National Editor

What looks like at least the start of a window for initial public offerings became the subject for debate at a panel talk during the Biotechnology Industry Organization's CEO & Investor Conference in New York.

Cathy Friedman, managing director and co-head of Morgan Stanley's biotechnology investment banking, called the window a "valuation sensitive" opportunity.

"If you look at the companies that have gone out - I think there have been about 12 - they're really quite striated in terms of where they are, whether they have products, whether they're in Phase III [or] Phase II," she said. "Now we're even heading into a little bit earlier territory than that, and the valuations have been very striated based on those levels."

For IPOs ending up with a market cap under about $150 million, she said, "the ability to get institutional investors to follow you, and to be able to get research coverage at that level, is extremely difficult. I think you've got to balance all the issues - the venture capitalists, the bankers and the valuation."

Wayne Rothbaum, with Quogue Capital LLC in New York, disagreed.

"I would say it's the market that is going to drive IPOs," he said. "I mean, sure, venture capitalists - I'm not a venture capitalist, so I don't want to speak out of school - but you always want your exit, and bankers always want to bring companies public to collect their fees, but ultimately it's the market that's going to determine when and if companies are going to go public."

The last three IPO windows all were open for a reason, Rothbaum said.

"In the late 1980s and early 1990s, it was the proteins and the success of companies like Amgen and Genentech and others," he said. In 1999 and 2000, it was genomics, "and in the last year or so, especially more recently, it's been renewed interest because of Avastin and Erbitux and some other successes within our industry."

Such attention-getters caused an influx of capital, with more demand than supply.

"The old adage in the hedge-fund community is that [the IPO window] is sort of the end of the cycle because all that supply has been eaten up and taken, and investors are saying, Hey what else is out there?'" Rothbaum said.

What's more, the investors tend to be "more of the aggressive growth investors, who are flush with cash and usually have the time and are looking for new ideas," he said. Those investors might overestimate the level of risk, but still are "theme" buyers searching for a hot area.

"Eventually, when the market changes, these investors tend to be one of the first who actually sell," Rothbaum said. "They can aggressively sell as fast as they aggressively buy, and that usually results in stocks collapsing, and you go back into the trough period again. That's really what creates the cycles, the booms and busts in biotechnology."

Friedman, though, pointed out that the environment for IPOs and everything else is different from the previous settings. More than 50 companies now boast market caps of more than $500 million, "which is double what we had last year and quadruple what we had the year before. Of those 50, in the first half of this year, half of those guys are going to have really story-driving news, whether it's in the clinic or getting approval. We believe that's what's driving a lot of this as well. You actually have a real market here, it's not just Amgen and Genentech and a couple of other big companies [making news]."

Another element in the IPO picture is more simple, noted panelist Deepa Pakianathan, partner with Delphi Ventures in Menlo Park, Calif.

Capital in the private market "right now is very expensive still, and the public markets definitely are cheaper capital," she said. "When you have a choice of either doing a $150 million IPO vs. a $50 million private round, you'll take the IPO all day."

The two-day BIO conference ended Feb. 25.