June 16 (Bloomberg) -- CombinatoRx Inc., which makes new drugs out of existing medicines, was heading toward an all-time low when billionaire hedge-fund manager James Simons tripled his stake in the first quarter.

Simons, whose $17 billion Renaissance Technologies Corp. uses computer models to select trades, wasn't alone. Biotechnology Value Fund LP doubled holdings to 2.96 million shares and QVT Financial LP boosted its investment by a third to 1.88 million shares, according to regulatory filings.

Founded eight years ago by chemist Alexis Borisy, CombinatoRx has four products in clinical studies, including treatments for psoriasis, arthritis and adult-onset diabetes. Because combining existing drugs yields results faster and at less cost than starting from scratch, the company may draw takeover offers from larger corporations needing products, said Edward Tenthoff, a Piper Jaffray & Co. analyst in New York.

``CombinatoRx could be an acquisition target for any of the big guys who are looking to replenish their drug portfolios and make better R&D investments,'' he said.

Pharmaceutical companies including Pfizer Inc. and Merck & Co. face the fewest new U.S. medicine approvals in 24 years. Large drugmakers spent $19 billion last year to bolster so- called development pipelines through partnerships with smaller biotechnology companies, almost twice the annual investment from 1999 through 2005, according to Ernst & Young LLP.

Cash From Agreements

Cambridge, Massachusetts-based CombinatoRx hasn't sold a single pill and has widened its net loss in each of the last five years. Yet it has amassed $109 million in cash and short- term investments, the second-highest ever, in part through licensing and collaboration agreements with companies including Vancouver-based Angiotech Pharmaceuticals Inc.

``The risk-reward is attractive,'' said Mark Bussard, an analyst with Baltimore-based T. Rowe Price, the second-largest holder of CombinatoRx shares. ``For not that many dollars, you get an innovative drug-discovery platform that, if proved positive, may generate interesting things down the road.''

CombinatoRx (pronounced com-bin-a-TOR-ex) gained 23 cents, or 6.2 percent, to $3.96 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares closed at a record low of $3.17 on April 10, less than half their value when the company went public in 2005.

The company's debt as a proportion of assets has almost tripled to a record 21 percent since 2005. The stock's price-to- sales ratio of 7.5 is two-thirds costlier than the average valuation of the 15 peers that are closest in market value, according to data compiled by Bloomberg.

Seven analysts surveyed by Bloomberg recommend buying. None advises holding or selling.

New Applications

Prescribing more than one medicine to fight disease is common. Physicians routinely use two or more drugs to treat cancer, heart disease and other illnesses. CombinatoRx takes the notion in a different direction, pairing compounds created by other makers into patentable products with new applications never intended for the originals, Borisy said.

One CombinatoRx mixture, for instance, consists of the cholesterol drug bezafibrate, sold by Roche Holding AG as Bezalip, and the arthritis-pain reliever diflunisal, marketed by Merck & Co. as Dolobid. The result, known as CRx-401, works against diabetes in adults, Borisy, 35, said in an interview. The company plans to announce human-testing results in the second half, he said.

``Using combinations, we can attack the disease on all fronts at the same time,'' Borisy said.

Delayed Tests

Three of eight CombinatoRx drugs that made it to clinical trials have been dropped, spokeswoman Gina Nugent said. In January, the company delayed human testing of a pain medication after the U.S. Food and Drug Administration asked for more information, she said.

Seven of the company's 10 biggest investors reporting stakes are venture capitalists or hedge funds, according to filings.

``We don't comment on any positions we may or may not have,'' said Mark Silber, an executive vice president for East Setauket, New York-based Renaissance.

Mark Lampert, founder of San Francisco-based venture capital firm BVF Partners LP, whose Biotechnology Value Fund is CombinatoRx's biggest shareholder, declined to comment on his 8.5 percent stake. Tracy Fu, a partner in Cayman Islands-based hedge fund QVT Financial, also declined comment.

While T. Rowe Price trimmed its holdings by 20 percent in the first quarter to make ``cash flow adjustments,'' the firm still likes the stock, Bussard said.

`The Potential'

``We don't own them for their value right now. We own them for the potential of CRx-102,'' he said.

CRx-102 is the company's leading drug candidate, Borisy said. The combination of a steroid with an anti-clotting medication reduces osteoarthritis and rheumatoid arthritis pain and stiffness, he said. The drug won a patent for use in rheumatoid arthritis, and a patent for osteoarthritis treatment is anticipated later this year, Nugent said.

The medication is undergoing the second of three trials required for FDA approval, and results are expected in the third or fourth quarter, Borisy said.

``After the data is released, we'll basically be holding an auction for the product,'' Borisy said. ``We expect, with good data, to get a very large-sized deal, hundreds of millions in milestone payments, a very large royalty and a profit share.''

To contact the reporter on this story: Kelly Riddell in Washington at kriddell1@bloomberg.net.

Last Updated: June 16, 2008 16:15 EDT