Biotech Goes to Harvard

If you haven't heard of Harvard Biosciences (Nasdaq: HBIO  ) , don't be surprised. The biotech toolmaker was a penny company -- under $5 a share and $100 million market cap -- as recently as May. But that's all changed: Shares closed yesterday at $7.80, for a total market value of $235 million.

Then, after the market close, the company reported 65% revenue and 50% EPS growth from the same quarter last year. What gives?

The company's tools, designed to speed up the drug discovery and development process, are sold directly and through distributors Amersham Biosciences and PerkinElmer (NYSE: PKI  ) . General Electric (NYSE: GE  ) recently announced it would purchase Amersham Biosciences' parent, Amersham (NYSE: AHM  ) , for $9.5 billion. In other words, GE's hot medical systems division now parents a Harvard Bioscience distributor.

The company formed in 1996, purchasing part of Harvard Apparatus, a venerable life sciences research tool company dating back to 1901. The re-named Harvard Biosciences did not strike it rich during the 1999-2000 biotech IPO boom but did manage to snare a decent $52 million when it offered shares to the public in Dec. 2000 -- just as the biotech IPO door closed.

Harvard could easily have been a casualty of the biotech bust that followed, as were many offering drug-discovery platforms. Instead, management carefully managed what cash they had, buying struggling competitors and complementary businesses or their assets -- including cutting edge DNA microarray technology -- on the cheap. Here are some highlights:

  • Genomic Solutions for $26 million (3.2 mil. shares, $9 mil. cash) in 2002.

  • BTX for $3.7 million cash in 2002.

  • GeneMachines for $8.1 million (cash, debt, liabilities assumed) in 2003.

  • BioRobotics for $3.2 million (cash, liabilities assumed) in 2003.

The company forecasts pro forma EPS of $0.26 for the year, which values the shares today at about 30 times forward full-year earnings. Acquisition-fueled year-over-year revenue growth has exceeded 50% for four quarters, but only in Q3 have these been accretive, boosting quarterly earnings compared with year-ago results.

Harvard Biosciences has also been free cash flow positive for six of the prior eight quarters, but we won't know about Q3 until the 10Q is filed (the earnings press release lacks a cash flow statement).

The stock may or may not be priced dearly, depending on whether you anticipate increases in big pharma and biotech research and development spending that would benefit the company's carefully managed financials disproportionately.

If you do, the company has many of the characteristics Tom Gardner and his guest analysts seek out in our Motley Fool Hidden Gems. Meanwhile, fellow biotechies welcome your thoughts on the Biotechnology discussion board.

Motley Fool Senior Analyst Tom Jacobs often covers biotechnology for Fool.com and writes the monthly investing column for the journal Nature Biotechnology. He owns no shares of Harvard Biosciences. Find more of his columns in hisarchive.


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