By Randall Osborne


It was bound to happen.

In the minds of reflective investors, and in the minds of people generally prone to philosophizing, the Internet and biotech have long had at least an incipient relationship although "long" has a different meaning than usual, in the fiercely fast-paced online world.

Especially with regard to data-dependent genomics, the idea of moving coded information quickly (which is one way of describing the purpose of the Internet and, not incidentally, one way of describing such technology as high-throughput screening) has powerful appeal.

As soon as "dot-com" stocks roared on Wall Street, then-beleaguered biotech leaders began looking for a way to partake of the wealth. The way soon emerged, though not as a result of any targeted efforts by the industry. Internet investors simply became bored with one segment of the so-called new economy and, lured by the promise of genomics, moved into the biotech realm.

But this was still not a marriage of the biotech and the Internet. In fact, it was arguably the opposite: Money bet on the latter simply shifted to the former, and the two never came together not even in the portfolios of the momentum investors whose fickle nature created the just-subsided biotech boom.

Now, the marriage between biotech and the Internet may have taken place for real. Ixion Biotechnology Inc. last month completed the first direct offering of biotech securities over the Internet.

The take hardly was huge. Ixion managed to pull down $600,000 by selling 150,000 shares at $4 each, of which current officers and directors bought 25,000 shares. Ixion netted only $470,000. Still, the point was made.

"It's something that's coming, and we were ahead of it," said Weaver Gaines, CEO of Ixion.

Being first was hard, Gaines said.

"The problem with being a pioneer is all the arrows" shot at you, he told BioWorld Financial Watch. "I could advise another biotech company on how to do it and make it worth the effort, but I would advise them on how to learn from our mistakes."

Gaines said the most troublesome aspect of the direct Internet offering not using any of several online brokerage and trading firms that have been set up in the past few years turned out to be mechanical. The Securities and Exchange Commission, operating under a law dating back to 1933, requires a cumbersome procedure be used in making sales with no broker involved.

"People actually had to write us a check, and we had to have the transfer agent send them a stock certificate that they keep track of in their house," Gaines said. Buying online could not be done.

"You could download the prospectus, and fill out the purchase agreement, but you have to physically mail it to the company," he said.

Recognized as the bellwether Internet offering was the IPO by Spring Street Brewing Co., in February 1996. The beer maker raised almost $1.6 million, mainly from the sale of 844,581 shares of stock over the Internet to more than 3,500 individual investors, at an average price of $1.85 per share.

"That's what gave me the idea," said Gaines, who registered for Ixion's offering in August 1997.

Other companies raising money through Internet offerings since Spring Street include a manufacturer of solar-powered bicycles and a maker of macrobiotic macaroni and cheese.

"They're retail companies that had customers already," Gaines said. "You could sell them stock, because they knew who you were."

Alachua, Fla.-based Ixion, on the other hand, has two main technologies, both in the research stage. One program deals with growing and manipulating pancreatic stem cells to produce replacement islets for the treatment of diabetes. Ixion's Islet Progenitor/Stem Cell ("IPSC") technology includes a line of in vitro islet stem cells for use in cell transplantation therapy, which is the only known potential cure for Type I diabetes.

The other program aims to use oxalate-degrading organisms or enzymes against diseases as wide-ranging as kidney stones, hyperoxaluria, cystic fibrosis, cardiomyopathy, cardiac conductance disorders, Crohn's disease, renal failure and toxic death, and vulvodynia.

Ixion's offering became effective in December 1997, and "there was a substantial slug of securities sold in the first six months," Gaines said. But the next year "was not particularly good for biotech companies financially, and the offering basically languished."

In early 1999, Ixion entered negotiations with an investor that asked the company to suspend the offering.

"They were negotiating a deal under which they'd have an option to get half the company, and they didn't want the target receding," Gaines said.

The investor put $1 million into the company, and talks are ongoing. Meanwhile, the offering reopened in the fall of 1999.

"We said we'd keep it open for six more months, and we're done," Gaines said.

Then came publication of a Nature Medicine article, showing the feasibility of using stem cells to produce new pancreatic tissue, as a treatment for diabetes.

The article "caused a lot of international fuss," Gaines said. "We basically sold out in the last month and a half, having sold smatterings in the interim."

Would the offering have worked without Nature Medicine's help?

"It's hard to say what it would have looked like, if we hadn't had all these intervening events," Gaines said.

Certainly, making a direct offering by way of the Internet is "much, much cheaper" than doing it any other way, he said.

"It takes a long time to sell stock over the Internet, and you have to price the shares in a way that [makes people] willing to participate," Gaines said. Ixion first had priced its offering at $10 per share, with warrants involved, he noted.

"I wouldn't advise it for everyone," he said.

A firm might consider the option "if you're an early stage company located in a jurisdiction where venture capital funds are difficult to come by," he said. "If you're not in California, New Jersey, Texas or North Carolina, you'll have a hard time getting venture capital."

Gaines said the company also should have "a corporate structure that makes a plausible company, [one] that can be viewed publicly," since detailed SEC reports must be filed. The firm "should be sufficiently sophisticated to handle the registration, legal and accounting issues," he added. Gaines has worked as a securities lawyer, and sought the help of a local attorney.

Another requirement is patience.

"You can't be desperate for the money," Gaines said. Ixion sought buyers who had diabetes, or people whose family members were afflicted with the disease.

"When we could reach people, it was a hell of a pitch," he said, but getting noticed on the Internet was a challenge.

"For some companies, at some stage of their operations, it's probably worth the effort, but until the ability to sell stock over the Internet develops further, it won't be true for many companies," Gaines said, adding that Ixion's effort was "like paving the cow path."

He said philosophers and others "are correct there are many interesting correspondences between the way the Internet works and the way biotech works, and it goes vastly beyond databases."

Director and co-founder of Florida's affiliate of the Biotechnology Industry Organization, Gaines said this year's theme of the annual meeting of the Florida affiliate of BIO in October is "When HTML Meets DNA."

Until that's a more solid union, Gaines said, biotech firms that meet the requirements might use direct Internet offerings as a way of making small sums of money, slowly but inexpensively.

"I think it will be a useful tool," he said, especially for firms with few tools available to stay solvent.

"If you're choosing between death now and death later, pick death later," Gaines said. *