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Keeping the Bears at Bay
Banking leads way, biotech shows progress among state's public firms
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Business New Haven
5/4/1999
By: Russell Stone
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Connecticut's public companies reflect the American economy in microcosm. Rising share prices have made managers and shareholders happy, but not all firms have benefited equally from continued economic expansion.
Banking has barreled ahead as low interest rates and a robust economy boost investment and cut defaults. Insurance, by contrast, has yet to fully cope with the HMO revolution in health care. While traditional manufacturing continues to struggle with lower-cost foreign producers, Connecticut high-tech manufacturers and biotechnology firms have been able to tap an educated workforce to break into worldwide markets.
The stars of Connecticut's economy have been the regional banks, which have ridden the state's economic recovery to impressive results. Besides turning in steady revenue and income growth since the lean years of the early 1990s, Connecticut's smaller banks also carry a premium valuation because of their participation in the lucrative game of mergers and acquisitions.
Several New Haven-area banks have already been snapped up in mergers and buy-outs. BNH Bancshares, parent company of the Bank of New Haven, was acquired by the Providence-based Citizens Financial Group. New Jersey's Hubco, already the owner of Bridgeport's Lafayette American Bank, agreed in March on terms for a buyout of Wallingford's Dime Financial, parent company of Dime Savings Bank. Hubco chairman and CEO Kenneth Neilson termed Connecticut “a market which we consider attractive,” and saw the acquisition of Dime as a means of expanding Hubco's regional scope.
Connecticut's local banks have themselves prospered by playing the acquisitions game to boost their networks of depositors, branches and ATMs. Waterbury's Webster Financial (NASDAQ: WBST) gained 20 branches in 1996 that Fleet Bank spun off in its own merger with Shawmut Bank. In early 1997, Webster purchased DS Bancor, parent of Derby Savings Bank. In its latest move, Webster agreed to acquire Eagle Financial Corp. in a $360 million stock swap.
Bridgeport-based People's Bank (NASDAQ: PBCT), the largest independent bank in Connecticut, has been just as aggressive as Webster in its acquisition campaigns. Earlier this year it completed its takeover of Norwich Financial Corp. People's Bank has also expanded internationally and pushed its steadily growing credit card business; the bank now ranks as the 24th-largest issuer of VISA and Mastercard in the U.S.
Could either Webster or People's succumb to Wall Street's merger mania in financial services? People's at least would seem invulnerable to a hostile takeover of the type SPX is attempting against Branford's Echlin Inc. (NYSE: ECH). More than half of People's outstanding shares, 36.5 of 61.1 million shares, are in the hands of People's Mutual Holdings and therefore out of reach of unwelcome attention.
Biotechnology has generated as much excitement as banking, but much lower sales and profits. The nature of the biotechnology business, especially the drug development that several New Haven firms concentrate on, is that many failures are necessary for one success.
Still, Connecticut's biotech start-ups have diversified portfolios of potential drugs, increasing their chances of success in the aggregate. The boom in American equity markets has also provided a ready source of capital for new firms to tap in gathering the cash to keep themselves running.
CuraGen (NASDAQ: CRGN), the newest member of the club, went public in March of this year (BNH, January 12). Concentrating on gene-expression, the mechanisms by which genetic blueprints cause physical outcomes, CuraGen's technology has significant agricultural applications in producing hardier or more productive crops. This broadens CuraGen's market beyond the more traditional ones tapped by New Haven's other biotech firms.
Alexion Pharmaceuticals (NASDAQ: ALXN) has focused its efforts on combating inflammation and related auto-immune responses. This means that the company is developing products to stop the body's attack on itself in such diseases as multiple sclerosis or lupus, and also studies such exotic new treatments as altering immune responses to allow animal-to-human organ transplants.
Neurogen Corp. (NASDAQ: NRGN) has found its niche in treating serious neurological and mental illness. Many of the drugs presently available to treat schizophrenia or depression have serious side effects. Neurogen's concentration on small-molecule drug design aims at minimizing those side effects by targeting precise receptors in the body.
Vion Pharmaceuticals (NASDAQ: VION) uses innovative techniques employing genetically-engineered bacteria to deliver anti-cancer drugs directly to tumors, also in hopes of minimizing side effects.
Other Connecticut companies have found success in producing medical devices, a less-risky side of the medical and biotechnology business.
