By Randall Osborne


Say the word "California" to people in other parts of the country and, often as not, they'll roll their eyes and shake their heads.

The state that is home to much of the biotech industry cutting-edge science, the most advanced computer research, and big money still represents an outmoded "state" of mind to many, who believe people there reside in the starry-eyed, tie-dyed Age of Aquarius.

One theory about it has to do with earthquakes. Californians live on such shaky ground, this argument goes, they naturally exist carefree and fuzzy-brained. After all, they could perish in "the big one" tomorrow.

But perish they have not. In fact, a good number of them are taking part in a biotech revolution that promises to do more for human welfare than yoga, macrobiotics or Tarot cards ever did.

And, lately, in the realm of financing, biotech on the West Coast and everywhere else itself has been undergoing what looks like a seismic shift, a movement for the good that is so large it's not easily perceptible to short-range vision.

"It was qualitatively different," said Jon Alsenas, managing director of ING Barings LLC, of New York. "The summer was dry, prior to last November, but January through June was pretty good. Then, there were a few months where it went totally dry, and picked up again in the fall."

The eye-popping numbers are being bandied about with glee by many in the industry. Over the past half-year, the industry has raised well over $20 billion. Dozens of companies have gone public, in a trend that began about this time last year and picked up steam as it went along but has dwindled in recent weeks, at least in the terms of initial public offerings, said Eric Schmidt, an analyst with S.G. Cowen Securities Corp.

"It's been a thunderously good year for IPOs already," he acknowledged, "but looking forward, the prospects are not quite as bright."

Alsenas agreed. "Things have been humming along," he said. "Until a few weeks ago."

Schmidt said that, "to some extent, the secondary [offerings] will also track what's hot in the market, but there are other product stories, more mature, therapeutically oriented stories. If you have a drug that's going to hit the market in the next 12 months, you'll always be able to raise some money."

Of late, though, money has been raised across the board.

"The window has not been wide open for the last 12 months, but it has been for most of it," Schmidt said. "The deepness or breadth [of the favorable movement] probably speaks to greater attention by fund managers for biotech. It's no longer just the domain of the Ph.D.-oriented buyers."

Other surges have been recorded, in the early and mid-1990s, but these didn't come close to matching the cash draw by biotech during the decade's turning year.

With the fourth quarter near to closing, analysts are looking back on a third quarter that surpassed all expectations. Biotech raised a whopping $8.5 billion, about 55 percent above the previous quarter, with 29 firms going public, as compared with 13 the quarter before.

The 29 initial public offerings (IPOs) raised $2.4 billion, more than 80 percent more than the second quarter of 2000 and more than 2,000 percent more than the same quarter a year earlier. Alsenas, having worked on the sell side and now working on the buy side, has seen it all, he said and recent history tops it.

"It's lasted a hell of a lot longer than [good financial times] have the previous 10 years, and we raised more money at higher valuations for speculative stuff than we have at any other time," he said.

"And, before, you had product companies or, if they were technologies, they were understandable, [such as] fully human antibodies," Alsenas said. "Now, you've got people just going off looking for genes. I'm not knocking them, but people are coming up with essentially lab techniques screening, and proteomics. The payoffs are distant. They can be rendered obsolete overnight. Look how quickly Incyte [Genomics'] database was devalued by Celera [Genomics] and the Human Genome Project."

Still, the money flowed.

"There's a big shift of investors from the tech funds and momentum funds," he added. "In the early 1990s, only diehards and [science] junkies were into this stuff. I can't tell you how many times I went to lunch, when I looked around the room and recognized very few people. They have no biology experience, and they were stuffing the biotech pockets until they were bursting."

Now, the IPOs have slowed, and the secondary offerings will moderate for a while, the analysts said.

IPOs will cool off first, Alsenas said. They already have.

"You can't just create a good company out of whole cloth, and rush it to an IPO in months," he said. "It shouldn't happen that way, and you have to wonder when it does."

Although the most solid, promising firms will continue to pull funds from secondary offerings, these will taper off, too, Alsenas and Schmidt said.

Alsenas said IPOs and secondaries are "totally different animals. They're only related insofar as, if the financing window is absolutely slammed shut, nobody can get out. Nobody's interested in buying new paper."

Many of the IPOs recorded earlier this year "did not do exceptionally well, in terms of after-market performance, even in the first couple of days," Alsenas said. And the IPO-fest meant that, toward the end of the glory days, "a lot of [companies] weren't going out at the valuations they wanted, but they never would have made it out at all, at the beginning of a cycle when people were skeptical that the biotech enthusiasm would last."

Alsenas said "there's going to be another big surge," once companies mature enough for their IPOs and once the industry itself gets even more sophisticated than it has become.

"One fear I have is," he said last Wednesday, "if yesterday's rally in [high-tech stocks] presages a more sustained rally, a lot of those dollars are going to come sucking right out of biotech and into software and chips. It's spooky that people still bid [biotech stocks] up as a group, and sell them as a group."

Shelf offerings, Alsenas added, which have become more popular, are "not an indicator of anything fundamental. It means the gun is cocked, but whether they pull the trigger is up to them. It doesn't indicate much other than a potential interest to raise money."

Schmidt also said the IPOs will revive, albeit more slowly, and the other financings will regain their pace.

"IPO markets come and go, and the window is likely to snap back open," he said. "But, until you see some of these IPOs trade above their offering prices and move into the black, if you will, it's unlikely you'll see investors willing to put in money. The best companies came out a little earlier in the cycle, and the quality has slipped a little bit since then. IPO-wise, I don't see a lot of reason to be excited."

In terms of other financings, though, the window has opened "every three or four years," Schmidt said. "I would hope that, going forward, things would not be quite as cyclical, and that we'll see over the next couple of years sustained interest. I think we will."

Although he's optimistic about the future, Schmidt, like Alsenas, is "pessimistic about valuations, which are very high right now" too high to justify, he said.

"I don't think the window is ever going to open as high as it did in 2000," Schmidt said. "We had a real feast going, and there's certainly going to be some indigestion associated with it." *