Biotechs AIM for Alternative Financing

London's lesser-known stock exchange offers the possibility of money for hungry biotechs

Jun 1, 2006
Jesse Schulman

Australian gold mining companies are doing it. Even a farmyard composting firm from Wales is doing it. US biotech companies are doing it, too - raising money through IPOs on London's Alternative Investment Market, known as AIM.

Entelos, based in Foster City, Calif. and specializing in mathematical simulations of disease processes, raised $20 million (US) on AIM, and Waltham, Mass.-based Aqua Bounty, a developer of biotech solutions to improve fish farming, raised approximately $37 million in March. With the AIM window apparently open, London-based brokers and advisers are actively prospecting in the US for new clients. Should your company consider it?

AIM was set up as a junior market to the London Stock Exchange in order to create a financial marketplace where small and speculative companies could find backing. A lightly-regulated market was seen as a way to get money into companies that might turn out to have world-beating technology, but for whom cash-flow positive operation could be years away. In that regard, AIM has performed as advertised, and might be seen as tailor-made for the financial needs of the biotech industry.

One factor driving US companies to look to England's shores is that dread monosyllable of investment banking jargon, "SOX." Satisfying the Sarbanes-Oxley provisions can easily cost $1 million per year. From the point of view of generating data and building value for your company and its shareholders, that money is lost. With AIM, say goodbye to Section 404 compliance audits and sworn statements designed to stymie aspiring Enrons. You file a short listing prospectus, and your periodic reports need contain only a brief financial summary.

Ultimately, though, it's another monosyllable that's bringing companies to London from far and wide - cash. The NASDAQ has been reasonably open to biotech companies for the past couple of years, but AIM at present is certainly the more exuberant market. While the rationality or other?wise of this exuberance is the subject of many a wine-bar conversation around London's financial district, tax breaks enjoyed by AIM investors have undoubtedly helped fuel a substantial flow of funds into the market. Receptive investors, minimal reporting burden, generous valuations - what could possibly go wrong?

Well, maybe nothing, but there are risks. Raising further funds after the IPO, to finance expensive clinical trials for example, is far less common on AIM than on NASDAQ. Turnover in your stock - liquidity, as it's called - can be paltry. Analyst coverage of AIM stocks is light, and if investors can't read research reports about you, they won't even know you exist, much less whether your shares are a good investment. Should AIM's valuations fall back into line with international markets (which is a way of hinting that AIM may currently be a bit on the expensive side), promising companies could find themselves painted into a corner. There is another risk, which is "the ghost of blow-ups past." UK investors got badly burned in the late 1990s by a major scandal surrounding a British biotech company called, curiously enough, British Biotech, and the marketplace hasn't forgotten. It's worth remembering that SOX is there for a reason.

Especially in biotech, which few AIM investors understand, there is widespread agreement in London's financial community that many AIM stocks are being bought more for their "story" than for their fundamental qualities. If the financial markets stay stable and AIM investors stay upbeat, that trip to London could well pay off. But even the highest quality companies could be in for a jolt, should a few AIM "stories" turn out to have more in common with Welsh farmyard compost than with Australian gold.

Jesse Schulman, PhD is a managing partner of Capel Thompson & Homer (CTH), a life sciences business development consultancy based in the UK. The opinions expressed are his own and do not represent those of CTH or any of its affiliates.