The California biotechnology company slated to buy Crop Genetics International of Hanover next month is dangerously low on cash, and its accountants have questioned its ability to continue as a going concern if the company's operating profits and balance sheet don't improve soon.
Biosys inc. made the disclosure in a registration statement filed with the U.S. Securities and Exchange Commission. The company said it had $2.3 million in cash and short-term investments as of Dec. 31, down from $14.7 million a year earlier.
The company has $3.8 million in short-term debt, and also needs to finance losses that last year totaled $12.6 million. Biosys has only a handful of products on the market and, like many young biotech companies, loses money consistently while developing and testing the products it hopes will make it profitable in the future.
Biosys Chief Financial Officer Bruce G. Fielding Jr. said the registration statement is required before the company can issue shares to buy Crop Genetics.
He said the company's short-term answer is to rely on Crop Genetics' cash hoard of about $6 million for several months after the takeover becomes final in March, then rely on further stock offerings and improved operations to keep the company going.
"Because we are waiting for a shareholder vote [to approve the merger] from Crop Genetics, the auditors wouldn't count their money as ours," Mr. Fielding said.
He said the disclosure does not make the deal less likely to happen. "It makes clearer why the deal needs to be done," he said. "With these companies, two plus two equals more than four."
Analysts who follow both companies said when the deal was announced Dec. 9 that each company faced ruin on its own.
Crop Genetics suffered a major setback last summer when the pesticide it had counted on to be its first major commercial hit didn't work in trials at corn fields in Iowa and Nebraska. Most of its other products are still several years away from commercialization.
Biosys had products on the market or close to it, but had no cash to fund its continued start-up losses.
Like Crop Genetics, it makes biologically engineered pesticides
that it hopes to market as environmentally safe alternatives to chemical pesticides.
"The whole bio-agricultural market has needed something," said Allan Cohen, an executive vice president at First Analysis Corp., a Chicago-based merchant bank. "It is something that one day will be meaningful, but people in 1980 thought it was a couple of years away and it still looks a couple of years away."
State officials had hailed the merger as a gain for Maryland's hopes to build a biotechnology industry that anchors other economic development based on life sciences.
The state Department of Economic and Employment Development last fall gave Crop Genetics a $3.4 million loan guarantee, a move that helped seal the merger deal with biosys.
Biosys in turn said it would move its headquarters to Maryland after the merger closed.
Neither company has ever turned a yearly profit.
Biological pesticide companies may gain, however, from recent agreements between federal regulators and pesticide makers to limit or eliminate use of certain chemical pesticides, Mr. Cohen said.
But the long delays have hurt biosys, he added, saying: "It would be difficult to say it has exceeded expectations" since going public in 1992, when its investment bankers said the company would turn profitable the next year.
"In retrospect, it borders on a ludicrous prediction."
However, Mr. Cohen shrugged off the announcement, saying the market has known since last spring that biosys was having a bad 1994, and that the bad results are common enough in biotech that it would not prevent the company from raising money in a good stock market.
"On the venture capital side, we invest in stuff like that all the time," he said.
Biosys stock closed yesterday at $2.50, down 50 cents.
G. Steven Burrill, a San Francisco merchant banker who is a recognized national biotech consultant, said other companies are trying to salvage pairs of weak companies into a single strong one, but he said such deals are too new for him to judge the chances of success.
"It can be a winning strategy," Mr. Burrill said, adding that biosys and Crop Genetics have had good management, though Crop Genetics chief executive Joseph Kelly is leaving after the deal is completed.
"The combined company probably has a better chance than either of the other two."
But he said success is not automatic.
"Merging two weak biotech companies only creates a big biotech company," he said.
Mr. Kelly could not be reached for comment.