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In Tight IPO Market, Cash-Needy Biotechs Weigh their Options

November 10, 2006

By Peter Benesh
Investor's Business Daily

Time was a biopharmaceutical company with a good idea and some basic research would go public when it needed to raise capital. Times have changed.

The number of biopharma initial public offerings fell from 73 in 2000 to seven in 2001 and six a year later. Today biopharma IPOs are rare.

One reason is that investors are more demanding than they were six or seven years ago, says Todd Huxster, editor of research analysis firm IPO Vital Signs. They want products instead of ideas. Companies with heavy debt, weak balance sheets and no profits won't get their asking price, Huxster says.

Even this year's biggest biopharma IPO — Warner Chilcott (WCRX) — failed to meet its own expectations. And it has a history of profitability.

Warner Chilcott, a women's health firm spun off in Pfizer's (PFE) purchase of Warner Lambert, went public in September at 15. It sought an opening price of 17. It now trades near 13.

The IPO raised about $1 billion for Warner Chilcott. Take that out, and the average biopharma IPO this year raised about $50 million.

Upon Further Review . . .

Officials at Anadys Pharmaceuticals (ANDS) can tell you all about disappointment on Wall Street. The company debuted at 7 in March 2004. Shares moved as high as 16.60 two years later, but now trade near 4.

Anadys, which develops drugs for hepatitis C and cancer, isn't expected to turn its first annual profit until 2010. Founder and Chief Executive Kleanthis Xanthopoulos says he'd think "longer and harder" about an IPO if he had it to do all over again.

"If I were running a private company today, I would put (mergers and acquisitions) ahead of IPOs," Xanthopoulos said.

Merging or being acquired holds certain advantages over going public, he says. One is a clean return on investment without the costs of an IPO. Another is that you can avoid demands from institutional investors — particularly hedge funds.

"They're driven by quarterly reports, and their holding periods are never more than two or three years," Xanthopoulos said.

The past few months have seen a recent spate of M&A deals involving privately held biopharma firms. Xanthopoulos puts the value of 10 deals since June at $20 billion. That's more than 10 times the value of IPOs year to date — including the Warner Chilcott IPO.

This year's deals include Gilead Sciences' (GILD) $365 million purchase of Corus Pharma, a respiratory-disease drug developer; and Pfizer's buy of PowderMed, a U.K.-based developer of DNA vaccines, for an undisclosed sum.

Power Shift

Another option for young biopharma firms trying to raise money — and avoid IPOs — is to lure private investors.

"If a company is in the midstage of drug development, there's lots of private capital available out there," said Michael Shulman, editor of ChangeWave Biotech Investor, an online newsletter. "It's sometimes the better business choice to bring in powerful private investors."

Biopharma firms seeking capital have plenty of bargaining muscle, says John McCamant, editor of the Medical Technology Stock Letter.

That's mainly because big drug makers need to find new products as blockbusters come off patent. Because biopharma firms can supply those products, the balance of power has shifted.

If the terms aren't good enough, a small firm can take yet another route: the reverse merger. This is where a biopharma finds a public shell company, or one with a stock market listing, but no operations. The biopharma raises money to get control of the shell, then gets its listing without having to file a prospectus or file an IPO.

Capital-needy biopharmas also can license or co-develop technology with a big drug firm.

This is what privately held ChemoCentryx did in August, when it inked a deal with GlaxoSmithKline (GSK) for products to treat inflammatory bowel disease.

'Pent-Up Demand'

Companies that do want to take the IPO route can always find the odd success story. When Trubion Pharmaceuticals (TRBN) bowed in October, it got its asking price of $13. It now trades near 15.

The reason Trubion went the IPO route is that it was cheaper than trying to get more venture capital funding, says Chief Financial Officer Michelle Burris.

The IPO also gives Trubion more flexibility and time to grow, Burris says. It landed a rich partner by selling a block of shares to Wyeth. (WYE)

Watch for more biopharma IPOs as 2006 ends, Huxster says.

"There is pent-up demand and there's often a rush late in the year," he said. "Nobody wants to be marketing into the dead month of January."