Finance/Funding
NEWS
Published online: 16 June 2005, doi:10.1038/bioent866
Investors and the precautionary principle
Entrepreneurs continue to be stymied by the current climate for IPOs.
ThinkEquity Partners
David Strupp of ThinkEquity Partners believes that the data on biotech IPOs is telling us something.
It is taken for granted that the market for initial public offerings (IPOs) is grim for biotechs, particularly so for early-stage biotechs. But is this consensus valid? There are exceptions, but a new report from ThinkEquity Partners (Life Sciences IPO Dashboard, June 2, 2005) makes clear that both of these assertions about biotech IPOs are close to the mark. To put it charitably, this market remains highly selective—too selective for most. As a result, many biotechs are waiting until conditions improve. At last tally, there were 11 biotechs that had filed S1 registrations with the US Securities and Exchange Commission to float an IPO. Some of these companies filed 14 months ago. There have been only six biotech IPOs in 2005 thus far. This is way off the pace of 2004, which saw fully 26 biotechs go public.
Not only are there fewer biotechs coming to market, according to ThinkEquity Partners, the amount of capital raised by those that chose to float an IPO remains lean. On average, market values are lower in 2005, too. In 2004, biotech IPOs raised on average $59.6 million versus $52.5 million so far in 2005; and total market value of biotech companies at IPO pricing in 2004 was $270.9 million versus $214.1 million thus far in 2005.
Assertions about biotech IPOs are close to the mark.
Still, many biotech CEOs are not content to wait until the IPO window reopens at some undetermined point in the future. Berlin-based Epigenomics, which is developing biomarkers and diagnostics based on DNA methylation, went public last year in Europe because it viewed the public market as the best avenue for capital. CFO Oliver Schacht says his company was able to tap EUR41.6 ($50.10) million of additional capital "at a time when getting that sort of money for product development from venture capitalists would have been very difficult if not impossible."
Santa Clara, California-based XenoPort didn't want to wait, either. On June 2, it went public. It's too early to judge, but one week later XenoPort was already trading down at $10.30 after going public at $10.50. Daniel Montano, CEO of CardioVascular BioTherapeutics, based in Las Vegas, Nevada, went public on March 14 and would do it again today even in this current climate. Montano says he knows more than 90% of the firm's investors and believes this core group will stay the course. Like most, CardioVascular, which has a phase 1 product for coronary artery disease, is trading down from its offering price, too. The firm went public at $10 and now trades in the $6 range.
Of the 45 US biotech companies that have gone public since July 1, 2003, 30 are trading below their offering price. Most of the biotechs that have pushed forward with IPOs have something else in common. They are best characterized as "unique, highly selective situations," says San Francisco-based Pacific Growth Equities co-CEO Thomas Dietz. That's code for 'most are late-stage biotechs or firms with early revenue prospects.' Indeed, biotechs with early revenue prospects seem to be among the precious few that are capable of maintaining any semblance of price stability.
Dietz points to Aspreva Pharmaceuticals of Victoria, British Columbia, a company his firm helped underwrite. The firm went public on March 3, 2005, at an offering price of $11.00, opened at $12.50, and recently closed up at $14.30 on June 10, 2005. Dietz says the reason that IPOs like these are outperforming the rest of the lot is because the company has "revenue visibility" from its efforts to commercialize new indications for already approved drugs. Wall Street can "attach value" to companies with revenue.
Thomas Dietz
ThinkEquity analysts note that just over 36% of the companies floating IPOs in the second quarter of 2004 had lead products either in preclinical or phase 1 studies, whereas the first half of this year has seen only one out of six biotech IPOs with a lead product in phase 1. Many think this trend will only accelerate.
David Strupp, head of healthcare investment banking at ThinkEquity Partners in San Francisco, predicts that this narrow IPO window and later-stage preference will be a lasting phenomenon for biotechs. For the foreseeable future, at least, he is advising his banking clients that those with late-stage products are in the best position to go forward with IPO plans. Tom Dietz of Pacific Growth Equities certainly reflects this thinking: "With the exception of some very unique situations, I don't believe we will broadly revisit preclinical or earlier stage investment ideas."
The grim reality is that many investors feel the same way not least because of the instability at the US Food and Drug Administration, rising global interest rates and jittery markets. Then again, there will always be bankers and biotechs who see bright opportunities where others see only dim light.