The new Securities and Exchange Commission (SEC) policyexempting biotechnology companies from regulation asinvestment firms still won't free research and developmentcompanies to play the stock market.

The Investment Company Act of 1940, designed to regulatemutual fund companies, has burdensome reportingrequirements and restrictions that some biotechnologycompanies have sought to avoid by seeking exemptions toinvest their capital.

But the SEC responded promptly when Icos Corp.(NASDAQ:ICOS) of Seattle, the accounting firm of Ernst & Youngand the law firm of Cooley Godward Castro Huddleston &Tatum teamed up with the Industrial Biotechnology Associationto address recent difficulties in obtaining exemptions after thespate of initial public offerings that arose in the winter of1991-1992.

A letter issued last week to Icos following a December meetingwith the SEC sets forth guidelines for all life science companiesto follow in lieu of seeking an exemption to the act.

-- First, the guidelines indicate that how a company spends itsmoney shows what its activities are. If substantial spending isfor research and development, and a minuscule portion goes tomanaging investments, the company would not be consideredan investment firm.

-- The second guideline is more open to interpretation.Companies are expected to preserve their assets by selectingsecurities with limited credit risk. They should avoid"significant" investments in equity investments and speculativedebt.

Companies that form subsidiaries and have strategicinvestments with less than a controlling interest cannot predicthow that relationship will be viewed, said attorney CydneyPosner of Cooley Godward.

Most companies have invested cash raised for research anddevelopment in government securities, which pose no risk ofdefault, but have lower yields than corporate securities.

The SEC policy change will allow biotechnology companies toseek more liquidity and higher yield without taking onappreciably more risk, said Laura Brege, chief financial officerof Cor Therapeutics Inc. (NASDAQ:CORR) of South San Francisco,Calif.

However, Brege said, companies would be ill-advised todiversify beyond high-grade corporate debt and AAA bonds."The problem is that there will be a hindsight test becausethere are no rules," she said. "You have to be a little bit moreprudent."

A company that didn't fare well in its investments could bedenied permission for a public offering if the SEC decides it didnot comply with the guidelines, she warned.

On the other hand, the change will increase the length of"survival" of biotech companies, bringing approximately $100million a year to the industry. The approximately 220 publiccompanies will be able to make almost 50 percent moreinterest earnings, said Mike Hildreth, a partner in the Ernst &Young life science division.

He estimated that about $6 billion in cash and investments isavailable in the industry. With short-term Treasury bills onlyearning about 3.5 percent interest, the opportunity to increaseinterest income another 1.5 percent would help companiessubsist longer on the money they raise.

Hildreth was impressed by how rapidly and cooperatively theSEC responded after the group raised the issue in December. Hesaid the SEC issued guidelines instead of a rule because theagency preferred to not preclude unforeseen investmentstrategies companies may adopt. If the agency issued a ruling,it would have to spell out what is and isn't acceptable.

Hildreth said the roughly 15 percent of companies that makeinvestments in other life science companies would do well toconsult with securities attorneys to stay in compliance with thenew exemption.

Jan Lecocq, Icos' chief financial officer, added that the SECactually simplified the hurdles the industry representativeshad proposed once the agency realized that the 1940 act couldnot be applied to companies that obtain public financing longbefore they have product revenues.

-- Nancy Garcia Associate Editor

(c) 1997 American Health Consultants. All rights reserved.