SciQuest's Misadventure Is a Sign of the Times

One victim of Wednesday's tech selloff was a planned secondary offering by SciQuest.com (SQST). The North Carolina-based online marketplace for life sciences equipment canceled its planned secondary stock offering Wednesday afternoon.

The company's CEO, Scott Andrews, phoned late in the day to explain that "we think our shares are too valuable to sell at the current price." That price, 16 11/16, marks the company's lowest close since its Nov. 19 initial public offering at 16, and is a far cry from its high of 91 5/8 on Dec. 27.

To use a technical expression regarding SciQuest's reasons for pulling back: Poppycock. There's only one reason a company pulls a secondary offering, and it has zero to do with its opinion of its worth. Companies elect to not flood the market with millions of additional shares when there aren't any buyers for the stock. Period.

In SciQuest's case, the company isn't desperate to raise more money: It had $124 million of cash and short-term investments at year-end, including assets of a recently acquired company, according to the prospectus for the secondary filed with the Securities and Exchange Commission.

It had hoped, however, to sell 2 million shares to add to its war chest, says Andrews. Of course there is another unstated reason -- as has happened at many young companies that came back to the public markets for another capital infusion. At SciQuest, the secondary would have provided a tidy payoff for venture backers as well as Andrews and other insiders.

According to the prospectus, Andrews and Peyton Anderson, vice president of business development, planned to sell 154,887 shares. SciQuest shares stood at 66 1/4 on March 15, the day before the offering was filed. (Nine investment banks led by Donaldson Lufkin & Jenrette were prepared to belly up to the trough of this offering as underwriters as well.)

Not that there's anything wrong with that. But for SciQuest to be shocked, shocked that Wall Street no longer values its precious shares as highly as it did just weeks ago, is a good example of a company believing its own press clippings.

See, SciQuest, which has been doing business for five years -- making it more credible than some wing-and-a-business-plan Internet IPOs -- is still tiny. Its revenue hit $3.9 million last year, the year it started its online service.

Analysts expect the company, which operates an online exchange for gear used in the pharmaceutical industry, to report first-quarter revenue of almost $5 million, and they expect SciQuest to break even perhaps by late 2002, maybe early 2003. One long month ago, a company with those kinds of numbers routinely was worth $1.7 billion, as was SciQuest. Today, it's tough to figure out how a company with such a small and unprofitable (albeit fast-growing) business is unhappy to be worth $435 million.

CEO Andrews argues that SciQuest is particularly well positioned because the life sciences industry, unlike, say, the automotive industry, is fragmented and well suited to a neutral third party like SciQuest. Companies hoping to make money off the auto industry have been frustrated by that industry's efforts to take its online efforts into its own hands.

Andrews also contends that SciQuest has been unfairly lumped with online companies that record revenues for the total sales of its customers. In SciQuest's case, he says, the revenue recognition is legitimate because SciQuest takes possession of the goods it sells before passing them on. Fair enough. He also might point out that the company's gross margins in the fourth quarter were 12%, a profit margin more akin to a steel company in a good year than a high-tech stalwart.

Andrews couldn't say when SciQuest will try again to sell its shares on the open market. He notes that the company has only one competitor, the Chemdex unit of Ventro(VNTR). The snap-back on that company's shares has been particularly severe. Ventro, you may recall, announced earlier this year that it no longer would ply its trade in only one "vertical," the life sciences business. Instead, it said it would develop online exchanges in many categories, and its shares shot up as high as 243 1/2 from around 120 before its announcement.

Ventro's shares closed at 31 3/8 Thursday, down 18%. Turns out investors want the company to prove its new strategy actually will produce results before it can be estimated to be worth gazillions.

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