Genesis of an IPO ... from NO

EDITOR'S NOTE: Carl Djerassi's novel NO concerns the development of a fictional, though close-to-life, drug and delivery system for the relief of male impotence. While the science in the novel is accurate, the book is a work of fiction. Nevertheless, some real-life characters, including Djerassi himself (a professor in the chemistry department at Stanford University), and other more or less disguised fictional characters based on real people make appearances in the book. In this issue and in the upcoming October 26 issue, we are publishing Chapter 19. In this extract we meet the chief protagonist of the book, an Indian scientist named Renu Krishnan, who has developed a drug called NONO-2 and a delivery system called MUSA. Guided by Martin Gestler, a hard-charging expert on biotechnology start-up companies, she has left academic research to found a company called SURYA. The extract describes the preparation and launch of the fledgling company through an Initial Public Offering (IPO). Readers will also meet Mort Heartstone, SURYA's cautious legal counsel, and I. C. Cantor, a flamboyant, Nobel prize-winning chemist from Chicago, who has been reluctantly persuaded to join the Scientific Advisory Board of the new venture. According to Djerassi, the passage involving Mother Teresa described in the second part of the extract is based on a real incident. Carl Djerassi NO, by Carl Djerassi, published by the University of Georgia Press, Athens, Ga. 30602. © Copyright 1998 by Carl Djerassi. Reprinted with permission from the publisher. The book may be purchased through Amazon.com. Chapter 19, Part One The initials IPO invariably mark a crucial point in a public company's life, a sort of corporate bar mitzvah. But just as a bar mitzvah does not actually make the boy a man, so a company's Initial Public Offering only admits a start-up to the field where the big boys play: the stock market. What happens next has little to do with the company's initial promise: everything depends on continuing performance, on the stock market's perception of that performance, and, indeed, on the overall economic climate. If the economic outlook is bleak, even the most stellar corporate achievements are overshadowed by Wall Street's bearish mood. In the spring of 1986, SURYA's board of directors concluded that the time for the IPO had arrived--a unilateral decision lacking any operational meaning absent the participation of some other key parties. In a corporate IPO, these outside parties consist of an underwriter--an investment banker or a brokerage firm--and the SEC, the all-powerful Securities and Exchange Commission in Washington. Underwriters are matchmakers; like most matchmakers, they are not unbiased. Once they have agreed to play that role and finish haggling about the size of their fee, their sole function is to make the client appear as attractive as possible. Like other matchmakers, underwriters rarely undress their client in public. Displaying the most attractive features while veiling the rest is part of the game. The rules of that game are established and enforced by the SEC, which, like the FDA, is feared as well [as] held accountable by the industry it regulates. On the face of it, SURYA looked like a marvelous IPO candidate: the company balance sheet showed no debts and seventeen million dollars in the bank, assets included a virtually complete FDA package for an exciting drug, potential markets were seemingly enormous, and, best of all, the company's image was sexy in the truest sense of the word. Martin Gestler--a veteran of underwriter wheeling and dealing, IPOs, secondary offerings, and other vagaries of the stock market--had taken on the primary responsibility for greasing the rails for what he hoped would be an express to and through the regulatory stops of the SEC. "Renu," he announced one day, "you'll have to watch the shop while I'm concentrating on the IPO. What we need now is a pair of underwriters: one impeccably staid, the other a go-go operator from the West Coast. Somebody like Robertson Stephens, Hambrecht & Quist, or Montgomery Securities." "Which would you pick if you had your druthers?" Renu--whose MBA was, after all, from Santa Clara, a blue-collar school catering to part-time students--was curious what the Stanford-trained Martin would choose. "For the staid one? Any from the first tier would do," he waved a dismissive hand. "Goldman Sachs, First Boston, Morgan Stanley. You wouldn't be able to tell them apart in a lineup. The second group is trickier. Montgomery is full of aggressive sales types: pushy, athletic, you see them with open shirt collars. Among the go-go class, I'd rate Robertson Stephens the classiest: they all wear striped ties and would never be caught in designer blue jeans. I'd probably go for