The past couple of years are best forgotten for biotechnology companies and their investors. Only four such companies went public in 2002, and none made it out the door in the first several months of this year. But when all is said and done, 2003 may be the year of the biotech IPO.
Acusphere Inc. became the first venture-backed biotech company to go public this year with its Oct. 8 offering, and another 11 VC-backed biotechs are waiting in the wings (see chart, page 4). Venture capitalists have a lot riding on the proposed new issues – over $1 billion, not counting the $135 million in venture funding that Acusphere took in before its IPO. The planned offerings hope to raise about $830 million.
Who stands to gain from the new issues? Foremost is Rho Ventures, an investor in four of the 11 companies hoping to go public. New Enterprise Associates (NEA) and HealthCare Ventures have each invested in three of the biotech companies. They are followed by Forward Ventures, JPMorgan Partners (JPMP) and MPM Capital, which each have stakes in two of the startups in registration.
If all of the companies are successful in going public, it would mark the most new biotech issues in a single year since 2000, when a record 42 went public. And analysts say that if the companies perform well on the aftermarket, then they expect a flood of biotech companies to continue to brave the IPO waters next year.
“There’s a backlog in the pipeline because we haven’t had any biotech IPOs go out for so long,” says Tucker Kelly, a vice president covering the life sciences sector for Adams, Harkness & Hill, a Boston-based investment bank. “And if the current biotechs that are filed to go IPO get priced and perform well, then we’re definitely going to see more, no doubt about it.”
VCs started to see some momentum build for new issues in the overall stock market in the third quarter. For the first six months of the year, only three venture-backed companies launched IPOs. But in the third quarter, nine venture-backed companies went public. This year’s numbers are tiny in comparison to the late 1990s, but some say that the robust number of pharmaceutical companies that has filed to go public is a sign that the pace will pick up for the remainder of the year and flow into next year.
Picking Up Steam
“The recent IPO activity and new filings are a good barometer of the overall health of the economy,” says Scott Wendelin, former head of investment banking at Salomon Bros. and now CEO of Prospect Financial Advisors, a Los Angeles-based financial consulting firm. “Though the number of IPOs are small, they have incrementally gone up and so has their value.”
“This isn’t about IPO hype,” says Standish Fleming, a partner with San Diego-based Forward Ventures. “Instead, there’s a substantial level of confidence in the IPO market once again, especially with biotech companies.”
Some VCs aren’t convinced this is a great time to test the IPO waters again. Peter Chung, general partner with Boston-based Summit Partners, agrees there is a thawing in the IPO market, with more companies expected this fall to file and price. Summit had one biotech company in its portfolio go public in November 2002 – Impac Medical Systems.
But Chung says the market is still recovering from the dot-com bubble, so don’t expect a return to the heyday of the late 1990s. “There is still a shortage of supply,” he says. “There aren’t that many companies that are ready to go public right now.”
Notably, just one of the 11 venture-backed biotech companies, Xcel Pharmaceuticals Inc., aiming to go public posted a profit last year, according to SEC filings. Combined, the other 10 had losses of nearly $270 million. And only seven of the companies had revenue.
Red Ink Not So Bad
Dick Kramlich, a general partner with NEA, which is an investor in Xcel, notes that although the biotech companies are registering poorly on the P&L statements, they “are potential good offerings with real products and the outstanding promise of drugs to come.”
The investment bank analyst Kelly adds that Wall Street is receptive because of its interest in drug stocks. After all, there’s been a string of new drug approvals, plus some positive clinical results that have given investors hope. And biotech stocks have rebounded during the past year. The American Stock Exchange’s Biotech Index declined slightly in September and early October, but it has steadily risen by more than 30% throughout the year and is in line with the Dow Jones, Nasdaq and Standard and Poor’s indexes.
“Biotechnology stocks are notoriously volatile, but they currently boast a number of unique advantages that should play out well,” says Kalina Milyoteva, an analyst who covers the market for online newsletter 123Jump.com.
“For instance, the Food & Drug Administration has managed to speed up its drug approval process. A faster regulatory process will grant a better success rate for pharmaceutical companies,” Milyoteva says. Eyetech Pharmaceuticals, a biopharmaceutical company focused on treatment of eye diseases, registered to go public on Sept. 12 after it was granted “fast track” approval by the FDA. Eyetech is testing its lead product candidate in a pivotal Phase II/III trial.
Tis the Season
Another factor working in favor of new biotech issues is that the fall season is typically the strongest period for such stocks. “Many biotech companies are poised for a rally at the end of the year, despite the ongoing gloomy economic reports,” Milyoteva says.
Acusphere received a warm Wall Street reception with its offering last month. It sold 3.75 million shares for $14 apiece (its planned range was between $13 and $15 a share), raising $52.5 million. The stock opened at $16 and closed at $14.03.
The company, based in Watertown, Mass., had scuttled its IPO plans in 2001 due to market conditions. Like most venture-backed biotech offerings, Acusphere reported a loss of $20 million last year on no revenue. Public investors were willing to overlook the red ink because the company, which is developing three drugs – for treating heart and lung ailments – is in clinical trials.
The 10-year-old company has received $135 million in investments from Polaris Venture Partners, Venture Capital Fund of New England, Comdisco Ventures, Prism Venture Partners, Audax, Alta Partners, Burr, Egan, Deleage & Co., Thomas Weisel Partners and Elan Corp., among others.
The biggest investment winner in the Acusphere IPO was the buyout shop Thomas Weisel, which owned more than 15% in common stock before the offering, according to SEC documents. Burr, Egan owned nearly 12% and Polaris owned 6.5%.