical to our doing the things that we need to do in the next year or year and a half to commercialize our lead product," said Craig R. Smith, chairman, chief executive officer and president of the pharmaceutical company.

"Our business plan is unchanged. Our resources are adequate to carry us forward."

The June stock sale provides enough capital for the 22-person company until at least the third quarter of next year, Dr. Smith said. By that time the company should have begun selling one of its drugs on a limited basis for clinical trials, which will reduce the need for additional capital while increasing the attractiveness of the company to investors, he said.

Guilford stems from research done by Dr. Solomon H. Snyder, a neuroscientist at the Johns Hopkins University School of Medicine. He was the founder of Nova Pharmaceutical Corp. in 1982.

Nova was sold to Scios Inc. of Mountain View, Calif., in 1992 without having brought any drugs to market.

The renamed Scios Nova Inc. then spun Guilford off in July 1993 to pursue central nervous system drugs, while Scios Nova concentrated on heart and kidney drugs and anti-inflammation products.

Guilford still has no products on the market yet.

The two closest are Gliadel, a product that surgeons would implant in the brains of patients undergoing a second operation for brain cancer, and Dopascan, which would be used in the diagnosis of Parkinson's disease.

Scios Nova, which owns a 29 percent share of Guilford, suffered a paper loss of $3.9 million in the last two days.

Dr. Snyder, the second-largest stockholder, had a loss in stock value of $1.5 million, and Dr. Smith's holdings dropped by $1.1 million in value.

But Dr. Smith said the losses were "irrelevant" because both Dr. Smith and Dr. Snyder have agreed to hold their stock for at least 18 months after the stock offering.

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