BioWorld Today Columnist

As we rouse from our postprandial Thanksgiving comas and head into the final weeks of 2006, what does the financial forecast show?

Well, there's hope that the public markets might thaw. BioWorld Industry Snapshots shows we are down to 11 brave souls waiting for the IPO markets to become receptive. The public investors have been relatively harsh on valuations all year, with most companies well below their anticipated offering range.

There are signs things are changing. One 20-year veteran in biotech investment banking sees reason for cautious optimism for first quarter, saying that "IPOs are getting done," now and that "investors are getting more reasonable on valuation."

But don't get all excited just yet. "More reasonable" in this case translates into pre-IPO valuations rising from the $120 million range to about $175 million. Moving in the right direction, but not enough to get VCs excited about liquidating their shares.

PIPEs are doing well, with better terms for existing shareholders now that the death spiral convert is gone.

Investors seem encouraged by the hefty secondary offerings of Celgene ($1 billion), Vertex ($300 million), Regeneron ($175 million) and Alexion ($140 million). Those financial versions of speed dating raised big bucks with one- or two-day roadshows. While not generating huge momentum, investors feel more comfortable about putting cash into the sector with each solid financing and generally good macroeconomic indicators.

Comfort Is What It's All About

The other big source of comfort is the accelerating acquisition activity in biotech. Keep in mind that it still favors companies with well-developed pipelines and typically with clinical candidates. But the burst of M&A is giving VCs hope of liquidity even in the face of a less-than-exuberant public market.

Will this glimpse of potential return be enough to get investors to fund preclinical R&D companies again?

I'm guessing no. The venture community is in the midst of its own evolution, with successful funds bloating up to $1 billion-plus in new money and starting to grow the legs of private equity.

How can more money be bad? Because you have to put it to work in deals that will generate those big returns that keep your limited partners happy. Otherwise, they will wander on over to those intriguing hedge and private equity funds.

Even the largest biotech venture funds don't carry the clout of the big boys - TPG (more than $20 billion at work, $1 billion in the venture fund alone), Kohlberg Kravis Roberts & Co. ($27.5 billion at work), Madison Deerborn ($6.5 billion in their 2006 fund alone) and others.

That puts venture funds in the unenviable position of being too small to compete directly with the next step up the Darwinian ladder, and too big to do small, early stage deals.

Biotech execs trying to extract that next round before year-end will tell you that the VCs are dragging their feet and begging for reassurance more than ever before.

That Warm Fuzzy Feeling

The extended period of nasty public markets and nervous venture investors has driven private companies to stay private longer. Between squashed valuations, increased regulation and public investors who want quarter-to-quarter performance, being public is just not that much fun.

An even bigger concern is the loss of control over a company's future once public investors step in.

I found intriguing examples of private biotech companies that were strong enough to be IPO candidates - innovative science and a pipeline of product candidates progressing toward the marketplace, great management and quality investors. And yet management and the boards have chosen to keep them private for several more years, until they can reach late-stage clinical trials or even market launch.

In other words, grow value with the right mix of assets until you can demand a strong IPO in any market.

In the case of ChemoCentryx Inc., the amazing August deal with Maxine Golan and her team at GlaxoSmithKline's Center of Excellence for External Drug Discovery is providing the fuel.

The company has raised $80 million in equity since its founding in 1997 through June 2006, which it used to build a broad chemokine pipeline, including a Phase II/III drug candidate. GSK paid $63.5 million up front in cash and equity for options to only part of the pipeline and will provide research funding and milestones that will allow ChemoCentryx to avoid asking investors for more cash until its valuation makes the next exponential leap.

FivePrime Therapeutics Inc. has done a great job of matching risk sensitivity of investors with that of the management. CEO Gail Maderis said she was very straightforward about wanting a small number of investors with an investment horizon that fit with the company's long-term timeline. She got a great group committed to being patient, kicking in $45 million in January 2005 - a tough market that frowned on platform plays far from the clinic like FivePrime.

That confidence paid off - since beginning screening in 2004, FivePrime has three compounds in formal preclinical development, three more in validations studies, and a slew in earlier stages. "VCs get very nervous if they think they might end up the sole support for a limping company. They are more patient if you have a strategy that brings in non-dilutive financial support," Maderis said. FivePrime has a deal with Boehringer Ingelheim for rheumatoid arthritis plus an active business development team.

Other Options?

Various groups are doing the new version of R&D limited partnerships (Symphony Capital and Celtic Pharmaceutical), or buying royalty streams (Drug Royalty and Paul Capital). There is a growing pool of potential corporate partners as midcap firms jump in.

Here's the real question: Can we devise a way to keep a company or program private forever? How could private investors get a return without classic liquidity? Could the put/call approach of the Glaxo/Theravance 2004 deal be mutated for a private setting? Can the academic and research institutions get their various incubator and program management schemes to work? Can we develop new classes of investors to play in these new ecosystems?

Stay tuned.

Robbins-Roth, Ph.D., founding partner of BioVenture Consultants, can be reached at Her opinions do not necessarily reflect those of BioWorld Today.