Frost & Sullivan, a leading consulting firm in the health-care industry, sees a continuing role for smaller companies offering specialized products for minimally-invasive surgical procedures. According to medical analyst Laura Wilkes, “There is potential room for niche-focused companies that can meet specific needs.”
U.S. Surgical (NYSE: USS) has grown to more than $1 billion in annual sales and $89.4 million in net income for 1997 by selling technologically advanced surgical products, many designed for minimally invasive techniques.
Novametrix (NASDAQ: NMTX) works in a niche market, producing non-invasive monitors and sensors. President and CEO William Lacourciere is bullish on his company's prospects, calling his company “more upbeat about domestic sales prospects than at any other time in recent memory.”
Connecticut manufacturers are quite representative of the challenges and opportunities facing manufacturers across the country. In contrast to manufacturers, Connecticut's banks draw the vast majority of their customers and employees from within the region.
Biotechnology firms are so small that their operations tend to be quite concentrated in Connecticut and New England, even if they have customers and partners worldwide. Connecticut manufacturers, on the other hand, routinely have production facilities scattered around the U.S. and abroad, even if their headquarters are in Connecticut.
The best example is Fairfield's General Electric (NYSE: GE), a manufacturing, media and financial conglomerate of staggering scope and size. Though its headquarters are local, its operations are global.
At a more modest level, Branford's Echlin Inc. (NYSE: ECH) suffered attacks for its allegedly heavy-handed labor tactics at production facilities in Mexico. Those accusations, however, have been forgotten in Echlin's ongoing bitter fight to save itself from SPX's hostile takeover bid.
The most successful Connecticut manufacturers have, in general, been those that have adapted best to the realities of the new global economy. Their customers are worldwide. Since unskilled labor is far cheaper in Latin America or Asia than in the U.S., superior firms have moved up the skill and technology ladder to produce increasingly sophisticated products with highly trained employees.
For example, MacDermid Inc. (NYSE: MRD), which recently moved up from NASDAQ to the Big Board, produces hosts of specialty chemicals, many of them proprietary, for the electronics industry or for metal and plastic finishing. By concentrating on these technically-complex products, MacDermid has expanded sales and income rapidly over the last three years.
Zygo Corp. (NYSE: ZIGO), one of Connecticut's fastest-growing companies, managed to double its profits or better each year from 1993 through 1996. It is as specialized as MacDermid, making precision measuring devices for the electronics and optics industries to aid in the manufacture of parts and components to extremely high tolerances. The company has even taken advantage of the collapse in Asian currencies and property values to expand its sales and service facilities with a new center in Singapore.
Insurance, Connecticut's traditional flagship industry, has had a rocky year. The blockbuster merger between Citibank and the Travelers Group has to a great degree obscured continuing troubles for Connecticut insurers to adapt to the rapidly changing world of American health care.
The prime example is Norwalk's Oxford Health Plans (NASDAQ: OXHP). October revelations of bookkeeping problems and billing irregularities devastated Oxford's share price and produced a flood of shareholder lawsuits. Founder and former chairman Stephen Wiggins would receive a $9 million golden handshake that led the state of New York to intervene to ensure that premiums would not rise. Despite management shakeups, continuing bad publicity like the flap over Wiggins' retirement package has kept Oxford's share price in the doldrums.
Similar problems at Aetna (NYSE: AET) in its US Healthcare HMO subsidiary hammered its share price last summer, and the company's stock has still not recovered fully. Aetna's overall finances, however, appear to be recovering nicely. 1997 revenues were up $3.3 billion to $18.5 billion. Income from continuing operations came in at $901 million, up from $205 million in 1996. The 1996 results, however, include $889 million in severance and facilities charges that substantially reduced income for that year.
Cigna (NYSE: CI), on the other hand, dropped in price with news of Aetna's health care problems, but recovered quickly to reach a series of new highs in 1998. Its revenue growth was not as impressive as Aetna's, rising only 5.7 percent to $20.038 billion. Net income was relatively stable, growing $30 million to $1.086 billion. Income was reduced by an $81 million acquisition charge.
The relatively positive results of 1997 suggest that Aetna and Cigna have largely completed the integration and digestion of their HMO businesses. Barring major changes in the legislative and regulatory environment, health care should not be the drag on earnings and share price that it has been over the last year. Connecticut's flagship industry may fly its banners proudly once more.
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