Jones Lang LaSalle

For biotechs, the IPO has lost its luster
By Jeffrey Krasner, Globe Staff May 15, 2006

For biotechnology companies, the initial public offering isn't what it once was.
Venture capitalists and financiers say the so-called IPO window remains open. But only biotech companies with desirable, late-stage drug candidates and the right kind of deals with pharmaceutical companies will be able to sell shares to the public at high prices.

Others may still be able to sell shares, but the money they'll raise will only be enough to fund the next stage of development. It won't be enough for executives and early stage investors to cash out.

''The IPO has become just another round of financing," said Marc E. Goldberg, managing director at BioVentures Investors, a Cambridge venture capital firm specializing in life sciences.
''You can do them if you recognize you're not going to get mega-valuations and it's not an exit strategy. People have had an unrealistic view of what an IPO can accomplish."

For instance, Valera Pharmaceuticals Inc. of Cranbury, N.J., a developer of treatments for urological conditions, raised about $34 million in a public offering in March. That kind of money is useful to push drugs through clinical trials, but does not fundamentally change a company's valuation.

In many ways, the IPO remains the most glamorous way to raise money and get access to the public markets.

There is the road show, at which executives pitch their company to prospective institutional investors, and the all-important pricing, at which underwriters tell their clients what the stock market will pay for their shares.

And, of course, the first day of trading, during which some may make fortunes if the market bids the price of shares up.

But more companies are looking at other ways to accomplish the same financial goals.
Infinity Pharmaceuticals Inc. of Cambridge looked at an IPO to raise funds as it develops a number of promising cancer therapeutics. But Adelene Perkins, chief business officer, said the firm wanted to avoid the uncertainty involved with an IPO: If the market sours on your company or even a particular business sector, it may be impossible to complete a planned offering.

Instead, Infinity plans to merge this summer with Discovery Partners International Inc. of San Diego. Discovery is shutting down its traditional contract chemistry business and will instead put between $70 million and $75 million of cash into Infinity's coffers. Discovery essentially contributes its cash and its Nasdaq market listing, and Infinity will be the company that emerges from the deal.

''This was a very attractive way to take the market uncertainty out of the equation," said Perkins.

How can that uncertainty affect an initial offering? BioMimetic Therapeutics Inc. of Franklin, Tenn., had plans to sell 4.6 million shares Friday at between $11 and $13. But it ultimately priced the shares at $8, raising $37 million. The shares closed at $8.25 on the first day of trading. The company is developing grafting material for bone regeneration.

The reverse merger has become so attractive that companies with valid market listings are becoming a rare commodity, said Stephen Hoffman, general partner at TVM Capital in Boston, a venture capital firm specializing in life science companies. ''The field is pretty well picked over," he said.

TVM is instead exploring a novel way to develop young biotech companies. It plans to use its new Life Sciences VI fund, which has about $300 million to invest, to grow biotech companies to the point they become attractive takeover prospects for larger biopharmaceutical firms. The key, he said, will be for firms to maintain control of their intellectual property -- instead of striking early-stage licensing deals to generate quick cash. In addition, he said, such firms need coherent stories with which to attract suitors. They should be focused on a single disease state, or one type of technology.

''A lot of people want to be public," said Hoffman. ''It sounds good, until you've been there. But the true path to wealth creation is to sell your company to someone with cash or a liquid stock."
Several other recent biotech offerings have done poorly. For instance, Novacea Inc. of South San Francisco, Calif., priced its offering last week at $6.50 a share, well below the $11-$13 share its investment bankers had predicted. It raised about $41 million, instead of more than $80 million. Shares in the developer of cancer drugs closed Friday at $6.60.

''Recent offerings have struggled out of the gate," said Bryan E. Roberts, general partner at Venrock Associates, the Rockefeller Family investment company.

''That highlights two things for me: the risks inherent in the public market, and the small number of potential buyers out there. The IPO window is cracked open. It's not flung wide open."

Jeffrey Krasner can be reached at krasner@globe.com