Curagen: A Biotech Bargain

Dec.26.06 | About: CuraGen Corp. (CRGN)

A special thanks to my extremely intelligent and talented friend and colleague, Brad Hargreaves, who kindly contributes the following insights:

Who says you can’t value biotech?

Outside of supercat bonds and weather derivatives, very few things in the market are stochastic. Some things are harder to predict than others, but even the seemingly daunting waters of biotechnology can be analyzed and priced. Today, I will look at valuation of biotech companies with a very straightforward example — Curagen (CRGN), about as sure a bargain as one gets in emerging technology.

Curagen, a Connecticut-based biotech company, isn’t your typical drug-development firm launched straight out of the lab. Rather, it has a penchant for speculating in other nascent technologies unrelated to its drug pipeline. Most notably among these is a 66% stake in 454 Life Sciences, a small (~120 employee) company that develops technologies to sequence DNA for labs, hospitals, and eventually personalized medicine.

However, the details of the technology aren’t terribly important as long as similar companies exist. Cambridge-based Solexa (SLXA) started marketing a similar product last year, over a year after 454 entered the market. The take-home: Solexa, despite burning cash at the rate of $10 million per quarter, was recently acquired for $600 million by Illumina (NASDAQ:ILMN), a biotech powerhouse. With net tangible assets of under $50 mm, Illumina paid a premium for Solexa’s technology and growth potential.

With that in mind, Curagen’s roughly $250 million market cap is surprising. Even making the very conservative estimate that 454’s weak intellectual property portfolio cuts its value to two-thirds that of Solexa’s, it’s hard to believe that Curagen’s drug pipeline is worth negative twenty million dollars. Rather, I believe that investors have simply overlooked the value of Curagen’s subsidiaries by relying on traditional pipeline-based biotech analysis.

Disclosure: The author, Mr. Hargreaves, has a long position in Curagen.