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Finding Exits, Returns: Bright Spots Within a 'Dark View'

By Jennifer Boggs

Managing Editor

SAN FRANCISCO – As hundreds of protestors gathered only a few streets away to oppose a fundraising luncheon for President Obama, biotech executives and investors gathered at the Palace Hotel were waging their own protest – albeit without signs and slogans – to the traditional drug development model.

"It's one of the most inefficient processes I've ever seen," said Sanjay Shukla, CEO of RxMd, a clinical development service company, during Tuesday's plenary lunch at the BIO Investor Forum, where the focus was on how to get an asset through development without building an entire company.

Project-based financing is hardly a new idea, though it's been coming into greater favor for biotechs as drug costs keep ballooning while venture capital gets harder to find and investors face the grim reality that they can no longer rely on the exits that existed only a decade ago.

Really, the changes in the industry since the Biotechnology Industry Organization hosted its first investor forum 10 years ago have been dramatic. And the days of early stage biotechs clearing the initial public offering (IPO) window with a cool $100 million or more are over.

Among the IPO class of 2000, for instance, 62.3 percent of firms that went public had preclinical-stage programs only, said John Craighead, managing director of investor relations and business development for BIO. By 2004, a mere 8 percent of IPOs involved preclinical companies, and by 2007, there were none.

The number of IPOs getting done has dropped drastically, as well. Between 2006 and 2007, a total of 47 life sciences firm went public, Craighead said. From 2008 to present, there have been only 28. But venture funding hasn't exactly been flowing in for private firms either. During his presentation, Craighead pointed to figures from the National Venture Capital Association, showing a 30 percent decline in VC funding between 2005 and 2010, as well as a 70 percent decline in the amount raised by VC funds in the past few years compared to the peak in 2007. Those figures present a "dark view," he said.

Companies can still get to the public markets, either via IPO or reverse merger, but even those success stories are few and far between these days. David Parrot, managing director at BMO Capital Markets, said during a morning panel that, of 24 life sciences IPOs since the third quarter of 2009, only about a third have performed well post-listing.

And the 2010-2011 IPOs are trading down about 23.7 percent to date, he added. Reverse mergers haven't fared much better. Of 19 firms that have opted to go public through the back door since the IPO window closed in the latter half of 2006, about half have dropped in value since, Parrot noted.

But, even in the gloom, there are some bright spots.

As BioWorld Insight reported in June, shareholders of public failed firm Sonus Pharmaceuticals Inc. managed to see a positive return following the merger with OncoGenex Pharmaceuticals Inc., due mostly to stellar data for OncoGenex's prostate cancer drug custirsen. Since the 2008 merger, shares of the combined firm have increased nearly 1,600 percent. (See BioWorld Insight, July 25, 2011.)

And then there's Cougar Biotechnology Inc., easily the most successful reverse merger in recent years. Cougar merged with shell SRKP 4 Inc. in 2006, watched its stock shoot up 150 percent in three years, thanks to promising data for prostate cancer drug abiraterone, followed by a buyout by Johnson & Johnson for nearly $1 billion. (See BioWorld Today, April 10, 2006, and May 26, 2009.)

Not above using the same trick twice, Cougar founder Alan Auerbach is using the strategy with his newest venture. Earlier this month, he launched Puma Biotechnology Inc. with a $55 million private placement and an in-licensing of a late-stage breast cancer candidate. He also took Puma public via a reverse merger with a public shell. (See BioWorld Today, Oct. 7, 2011.)

For Auerbach, it was a strategy that works with his background as a sell-side analyst. But he had no intention of taking his firms public via failed public biotechs, opting instead for a special purpose acquisition company (SPAC) – a firm created solely to serve as a public shell. That meant there would be no cash coming from the deal, hence the need for the concurrent private placement, but it also allowed shareholders of Cougar and Puma to hold 100 percent of the combined firm and avoided the "legacy investors," he said.

Other firms have opted for the SPAC approach, most recently Radius Health Inc., which merged earlier this year with MPM Acquisition Corp., which will give it a public listing, with Radius shareholders owning 100 percent of the new firm. (See BioWorld Today, May 25, 2011.)

The challenge to reverse mergers is there's no "coming out party" like with an IPO, with underwriters helping to build enthusiasm for the newly listed stock, Auerbach said. "You kind of have to build momentum on your own."

There also are additional challenges that could affect reverse merger deals down the road if Nasdaq has its way. Proposals under review at the SEC include requirements that would keep a company from applying for a listing until six months after it submits audited financial statements and requirements for a closing bid price of $4 or more for at least 30 of the 60 trading days preceding Nasdaq listing. (See BioWorld Today, June 25, 2011.)

And some executives still prefer using the front door, like Marc Beer, CEO of Aegerion Pharmaceuticals Inc., which went public via IPO last year. "I'm an S-1 kind of guy," he joked, though he added that Aegerion also had backup plans, including a reverse merger or a private equity offering, should the IPO have fallen through.

At the time Beer took over at Aegerion, the Cambridge, Mass.-based biotech was in dire straits. "We had zero on the balance sheet, and we were running a Phase III trial" with lomitapide, a small-molecule microsomal triglyceride protein inhibitor, in homozygous familial hypercholesterolemia (HoFH), he said. "It was a very painful IPO," he acknowledged, "but the markets are there."

And Aegerion has been one of the more successful biotech IPOs since the window creaked open in early 2010. The company's stock made a strong debut and has climbed about 45 percent since the first day of trading, thanks largely to lomitapide data, and Aegerion was able to pad its coffers with a $50.4 million follow-on offering in June to support a new drug application filing in HoFH by the end of this year. (See BioWorld Today, June 27, 2011.)

Just don't count on an IPO as an exit. "When I took the company public, I said [to investors], 'Don't plan on getting out,'" Beer said. "It's a capital-raising event. We never looked at it as an exit."