them, because I want a classy IPO." He winked conspiratorially. "The problem is not how to convince any one of them to take us on but to discover which pair would be willing to work together. I hope penile erection will sway them. How often can underwriters do business in so sexual an arena without looking tacky?" Gestler was dead right. His display of exciting science, reasonably conservative financials, and one-upmanship carried the day. "When last did you put your name on an ithyphallic red herring?" he deadpanned during his meeting with the senior management of Goldman, Sachs and Robertson, Stephens--SURYA's ultimate choice. The managers looked puzzled. "'Ithyphallic'?" One of the investment bankers said at last. "Spell it." Gestler did so. A long pause ensued, at the end of which one of the junior managers present made his way to the large dictionary stand in the corner. He straightened abruptly, then returned to whisper in his superior's ear. "Of course," the senior manager observed, "we can't use that word." "Maybe, they can't," Martin reported to Renu, "but just wait and see how I plan to use it." Renu looked it up too. "And where will you display that nugget of erudition?" she asked. "Wait and see." As usual, the actual preparation of the "red herring"--the preliminary prospectus required for SEC approval--was a joint enterprise involving the intramural talents and experience of the lawyer Mort Heartstone and the entrepreneur Martin Gestler and the extramural vetting by the underwriters. How much of such vetting is simply fancy rubber-stamping depends on the seriousness of the underwriters. In SURYA's case, the Goldman and Robertson firms proved to be serious, at times even annoying--at least as far as Renu was concerned. Renu's role--unlike that of the minions in Heartstone's legal firm and in the underwriters' offices--was very much tutorial; she was both a teacher and a student. As SURYA's chief scientist, she was responsible for producing a generally intelligible introductory section dealing with the basic biology of penile erection, with special attention to the role of nitric oxide. That and the subsequent description of the MUSA system and the NONO-2 active ingredient were supposed to impart a serious, intellectual aura to the text of what was, crassly speaking, a promotional sales document--albeit one dotted with legal caveats. Thus Renu was treated with some deference by the underwriter's cadre. Nevertheless, they kept asking so many questions that Renu became impatient. Had they truly managed to avoid all exposure to science since high school? And why, she wondered, did they seem to consist only of a variety of vice presidents--plain, "executive," "senior," or "assistant"--and secretaries, but nothing in between? But in addition to providing scientific expertise, Renu was also the recipient of valuable information, primarily from Mort Heartstone, SURYA's master of the legal caveat. Initially, after Heartstone tutored her on his reasons for inserting so many faintly damning statements into the prospectus, Renu felt insulted, then irritated, and finally overwhelmed. He titled Renu's description of the MUSA system, "Dependence on the Company's Transurethral System for Erection." He killed the scientist's proud, upbeat starting sentence, replacing it with what Renu considered sickening pessimism: The Company currently relies upon a single therapeutic approach to treat erectile dysfunction, its transurethral MUSA® system for erection. No assurance can be given that the Company's therapeutic approach or its proposed pharmacological formulations involving nitric oxide releasers will be shown to be safe and effective or ultimately approved by regulatory agencies. As if this were not enough, Heartstone added a sledgehammer summary: As a result of the Company's single therapeutic approach and its current focus on NONO-2, the failure to obtain eventual FDA approval of its New Drug Application (NDA) for MUSA® on a timely basis, if at all, or to successfully commercialize such product would have an adverse effect on the Company and could threaten the Company's ability as a viable entity. Reading the draft in Heartstone's library, the walls lined with elegantly bound tomes, so different from the ratty mixture in SURYA's budding scientific library, Renu couldn't contain herself. "Mort," she exclaimed, "after reading this, who'll want to buy a single share of our stock?" "Read on," the lawyer admonished her. "Then we'll talk." Renu started to read out loud, her tone expressing her mounting distaste. "'Since the Company's product involves transurethral delivery, a new therapeutic approach, regulatory approvals may be obtained more slowly than for products encompassing more conventional delivery systems.'" She let out an impatient sigh. "'The Company