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Biotech's Battered Banker



The crisis at D. Blech & Co., a New York investment boutique, barely lasted a week. But the aftershocks are still reverberating throughout the biotech industry.

D. Blech, which is run by 38-year-old biotech finance whiz David Blech, appears to have survived a serious cash crunch and a powerful assault by short-sellers. Yet his problems have left investors reeling. A three-day pummeling by the shorts, which began on Apr. 13, pushed down shares in six recent Blech-managed initial public offerings an average of 18%.

Companies that hired Blech to raise capital, further, may be forced to scale back their plans. Five IPOs that Blech has in registration with the Securities & Exchange Commission will almost certainly be delayed, and the offering prices will be cut below those originally planned, industry sources says. Blech declined comment, but a spokesman confirmed that all Blech deals are currently on hold. One deal waiting in the wings is a monster $150 million IPO for Ariad Pharmaceuticals Inc., a Cambridge (Mass.) company that became the largest biotech startup in history in 1992 when Blech raised $46 million in a private placement.

OVEREXTENDED? All of this is a humiliating blow to the nation's most aggressive biotech financier, one of the few investment bankers capable of raising capital for cash-strapped biotech companies. His sales force now totals about 200, and he has developed a following of wealthy individuals who invest in his often highly risky stocks.

At the root of Blech's troubles was the recent stock slump, which inflicted serious damage on biotech issues. To arrest the decline in companies he had taken public, several biotech experts speculate, Blech began buying shares to prop up their prices. Between December and February, for example, he bought more than 1 million shares of Texas Biotechnology Corp.--about a third of the total public offering. Industry sources say Blech wanted to maintain high values for his IPOs to give his sales force ammunition to sell even bigger IPOs. Yet these sources believe that Blech may have overextended himself by using borrowed money to make the purchases.

The first signs of Blech's problems surfaced on Apr. 12, says Marc J. Ostro, a senior vice-president at Mabon Securities Corp., when Blech called Mabon to liquidate his 24% stake in NeoRx Corp., a tiny Seattle biotech company. Mabon, which was NeoRx' underwriter and had control of its shares, balked because those shares were restricted from being sold publicly by Blech until June.

Ostro quickly found out why Blech wanted to bail out: Citibank had called in a huge loan to Blech. On Apr. 14, Citibank ordered Mabon to sell the shares, which had been pledged as collateral on the loan, Ostro says. Citi did not disclose the loan size to Mabon, but several sources peg it at $40 million. Two days later, Mabon sold 2.8 million shares at the fire-sale price of $3.75 a share. NeoRx' shares had sold as high as $8 only two months earlier. Citibank had no comment.

"SINGLED OUT." Meanwhile, rumors began circulating on Wall Street that Blech was facing a liquidity crisis, says Robert Sablowsky, capital markets head for Gruntal & Co. "That's when the onslaught began," he says. Many biotech stocks were down that day, but according to Sablowsky, short-sellers specifically targeted stocks associated with Blech. Volume in Blech-related shares was 25% to 30% higher than normal, says Sablowsky.

"It's an obvious strategy" to target Blech stocks, says one hedge-fund manager who specializes in biotech stocks. "Blech was singled out." Attacking several Blech issues would make it much more difficult for Blech to fight back by supporting the shares. The battering was brutal. Hemasure, a $7-a-share IPO that closed earlier in the month, finished the week down 19%. And Texas Biotech, which Blech had taken public in December at 63/4, closed at 4, down 41%. Selling pressure finally eased on Apr. 19, when Blech told his sales force that he was once again on solid financial ground, Sablowsky says.

The situation remains fluid, though, and Blech's many investors are keeping their fingers crossed that his finances as as solid as he says they are.Geoffrey Smith in Boston

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