Investor Is Making Mark In Small-Cap Biotech Stocks

0

Despite the market turmoil last week in biotech stocks, among the hotter hands in town right now is veteran bio-investor Stephen Kriegsman, founder of the Westside-based finance boutique Kriegsman Group.

“We invest for an average of two to three years in a biotech stock,” said Kriegsman, discussing last week’s bio-sector selloff, and then bounce-back.

“This whole (selloff) is a joke… just a buying opportunity,” he insists.

Though Kriegsman does buy pre-IPO equity, and even finances a couple of biotech startups, his core business is buying overlooked biotech small-cap stocks that are well along the road to getting Food & Drug Administration approval for a new product or procedure.

“We like to see them past phase II,” he says, of the three rounds of testing the FDA usually requires.

Unlike many money managers, Kriegsman does not like to diversify much to spread risk. He likes to intensely research a few situations, then put down the dough. And he has pretty deep industry knowledge, having been active in medical-sector investments since the early 1980s.

“We spend hundreds of hours getting to know a company, the market and the company management,” he says. Even with a staff of 12 professionals, Kriegsman says, “I only like to be in five companies at a time, no more than 10.”

But once Kriegsman goes into a company, it’s usually with both feet and some extra spin. Rather than merely buying stock, he typically negotiates directly with company management to inject some growth capital by buying stock in the form of a private placement.

“We often do a private placement, get the stock at a discount to market, with some warrants,” says Kriegsman. By so doing, Kriegsman maneuvers himself into a hefty position with a growing company, at a discount to market in a company ready to pass FDA hurdles. “I like to minimize risk,” he says.

Kriegsman, formerly a CPA with KMPG Peat Marwick, has some hits to show for it. He recommended Maxim Pharmaceutical Inc., which is developing a treatment for macular (eye) degeneration, at $10 a share and recently scorched $73, and he liked cancer-treatment outfit Miravant Medical Technology Inc. at $6, and it recently hit $26, though both stocks retreated a bit last week.

Another Kriegsman favorite is Little Rock, Ark.-based Autologous Wound Therapy Inc., which has a new treatment for wounds.

The name “Kriegsman” means man-of-war. “But that is not what I am about,” demurred Kriegsman. “I like investing in companies that solve health problems. If you can give money to a company that does that, then you feel really good.”

Go-Go Krause’s

The next hot thing Internet stock is… Brea-based Krause’s Furniture Inc., traded on the AMEX.

Get this: Major venture players, including firms Thomas H. Lee, Putnam Internet Partners and GE Equity, have sunk a combined $19 million into Krause’s to fund its e-commerce initiatives.

“It just sort of fell into our lap,” explains Bill Gibson, Krause’s spokesman. “They were looking for somebody to do fulfillment.”

Thomas H. Lee, in particular, has been an active investor in furniture-selling Web sites, and therein lies the story, says Gibson.

Furniture is being sold on the Web in increasing quantities, but few independent manufacturers can handle the volume. It’s a lot easier to throw some graphics up on a Web site than to actually make and ship the stuff in a timely manner, and without excessive damage in transit.

Moreover, most of the major furniture makers in the United States sell to franchises or retailers, who would take great umbrage at seeing the same product hawked over the Web. Most manufacturers cannot afford to compromise those existing relationships.

Fine, but online furniture sellers need gobs of furnishings, delivered on time, to meet demand.

To the rescue comes Krause’s. It has only company-outlet stores. Therefore, it can sell over the Web with no problem there is no base of retailers to complain. And, at $130.4 million in annual sales, Krause’s has the horsepower the factories to actually produce and ship the goods.

Krause’s stock has risen to more than $5 a share in recent trading, up from $1 late last year. The company has lost money for five straight years, and analysts predict 2000 will be another loser.

One interesting note: The chairman of Krause’s is Philip Hawley, whom some Angelenos will recall from his days as chief of Carter Hawley Hale Inc., the demised department store chain. He declined to comment last week.

Spokesman Gibson hinted that there is perhaps even more going on behind the drapes at Krause’s. “There may other items that Krause’s could make or distribute to Web retailers.”

WestPark Capital

There’s a newish investment banking-brokerage shop in town, Century City-based WestPark Capital Inc., started up by Kevin Shultz, managing director (and former investment banker with Drexel Burnham Lambert and then Prudential Securities), and Rick Rappaport, chief executive. The new shop is comprised of essentially what had been the entire Westside branch office of EBI Securities Inc., with those financiers deciding to band together and set out on their own.

In this hot market, WestPark has hit the ground running, and in February co-underwrote a $35 million initial public offering for Dallas-based World Quest Networks Inc., a company providing phone service over the Internet, among several other deals.

“We typically handle private placements from $5 million to $20 million, and public offerings up to $30 million,” said Rappaport. “We have both institutional and retail brokers to distribute product.”

On the World Quest deal, first WestPark sold private stock to clients at $6 a share. Then World Quest went public at $13 a share, and as of last week was trading at around $33.

With scenarios like that, more and more high-net-worth investors are demanding pre-IPO stock, noted Rappaport.

All told, 25 professionals are employed at WestPark, including 15 investment bankers, said Rappaport. More hiring is planned.

In addition, WestPark will happily bring other brokerages into an offering in other words, syndicate to get bigger distribution.

While WestPark is working the Internet and tech industries, Rappaport said any industry is fine. “We are looking for growth companies, whatever the industry,” he said. “There are other fields besides the Internet.”

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

No posts to display