Hot biotech stock cools nearly 33%

BioReliance loses $10.69 after caution from chief executive

Called a victim of hype

Investors apparently expected rosier 2002 profit forecast

January 10, 2002|By Julie Bell | Julie Bell,SUN STAFF

BioReliance Corp. shares plummeted nearly 33 percent yesterday after its chief executive outlined higher earnings expectations but cautioned investors who had run up the stock in an apparent bet that the company would reap major benefits from the war on terrorism.

Shares of the Rockville contract manufacturer fell $10.69 to $22.08 as nearly 2.6 million shares traded hands, more than 15 times the average daily volume of about 168,000 shares over the last six months.

The company's market capitalization - a measure of its value figured by multiplying its share price by the number of shares outstanding - lost $88.5 million on the day, finishing at $182.8 million.

The sell-off came after CEO Capers McDonald outlined earnings expectations for 2002 that analysts said were not as robust as speculators had hoped.

The biotechnology firm is among a number of companies tapped to manufacture enough smallpox vaccine under a government program to protect every American in the event of a bioterrorism attack.

That contract and speculation that there would be more bioterrorism-related business pushed its shares up from a Sept. 10 price of $12.30 to a high of $36.41 on Dec. 14.

"There's been a lot of hype in the area because of the assumptions that they were going to solve the problems of biological warfare," said Stefan Loren, a biotechnology industry analyst for Legg Mason Wood Walker.

"That's setting up a momentum play, with people expecting much higher earnings and revenues," Loren said.

For all of 2002, McDonald estimated that BioReliance would earn 90 cents to $1 a share, in line with the 94 cents projected by an analyst queried by Thomson Financial/First Call.

It was the first time the company has stated its expectations for 2002.

If BioReliance hits those numbers, it will have posted earnings per share growth of as high as 60 percent, McDonald noted late yesterday afternoon in an interview.

"That's very robust growth in earnings," McDonald said.

Still, investors apparently wanted to see more from a company that is benefiting from the war on terrorism.

"There's nothing wrong at the company," McDonald said. "There perhaps could have been more in the press release."

The five-paragraph release outlined earnings projections that McDonald expanded upon at a major health care investors conference in San Francisco.

The release, however, pointed out that "several anticipated effects would burden the results for the first quarter of 2002."

These included salary increases and higher effective income tax rates for 2002.

In addition, McDonald said in the release, the company expects that its higher stock price will negatively affect diluted earnings per share.

The reason: Fully diluted earnings per share are not just figured on the number of shares outstanding, but also include the number of exercisable options.

As the stock price has climbed, so has the number of options that can be exercised, meaning the number of shares to be divided into earnings has grown.

McDonald reiterated yesterday that the company expects diluted earnings per share of 21 cents to 26 cents in the fourth quarter, and 62 cents to 67 cents for 2001, in line with the analyst's expectations.

For the first quarter, he projected diluted earnings per share of 15 cents to 19 cents, lower than the 20 cents per share projected by the analyst consulted by Thomson Financial/First Call.

In the interview, McDonald said the company's intent at the investor conference wasn't to quell investor enthusiasm but to outline earnings expectations and BioReliance's plans for growth.

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