OAKLAND -- Although 1991's flood of public stock offerings forbiotechnology companies has slowed to a trickle in recentmonths, prospects for venture capital funding -- especially forstart-up companies -- may be the best they've been in fiveyears, participants told a Coopers & Lybrand technologybreakfast here last week.
Venture capital activity "bottomed out" in 1991 after fundinghad retreated about 25 percent in each year since 1987, saidKenneth Kelley of the venture capital firm InstitutionalVenture Partners (IVP) of Menlo Park, Calif. "Money willincrease dramatically this year," he said.
IVP's record reflects the trend. The firm, which specializes inbacking start-up companies, put more money intobiotechnology ventures in the first quarter than in any otherquarter in its history, Kelley said.
Start-up companies, which might be poised to go public in thenext favorable IPO cycle, appear to be receiving more interestat the expense of established companies looking for later-stagefunding.
A rising number of scientists with impressive credentials areleaving academia -- where research is being constrained by alack of funding -- to start their own companies. "Technologydevelopment is exploding," Kelley said.
Kelley predicted that the next hot IPO market might arrive in1994-95. So far, today's IPO market is considerably cooler thanthe record1991. Although nine companies raised $405 millionin January, 10 IPOs have raised only about $250 million sincethen.
Those companies still tapping the public offering markets arecontending with significantly lower valuations, according toinvestment bankers and venture capitalists
Several factors combined to turn the euphoria of the 1991biotech IPO market into the gloom of 1992, said CynthiaFeldman, chairwoman of the National Bioscience andTechnology Group at Coopers & Lybrand in San Francisco.
Centocor Inc.'s difficulties in April with the FDA over itsCentoxin monoclonal antibody drug triggered a broader sell-offof biotechnology stocks. In addition, institutional moneymanagers have shifted their portfolios' emphasis from growthstocks to cyclical issues in hopes of profiting from ananticipated economic recovery.
The biotechnology sector's fall-off is reflected in the Coopers &Lybrand's Biotech Index, which has underperformed the DowJones industrial average and the general NASDAQ market by 30percent this year, while companies that went public last yearare trading at 20 percent below their issue price.
Meanwhile, investment bankers and venture capitalists are"cherry picking" among private companies, said Corinne Lyle, avice president of Kidder, Peabody & Co.'s health care group inLos Angeles. "We're looking for management credibility, proventrack records in advancing research and clinical trials, andcompany milestones," such as patents and FDA approvals.
A company that can meet these criteria has an excellent chanceof obtaining private funding, added IVP's Kelley. Last year'swave of successful IPOs offered many venture capital firms theopportunity to cash out their profits from investments madeyears ago in now-established companies. Flush with cash fromthose deals, many are looking for new investmentopportunities, Kelley said.
The new start-ups are concentrated in several sectors, amongthem gene therapy, anti-sense and cell therapy. Kelley said thelast area, cell cycle growth, is among the hottest for venturecapital investment.
Companies in need of mezzanine-level financing are in moredifficult straits, as they contend with delayed IPOs that willforce many of them to search for yet another round of privatefunding to meet their near-term needs.
-- Karen Southwick Special to BioWorld
(c) 1997 American Health Consultants. All rights reserved.