Companies typically use their first-time listing on a stock exchange, known as the initial public offering (IPO), as a crucial one-time opportunity to generate cash. However, a run of disappointing biotech market debuts over the summer has caused many biotechnology companies to put their IPOs on hold or cancel them altogether.

"Only if companies are down-and-dirty desperate to get money and have very few other options are they opting for IPOs," says Steven Burrill, CEO of the life sciences merchant bank Burrill & Company. Moreover, companies that do go ahead with an IPO can create the perception that they are in dire straights, and that perception can, in turn, undercut the offering's ability to generate funds.

A window for biotech IPOs opened in late 2003, and many companies generated a substantial amount of cash to keep their operations humming along. That window has all but closed again, leaving some early-stage...


Many biotech companies that have braved the IPO market in recent months have raised far less money than they'd hoped for. Cambridge, Mass.-based Alnylam Pharmaceuticals, among the first companies to go public in the much-watched field of RNA interference (RNAi), realized net proceeds of $26 million (US) from its market debut in June. Just a few months earlier, the company had estimated the worth of the IPO at $86 million.

Memory Pharmaceuticals in Montvale, NJ, focuses on central nervous system diseases; it managed to net $35.4 million through an IPO and the exercise of over-allotment options in April. An over-allotment is the sale of more securities than are available, in the anticipation that not all orders will be confirmed. Investors on this "waiting list" can get in on an IPO if not all of the initial orders are confirmed.

This successful debut was helped by an alliance with Roche, according to Gardiner Smith, Memory's vice president of business development. "I think that the corporate validation was valuable to Memory through the IPO process," he says. But even with that validation, Memory was forced to delay the IPO owing to market conditions. Ultimately the company cut its intended offer price to $7 per share from an initial range of between $13 and $15. "The power has moved dramatically to the buy side, and the buy side is not paying up to get into the deals," says Burrill.

Another case in point is San Diego, Calif.-based Metabasis Therapeutics, which has a diabetes drug (CS-917) and hepatitis B treatment (remofovir mesylate) in Phase II trials. Metabasis kicked off its IPO efforts last fall, when biotech companies such as Myogen in Westminster, Colo., and CancerVax in Carlsbad, Calif., were managing to execute significant IPOs, albeit at the low end of their pricing ranges. Myogen, which focuses on cardiovascular disease, saw net proceeds of about $73.2 million through its offering. CancerVax, which is developing cancer vaccines, netted approximately $65.3 million.

"People thought things were going to start opening up, but it really didn't work out that way," says John Beck, chief financial officer for Metabasis. The company's IPO timeline was delayed by study data that came in earlier than expected and needed to be analyzed. A number of revisions to its Securities and Exchange Commission (SEC) filings, which ensure that investors get accurate company information, caused further delay. Ultimately, Metabasis found itself debuting on June 15, in the midst of challenging market conditions.

Nearly 25 biotech-related IPOs took place in the 12 months leading up to Metabasis' debut. "Of those 20 or 25, many broke issuance price the first day, and many had experienced price reductions, so there was a perception at that point that the buyers were clearly in control and could drive the prices down," Beck says. Metabasis, which had hoped to offer its shares at between $11 and $13, cut the price twice before the IPO, finally selling the shares at $7 apiece to raise about $35 million.

Beck says part of the problem was a sector-wide dearth of momentum investors, who follow stock-price momentum rather than using traditional valuation tools to try to determine a company's worth. Momentum investors can make or break biotech IPOs, Beck suggests, in part because a limited number of institutional investors are sufficiently educated about biotech to make the sophisticated valuation calculations used to determine a company's potential.

"When the first couple of IPOs don't perform well, the interest of momentum investors isn't piqued, and it becomes a kind of snowball effect," Beck says. "We met with many momentum investors and we got the sense that they just weren't ready to jump in yet."

In the wake of such disappointments, some biotech and biotech-related firms have called off their IPO plans. Nanosys, a nanotechnology start-up in Palo Alto, Calif., announced in early August that owing to market conditions it was scuttling plans for its debut. The company had hoped to raise gross funds of as much as $106.2 million by selling 6.25 million shares.

San Diego, Calif.-based cancer drug development firm Salmedix, which has three products in the clinic, filed a registration statement for an IPO with the SEC in April. At press time, the company is still in a holding pattern, waiting for the market to improve.


