ATLANTA – With a challenging market for recent initial public offerings (IPOs) firms – especially those in early-stage product development – might have to look at other alternatives, a group of investors said during a panel discussion at the BIO VentureForum East conference here.
Of the about 400 registered attendees at the Intercontinental Hotel Buckhead, many packed a ballroom for the breakfast session on venture capital investing trends.
Although there have been a handful of completed IPOs in recent months, John Borer, president of investment firm Rodman & Renshaw (New York), said he’s “heard very little enthusiasm” from the market. In today’s climate, the “biggest fear of entrepreneurs and private investors is that [biotech firms] will go out and try to raise $60 million” and end up with only $38 million, prompting a return to the market six to nine months later.
IPOs priced on U.S. markets so far this year have ranged from $91.1 million by Aspreva Pharmaceuticals (Victoria, British Columbia) to a $17.25 million IPO from CardioVascular BioTherapeutics (Henderson, Nevada).
Figures provided by Medical Device Daily’s sister publication, BioWorld Today, show 12 IPOs thus far in calendar 2005, with an average take of about $52.4 million (not including devices, see sidebar).
For comparison, 16 companies went public in the first four months of 2004, raising an average of $76.2 million.
Because of those lower pricings, Mark Strobeck, a principal with SR One (West Conshohocken, Pennsylvania), said his firm has tried to “strongly discourage our companies” from going public.
Firms shying away from the IPO market will consider merger or acquisition opportunities; however, Deepa Pakianathan, a general partner with Delphi Ventures (Menlo Park, California), cautioned that, for biotech firms, those routes have “never been as feasible” as they have for the technology or medical device industries, citing “wild cultural issues and return-expectation issues,” along with the fact that there are few biotech companies in a position to be acquirers.
Genzyme (Cambridge, Massachusetts) is in that position, though recently signing an agreement to purchase Bone Care International (Madison, Wisconsin) for $600 million (Medical Device Daily, May 5, 2005).
But pharma has been reloading in 2005, too: Transkaryotic Therapeutics (Cambridge, Massachusetts) was bought by Shire Pharmaceuticals Group (Basingstoke, UK) for $1.6 billion; Peninsula (Alameda, California) was acquired by a subsidiary of Johnson & Johnson (New Brunswick, New Jersey) for $245 million; and ESP Pharma by Protein Design Labs (Fremont, California) in a $486 million transaction.
If the IPO window for biotech appears closed – and an acquisition unlikely – then companies have to find their own angles for attracting investors, said Garheng Kong, a general partner with Intersouth Partners (Durham, North Carolina).
“I think you get paid for being different,” he said. “You have to have an edge.” But, these days, venture capitalists have been “likened to lemmings,” Pakianathan observed, with many taking a follow-the-leader approach. Investors want clinical data, experienced management and a broad technology base, and that is “asking a lot of an early stage company.”
Kong and Strobeck, however, said they believe the current market provides good opportunities for investing in young firms, though the potential return is likely further down the road.
Either way, investors definitely have the advantage, said Kelly Holman, managing director of Genesys Capital (Toronto), “because this is a buyer’s market and is going to continue to be a buyer’s market.”
There are success stories, of course.
Holman said one of his firm’s companies recently raised $40 million in a Series B round, despite planning for only $25 million. “It took a while, but as soon they had one significant investor, then others started biting,” he said.
Some companies also have started conducting financing rounds in tranches, relying on discovery and development milestones to boost each following tranche.
“As long as you’re patient and persistent,” Kong said, “when you get that lead investor, capital does flow in pretty freely.”
And, while there is competition among companies for capital, there also is competition among investors.
“Every investor wants to do the deal they can’t get into,” he added.
The conference ended yesterday.