completed pivotal clinical trials . . ." Renu stopped to glance at Heartstone. "The first complimentary word: 'pivotal.' Thanks, Mort." "You better continue," he warned her, "before going overboard with gratitude." "'. . . and is about to submit its NDA to the FDA while pursuing further clinical trials.' Nothing wrong with that," she said. "Mm-hmm," he grunted. "'There is no assurance that these clinical trials will be completed successfully within any specified time period, if at all.'" Renu nearly yelled the last three words. "Mort, for heaven's sake be sensible! Given all of the clinical work we have completed-- on time, I must remind you--how can you say--" "Relax, Renu. We'll both save a lot of time if we discuss this when you're through reading." "Okay." She took a deep breath. "'Furthermore, the FDA may suspend clinical trials at any time if it is believed that the subjects participating in such trials are being exposed to unacceptable health risks.' Christ," she muttered, "what is there?" "Try the section on manufacture." Renu flipped through the pages. "I see you changed the title," she said. "'Limited Manufacturing Experience.'" She shook her head in exasperation. "And inserted a new sentence before my stuff. 'The Company has no experience manufacturing its product in volumes necessary to achieve significant commercial sales at commercially reasonable cost.'" She looked up, eyes narrowed. "Thank God, my husband isn't running that facility. I can imagine what he would say. But just wait till Menachem Dvir reads this," she warned him. "Let me see what you did to my section on patents." "You won't like it," he said mildly. "'While the Company's success will depend, in large measure, on the strength of its current and future patent position, the latter, like that of other pharmaceutical companies, is highly uncertain. Patent claims may be denied or significantly narrowed; furthermore, there can be no assurance that the Company's products will not infringe on patent or proprietary rights of others. In any event, the Company believes there will continue to be significant and expensive litigation in the pharmaceutical industry regarding patent and other intellectual property rights.'" Renu put down the draft, which was already bound and printed--one aspect of the prospectus preparation she had admired with undisguised envy. "It's extraordinary that your financial printers can bring out such documents overnight, while we poor scientists have to wait months to get a journal article printed." "Wait till you see the bill," laughed Heartstone. Renu looked at the cover page, the left margin framed by a block of boilerplate printed in startlingly bright red: "Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective." "While it may not make you feel any better, look what I've had to add to some of the other people's sections." Heartstone's paternal timbre was meant to calm her. "'Since the Company intends to market and sell the MUSA product through its own direct sales force in the United States but has no experience in the sale, marketing, and distribution of pharmaceutical products, there can be no assurance that the Company's sales and marketing efforts will be successful.'" He closed the document. "It's full of that." "Why indulge in such terrible overkill, Mort? What will the underwriters say?" "They will love it," he grinned, "and then add a few more ifs, whens, and buts. Maybe you will appreciate it more if I let you in on a little secret: at the next board meeting, you will be elected to the board." While Martin Gestler had privately alerted Renu to that promotion, her cheeks still reddened. It was the first pleasure she had experienced all morning in the lawyer's office. "With the exception of Martin, all of the directors are outsiders. It's time more management enters the board. You not only deserve it Renu, but it's desirable that the chief scientist of a high-tech company is actually a director. Or for that matter, to have more than one woman on the board. But one of the privileges of a director," Mort chuckled, "is that you will automatically become a defendant in any stockholder's suit. If SURYA's stock does poorly--or perhaps even exceptionally well--I guarantee that we shall be sued." Renu's dismay caused him to raise two reassuring palms. "With very few exceptions, these are nuisance suits filed by shyster firms. All they do is fill the pockets of the shysters . . . and, of course, those of the shining legal knights asked to come to the rescue. Like my firm," he grinned disarmingly, but then turned serious. "Renu, it is none of my business, but have you ever been on the Pill?" Renu looked nonplussed. "My answer to most men--other than my husband--would be that it's none of their business. But in your case, I suspect a legal motive. Am I