Toolkit companies that went public this year enjoy a robust premium on their valuations compared to more mature toolkit plays as well as profitable product companies. Indeed, comparing market cap to projected 2001 revenues, a sampling of 15 of the toolkit companies that went public this year is trading at nearly triple the multiple of six profitable biotech product companies. Thus, the question is how fast - or whether - these fledgling toolkit developers can ramp up their revenues to justify their valuations.

"Toolkits have had a lot of momentum investors and thus have been afforded a lot of leeway this year," said fund manager Dennis Purcell of Perseus-Soros.

Robertson Stephens analyst Michael King noted that new-to-market companies often enjoy a valuation premium. "There's typically a dichotomy between new and more established companies," he said. "But investors have to realize that maturity takes time. Even Affymetrix wasn't fully mature when it went public."

Thus, as the new become established, Purcell said that "people will be watching whether the new tool companies make their revenue numbers." Because pharma companies are primary purchasers of enabling technologies, he noted that toolkit revenues will be closely tied to what pharma companies are willing to pay. "Whether or not pharma has the capacity to do such a high number of deals will signal whether these new companies are sustainable," Purcell said.

Ultimately, companies may turn to consolidation in order to increase their menu of technology offerings, thereby increasing the dollar value per customer and reducing the pool of potential competitors. "Managers of these new tool companies are very savvy," said Purcell. "They'll try to use their assets to force consolidation. You can't have this many companies selling to a limited number of partners."

Field of greens

Don't look now, but Friday's $825 million follow-on by Human Genome Sciences puts its war chest within spitting distance of Amgen's cash horde of $1.9 billion at Sept. 30. HGSI, which had $853.4 million in cash at June 30, sold 11 million shares at $75. The dilution would have been less severe, with similar proceeds, had the company sold the originally proposed 8 million shares when its stock price was $100.938.

The deal, which stands to raise about $124 million more through the 1.65 million-share overallotment, was underwritten by CS First Boston; Goldman, Sachs; Lehman Brothers; CIBC World Markets; J.P. Morgan; and Dain Rauscher. HGSI closed Friday at $88.125, down $3.375 on the week.