The biotechnology industry and its financial backers may seecompanies as researchers toiling at lab benches hoping tonudge science to a cure for cancer or AIDS.

But under federal securities law some of the industry'sproduct-poor, cash-rich companies can be viewed in quite adifferent light -- as investment companies.

Companies with a majority of their assets tied up ininvestments and drawing more than half their income frominterest run some risk of being defined -- and potentially morestrictly regulated -- as investment companies. It's thisinterpretation of the Investment Company Act (ICA) of 1940that is causing some executives to squirm.

"Nobody in 1940 was concerned about genetic engineeringcompanies," said Matthew Chambers, associate director of theSEC's division of investment management in Washington, D.C."No one (then) would have conceived of a company going publicwith no revenues and no products."

Being tagged an investment company would clearly hamstringa typical biotechnology company. The rules prevent companiesfrom granting employees stock options and limit a firm's abilityto make goods or purchase real estate without shareholderapproval.

"It may be we are uniquely situated as an industry because ofthe very long product time lines," said Lisa Raines, vicepresident of government affairs for the IndustrialBiotechnology Association (IBA) in Washington D.C. The IBAboard voted informally last week to pursue changes in SECrules.

Further complicating matters is the recently ended two-yearpublic stock offering boom by which biotech

nology companies raised $5 billion. Fifteen companies eachhave more than $100 million in cash (for a total of $3.2 billion),according to Ernst & Young's 1992 biotechnology survey.

Also, the recent decline on the interest rates on U.S. Treasurybills is causing companies to look longingly at the higher yieldsavailable on corporate bonds.

To avoid the appearance of speculating, "some of thesecompanies have concluded the safest thing to do is to invest inTreasuries," Raines said. For a company with $65 million toinvest in today's market, the safe course of buying Treasurybills means getting about $1 million less in interest comparedto high-grade corporate bonds, she said.

"They just don't want to challenge the SEC," said Mark Heesen,director of legislative and regulatory affairs for the NationalVenture Capital Association of Arlington, Va.

So far, the issue has been raised only in occasional queries bySEC staff to filings and no biotechnology company has beenreclassified, Raines said.

"We're not trying to give these people a hard time," the SEC'sChambers said last week. "We're willing to try to work withthem."

Indeed, the IBA said it was well-received in recent meetingswith the SEC staff. Raines hopes to propose to the agency nextmonth an exemption to the act.

The SEC already has a half-dozen grounds for exempting firms,Chambers said. It is concerned that a new exemption would notallow investment companies to fly the biotechnology banner toescape rules.

One approach to a proposal is that "an investment companyacts and looks a lot different than a biotechnology company,"said Mike Hildreth, a partner with the accounting firm of Ernst& Young in Palo Alto, Calif., who is working with the IBA.

A proposed exemption could qualify companies based oncharacteristics common to biotechnology companies, such asspending on research and development, Hildreth said.

"It would be hard to conceive of this becoming a contentiousissue," said David Singer, treasurer of Affymax N.V. of PaloAlto. "I'm a firm believer that logic will triumph."

-- Ray Potter Senior Editor

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

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