West Coast Editor

The PIPE-line is fuller by 73 percent this year over 2005, and financial experts believe the numbers may reach 2004's record levels before the corks pop at midnight on Dec. 31, said Benjamin Howe, CEO of America's Growth Capital in Boston.

He's talking not about drug development, but about private investments in public entities (PIPEs), a money-raising route popular this year for biotech firms. Four hundred and thirty such financings have taken place in all sectors so far this year, raising $5.9 billion (annualized), compared to 248 PIPEs raising $4.8 billion last year, according to a report by America's Growth, a research, trading and investment banking partnership,

"If you look at the bulk of the biotech [firms], they trade below a $220 million market cap, have limited liquidity in their daily float and have enormous demands for continuous capital" - all factors that make the sector ripe for PIPEs, which have become part of the mainstream, Howe said.

In 1995, PIPEs made up 8 percent of overall financings, with 92 percent done as follow-ons. This year, PIPEs are up to 56 percent, with follow-ons at 44 percent. The median issuer market cap stands at $60 million.

The AGC report lists 22 biotech firms that completed PIPEs this year. Among them was Hana Biosciences Inc., which pulled down $40 million, topping the list for money raised, with 4.7 million shares of common stock sold at $8.50 apiece. Hana's affiliated investors bought 72,000 shares at $9.07 each, the closing price of Hana's common stock the day before the deal. The netted funds will cover Hana's expenses "well into 2008," said Mark Ahn, president and CEO of South San Francisco-based Hana. (See BioWorld Today, May 18, 2006.)

Other biotech firms raising high amounts in PIPEs this year included Oscient Pharmaceuticals Corp. ($35 million), Memory Pharmaceuticals Corp. ($27 million) and Tapestry Pharmaceuticals Inc. ($26 million).

Terms are better in today's deals, Howe noted, and the so-called "death spiral convert" is gone. In that arrangement, privately held preferred stock or bonds that can be exchanged for shares of common stock were sold, but investors wanted a built-in guarantee that if share values fell after the deal, buyers would get more shares - diluting the pool for existing shareholders.

"That created a very negative reputation for PIPE investors in days past, and there are very few of those structures in the PIPE market today," Howe said.

Many biotech companies lack the clout to pull off an underwritten equity offering, and PIPEs are quick, easy and flexible. Investors can win, too, since most shares are purchased with built-in gain, or at least with downside protection - "but far less protection [than before], typically in the form of a 20 percent discount on the initial issue price," Howe said.

Demand for PIPEs has given companies an edge. The Houston-based network security company TippingPoint Technologies Inc., one of the firms for which America's Growth conducted a PIPE, ran up against investors who wanted discounted, preferred stock with warrants - and in a less healthy market, they might have won out. "There was a lot of demand, so we didn't give them any preferred, and we didn't give them any warrants," Howe recalled of the $24 million financing. "We gave them a little discount." TippingPoint later was acquired by 3Com Corp.

Demand for PIPEs is strong across all sectors, with biotech enjoying the ride, Howe said, and predicted that interest will not subside. "Even if it's at the 2005 level [next year], we're still in a fluid, ready and robust market for PIPEs," he said.