right?" "Absolutely." "In that case, the answer is yes. As a matter of fact, I am on the Pill." "Good," he said, heaving himself out of his chair. "Have you read the package insert?" "Not recently. I probably read it when I first got a prescription. Why?" Heartstone lumbered to the bookshelves, running his finger along the leather spines. "I used to be corporate counsel to one of the pioneers in the oral contraceptive field." He removed a volume, entitled Syntex Corporation Registrations. A slip, apparently serving as bookmark, stuck out on top. Still standing upright, the heavy volume resting against his bulging stomach, Heartstone started to read from the loose page. "Occasional side effects include nausea, vomiting, disturbance of hearing and vision, anemia, asthma, mental confusion, sweating, thirst, diarrhea, allergies, occasional gastrointestinal bleeding. . . ." He looked at Renu. "If you read all that in a package insert, would you take such a drug?" She hesitated. "I'm not sure." "Of course, you aren't. Who would be, reading this in isolation? What I read to you," he paused, "were the reported side effects of aspirin. Now," he said, satisfied, "look at this." He opened the bound volume. "The 1978 text, which I prepared and which is still unchanged, of the side effects of the Pill. Three pages long, single-spaced, small print--the stuff you don't recall reading, if, in fact, you ever looked at it. Suffice it to say that this list covers the gamut from cancer and stroke to bleeding of the gums and reduced ear wax. The lesson is simple and sad: list every conceivable side effect, however unimportant or infrequent, or you will be accused of not having warned the consumer. In the most litigious society in the world, the potential benefits of serious warnings are totally diluted by all the detritus. Now let me return to the red herring." He shoved the slender prospectus toward Renu. "It would be naive to assume that this document is only so named because of the red print of the warning legend on the first page." Heartstone ran his finger along the margin. "You probably know the dictionary meaning of the term: 'something that distracts attention from the real issue.'" He shook his head so vigorously that the wattles under his chin quivered back and forth, "the dictionary definition very much applies." "Rather discouraging, isn't it?" "Not totally so. Think of this as truth in advertising. The people who read these prospectuses are the sort you will be meeting on the road show: pension and mutual fund managers, security analysts, portfolio or money managers, some stockbrokers. The people who show up are sophisticated and have read dozens upon dozens of these stock offerings; they know what to ignore and what is just legalese, but in the end they're all professional gamblers. While they know the inherent risks of the game, they usually think that the lousy odds do not really apply to them because they're more clever than the rest. Of course, with SURYA's stock, I think their odds are actually very good." "How would anyone conclude that in view of what you've written here?" she asked sarcastically. "That, my dear, will depend on Martin, on the CFO--although the financials are pretty straightforward--and on you. On what you will tell them on the road show." "On me?" she exclaimed. "What am I supposed to say? That we have a gloomy, cynical lawyer as corporate counsel?" Heartstone laughed so hard, he had to embrace his bouncing belly. "No, it's your tone, your facial expression, your mysterious 'no comment' when a critical question is asked, your coy response, 'now what do you really think?' and the like. Martin is very good at this; he will certainly prepare you ahead of time after Goldman, Sachs and Robertson, Stephens have presented you with a list of people and places you will visit. And there is one more thing: usually, companies are represented by the CEO, the CFO ... and the chief technical officer, usually the VP in charge of research. But Martin and I concluded that, in this instance, we will emphasize the science, and do it glamorously. So we thought we should include the chairs of the scientific and medical advisory boards, respectively. It will be your job to convince them to participate--especially Cantor, because Martin, who seems to have fallen in love with the word--" "I know it only too well," interjected Renu. "Martin thinks that a truly ithyphallic presentation should be ennobled by a Nobelist." He raised his eyebrows in mock dismay. "I'm never convinced that the luminosity of a Nobel Prize penetrates very far beyond its immediate murky terrain, but anyway," he gestured toward Renu, "that's your department." To be continued in the Oct. 26 issue of The Scientist.

Genesis of an IPO ... from NO

Interested in reading more?

Become a Member of