By Nancy Volkers

Special To BioWorld Financial Watch

The first four months of 1999 were dismal for biotech financings. Headlines full of doom were coupled with numbers that proved the point. Compared with the first five months of 1998, financings in the same period of 1999 were down nearly 18 percent.

But the tide began turning in May, when biotech companies raised $720 million, a hefty increase from the $433 million it raised in March.

Though summer is historically slow on Wall Street, the biotech sector held its own through July, anchored strongly by Genentech Inc.'s $1.94 billion initial public offering (IPO) in which Roche Holdings offered 20 million shares at $97 apiece; last week, the stock (NYSE:DNA) closed at $145. Roche still owns about 83 percent of Genentech.

But other companies have done well, too, in both public and private financings. BioMarin Pharmaceutical Inc. raised $58.5 million in its IPO, selling 4.5 million shares of common stock at $13 per share. Vion Pharmaceuticals Inc. registered to sell 3.6 million shares in a public offering that would be expected to raise about $19 million.

"Biotech is almost the only place to be right now," said Jay Silverman, senior analyst at BancBoston Robertson Stephens in New York. "Biotech drugs that have been approved the past couple of years have done really well. And now we have a new class [of drugs] and a pretty nice pipeline."

Other analysts agree. "It appears at this point that the second half of the year will be more active than the first half," said Peter Ginsberg, senior research analyst at U.S. Bancorp Piper Jaffray in Minneapolis. "That's in large part driven by the stock performance over the past few months ­ just look at the Genentech offering: it's up 45 [from the offered price]. The performance in turn [has been] driven by recent consolidation ­ which we think will accelerate ­ and by the large number of recently introduced biotech products that have been successful."

Recent acquisitions of Alza Corp. (by Abbott Laboratories), Sugen Inc. (by Pharmacia & Upjohn) and Centocor Inc. (by Johnson & Johnson), among others, have illustrated that big pharma is interested in filling its pipelines with late-stage and newly approved products. Also, the success ­ and accompanying stock jumps for the associated companies ­ of products such as Herceptin, Enbrel, Synagis and Rituxan ­ has signaled a renewed attentiveness to biotech.

Raising money in the public market, then, isn't as difficult as it has been. In this environment, Silverman said, a company with a good story should have a good chance of raising money. "I think some of the Internet heat is also coming off onto biotech."

"More of the money is going into biotech than other areas in the healthcare arena," Ginsberg said. "What's interesting is that in the past two months, the flow of funds into dedicated health care mutual funds has actually been quite thin, relative to early spring. That's a bit surprising given the recent developments."

On the private side, EntreMed Inc., Ilex Oncology Inc. and Maxygen Inc. all raised at least $20 million in private placements, while Ligand Pharmaceuticals Inc. raised $40 million by issuing strategic alliance partner Elan Corp. plc zero-coupon convertible notes.

EntreMed raised $25 million, which the company will use for trials of its angiogenesis inhibitors, including Endostatin, the compound that's practically a household name already, though it has yet to be tested in humans. Phase I testing is slated to begin near the end of September. Though the trials are for cancer indications, the Rockville, Md.-based company said the inhibitors ­ which also include Angiostatin and 2-methoxyestradiol ­ may also have potential for treating arthritis and macular degeneration.

Ilex placed 2.4 million shares, and plans to use the proceeds to improve its cash position and continue clinical development. The San Antonio-based company's lead product is Campath, which Ilex is developing with LeukoSite Inc., of Cambridge, Mass. Campath, a humanized monoclonal antibody for patients with B-cell chronic lymphocytic leukemia, has finished pivotal Phase II trials, and the company said it could be available by mid-2000. Ilex also has six other compounds in human trials.

Maxygen's capital will be used to accelerate internal programs, hire more staff and seek deals involving either in-licensing or complementary technology. Maxygen, based in Redwood City, Calif., is focused on "molecular breeding," or DNA shuffling, which can create new properties of a protein through directed evolution of its DNA. The Redwood City, Calif., company has major collaborations with Pioneer Hi-Bred International Inc., of Des Moines, Iowa, and Pfizer Inc., of New York.

Ligand, based in San Diego, plans to use the $40 million it raised to satisfy merger obligations to Seragen Inc. and Marathon BioPharmaceuticals LLC. Ligand acquired Seragen and the assets of Marathon for $67 million last year to gain the rights to Ontak, a diphtheria toxin fragment fused to human IL-2 and aimed at cutaneous T cell lymphoma. The approval of Ontak in February set off a six-month clock that results in Ligand paying Seragen stockholders an additional $37 million, and Marathon $3 million.

Last month, other companies went the convertible stock route, including Maxim Pharmaceuticals Inc., Shaman Pharmaceuticals Inc., Celgene Inc. and Visible Genetics Inc. Convertibles have been a popular way to engender private financing; in 1998, they accounted for more than one-third of all private financings by public companies. Offering convertible preferred stock allows investors to convert their preferred shares into common shares when the company's stock goes up.

Some offerings also give investors warrants, or royalties on future product sales. Visible Genetics included 1.1 million warrants in its sale of preferred convertible stock to equity investment firm E.M. Warburg, Pincus & Co. LLC. The warrants may be exercised at $12.60 per share. The purchase gives Warburg approximately 30 percent ownership in Toronto-based Visible Genetics.

"Big companies with cash flow can do [convertibles] very easily," Silverman said. "They're almost overnighters."

A convertible financing can create investors that are more interested in the short term than the long term, however. The goal is to sell the stock and take advantage of the discount, rather than to buy and hold. Also, these vehicles create a supply of stock without a demand, which prevents a stock price from rising.

"They are a different sort of investor," Silverman said. "If it's a small company that's trying to get by with a bridge financing, the investors are not long term. But if it's an Idec or Alkermes, then the convert actually will stay. It fits."

As the year continues, the environment for biotech financings appears to grow friendlier.

"There's money around," Silverman said. "But [investors are] not going to throw it around indiscriminately. We have a sophisticated audience, and new money from incremental players."

However, Silverman said, "The only problem is that it looks like everyone is benefiting. That leads to buying blind."*