The good news is that while companies hoping to enter the public market are riding out the storm, those going after private funds are enjoying sunny climes. The private and public markets generally maintain an inverse relationship, and so in economies like the current one, private financing becomes more readily available. "We're attracted to the market, because value's on our side of the table," Burrill explains.

Burrill's figures show that venture capitalists have invested more than $3.6 billion in biotech so far this year. Some companies, including Louisville, Colo.-based Replidyne, which has a DNA replication program nearing the clinic phase, and Fort Lee, NJ-based Metaphore Pharmaceuticals, which has a pain drug code-named M40403 in Phase II, have raised as much as $40 million in a single round.

But while the private market is thriving in large part because of the cautious public market, private funding does not operate in isolation from the sentiment of public investors. When venture capitalists invest, they want to have an exit strategy; that is, they want to know that the company they've invested in is headed for an IPO or is likely to be bought by a larger firm. Because the IPO market feels the pain so acutely when the overall market suffers, some private financiers have turned their focus almost entirely to companies they believe can be groomed for acquisitions.


"In my opinion, you've got to build companies for an acquisition, not for a public offering," says Gregg Honigblum, CEO of the life sciences investment bank Creation Capital in New York. Honigblum's venture capital operation focuses on finding startups with technologies that address large markets, in hopes that the small companies will be snapped up by conglomerates. For example, Creation Capital has a particular interest in startups working on technologies for orthopedics. "There is tremendous activity in the orthopedic space because of the aging of the baby-boomer population," Honigblum explains, pointing to the $6 billion worth of acquisitions in the sector over the last couple of years.

The public market also affects the private market by sending messages about what counts as a value driver. Not surprisingly, investors in the public market are favoring later-stage events, and venture capitalists are adopting their thinking. Some early-stage companies may find that the shift only makes it harder to get the attention of venture capitalists, but for Horsham, Pa.-based Nucleonics, an RNAi start-up, the trend resulted in a windfall.

Nucleonics CEO Robert Towarnicki says that his company secured private financing of $49.2 million last spring after setting out to raise only $20 million, which would have been enough to see it through investigational new drug (IND) filings for its first two products. The financing deal is a tranched structure, meaning that the funding is delivered in installments based on the achievement of certain milestones.

"I went out with an old model of thinking from five or six years ago," Towarnicki says. "What we heard back (from investors) is that an IND is no longer a value driver in the public marketplace, and therefore it's not a logical place to stop and raise money again. What the community was feeling is that the first real driver is clinical data." As a result, Nucleonics' investors opted to provide enough financing to see the company through early Phase II clinical data for its two lead products, with the deal's tranched structure offering a degree of safety for the investors and an incentive for the company to meet its milestones.


In the long term, most industry watchers agree that it will become easier to finance biotech companies as the industry and its investors mature. Robbins-Roth is encouraged by what she calls "the beginnings of a new class of investors [that is] slowly evolving" as the industry gets older. That class includes people who are joining the investment community after careers with biotech companies, where they often have worked on both the science and business sides and have developed a deep understanding of how the industry works.

"The way our companies operate, the technology typically takes a decade to go from a discovery to a product that is used in people," she says. "You need to have a class of investors that are OK with the timeframe and aren't going to pull out of biotech the next time something like an Internet bubble comes along [and] they think they're going to get rich quick."

It may be frustrating to wait for that class of investors to develop, but Robbins-Roth feels confident that it is on its way. "If there's a financial opportunity that's not being addressed, someone will come in to take advantage of it," she says. "Where a vacuum exists, nature will fill it."

In the meantime, companies that hope to go public should be doing more than waiting, according to Atkins. "My advice is that two years before you think you're going to go public, you should start getting on the radar, letting people know your story, letting people know what your milestones are, and letting them know when you achieve them," she says.

Stephen Ferruolo, a partner at the venture law group Heller Ehrman White & McAuliffe in San Diego, advises companies to adopt stock incentive plans and take care of accounting issues about a year before an IPO. About six months before going public, it's time for a "corporate cleanup" that includes simplifying the corporate structure and dealing with issues related to insider transactions.

Kate Fodor kfodor@the-scientist.com

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