By Randall Osborne

Editor

Showing up as not much more than a blip on the quiet screen of initial public offering (IPO) radar was Tularik Inc.'s registration to seek about $70 million, and much of the action remained in private placements such as the agreement by publicly held Transkaryotic Therapies Inc. (TKT) to issue 3.3 million shares of common stock that will provide the company with $132 million. The funding will be used to advance its products for Fabry disease and anemia.

"It's a big old chunk of change," the likes of which other companies might wisely seek, despite the disadvantages of the private method, said Joe Dougherty, analyst with Warburg Dillon Read LLC, of New York.

Private placements "can be a speedier way [to raise money], but companies give up the benefits of a road show, of getting a chance to tell their story to more investors," Dougherty said. "Scarce resource allocation is always an issue, but it can be time very well spent."

He noted another drawback: Private placement stock is "often sold at a discount, as we saw with TKT, which looked like it went out at about a 10 percent discount to the market," Dougherty said. "There can be issues with current shareholders."

Thomas Dietz, director of research for Pacific Growth Equities, of San Francisco, the lone underwriter of the TKT agreement, said it was the largest, sole-managed private investment in a public entity (PIPE) deal ever done for a biotech company.

"When we priced this, it was done at less than 10 percent discount," Dietz acknowledged. "But the average [PIPE discount] is running in the 20 to 25 percent range."

A PIPE deal offers clear advantages, he said. "It creates somewhat less market risk," Dietz said, noting that in the PIPEs completed over the last year or so, the stock has not dropped significantly.

"Some PIPEs can move very fast, when you're prepped and you know who the buyers will be," Dietz added. "Every [deal] has a little bit of a different spin to it."

With its financing, Dietz said, TKT overcame the stigma of its dispute with Amgen Inc. over erythropoietin (EPO), which began with a lawsuit filed by Amgen in 1997 against TKT and its partner, Hoechst Marion Roussel Inc. The ongoing litigation alleges TKT's EPO has the same structure and biological activity of Amgen's patented product.

"A lot of people have looked at [TKT] for a very long time, and the overriding issues investors have focused on have been the Amgen battles," Dietz said. "Now, people are looking at the entire platform. [TKT has] a lot that is not litigation-encumbered."

PIPE deals can create problems with existing shareholders, Dietz said, but whether this happens depends on the firm's money supply. "If the company is low on cash, it's a way to quickly boost resources," he said. "Shareholders, in the end, even if there's a little bit of dilution, know the company's moving forward."

The marketplace, Dietz said, hasn't seen many standard, follow-on public equity offerings this year, tending more toward convertible debt or private placements, because they can be done "somewhat more quietly and quickly. Most of the [convertible-debt deals] I've seen have not been done with good terms for the company, but with good terms for the investors."

Versicor Inc. closed a $40 million round of private equity financing. Maxim Pharmaceuticals Inc. generated $20.6 million by selling convertible preferred stock to a group of existing shareholders as well as new investors. Ambryx Inc. raised $12.2 million in a private placement, which was the company's first financing and one of the larger initial fund-raisings, and Inspire Pharmaceuticals Inc. completed one for $12.4 million.

Publicly held Cubist Pharmaceuticals Inc. and Amylin Pharmaceuticals Inc. added $18.8 million and $18.5 million to their coffers, respectively, through private placements.

Geron Inc., also publicly held, said it will sell $12.5 million in convertible debentures to one of its largest institutional investors in a deal that could mean $25 million if the investor opts to buy up to 1.1 million warrants.

Among recent public offerings, unmatched was the late-September success of Pharmacyclics Inc., which raised $89.1 million, more than twice the proposed amount, in a public offering. CV Therapeutics Inc. and Invitrogen Corp. each raised $60 million, and BioCryst Pharmaceuticals Inc.'s public offering generated $50.5 million.

Peter Ginsberg, an analyst with US Bancorp Piper Jaffray in Minneapolis, said Invitrogen is a good example of a growing trend.

"We're seeing a lot more activity on the public front," he said. "There are a lot more financings out there than a couple of months ago. One of the main drivers is the consolidation that's taking place."

Ginsberg said consolidation in biotech, and the general maturing of the industry, have long been talked about, but consolidation "didn't really start to happen until earlier this year."

Invitrogen, he said, is in a highly consolidation-prone field right now. The firm's secondary offering was prompted by a deal made when it bought Novex, a private company in San Diego. Under the terms, Invitrogen which develops, manufactures and markets kits for gene cloning and protein expression was to issue about 2.5 million shares of common stock for Novex's 11 million shares of capital stock, and assume about 500,000 outstanding options.

Another secondary offering, which made headlines but which Dougherty said is "somewhat in a class by itself," was made by Roche Holdings Inc., which raised $2.87 billion by selling Genentech Inc. stock.

"It drew more eyes to the [public-offering] sector, but this has been a somewhat rockier market as well," Dougherty said.

Vion Pharmaceuticals Inc., for example, trimmed its public offering by 1.3 million shares, raising $11 million instead of the intended $19 million.

But the public-offering realm hardly compares to the risky IPO zone, where many firms have put a toe in the water only to quickly pull out, withdrawing their registrations. Tularik's bid will be an "interesting test case," Dougherty said. "I think there is clearly investor interest in quality names, and people are willing to listen to IPO stories."

He said each type of financing has its time and place. Although IPOs are scarce now, "I don't see any form of fund-raising dominating," Dougherty said.

Ginsberg would only call Tularik's foray into IPO territory "a start. I think we'll see more, but I don't think we'll see a slew of IPOs, like we did in years past."

The reason for the slowed IPOs is another much-talked-about factor in biotech: the increasing sophistication of investors, who demand from companies more and more proof they're worthy, Ginsberg said.

Biotech firms will need strong management teams, he said, and their IPO success will depend on "more product-focused stories than technology-platform stories."

In the months ahead, Dietz predicted "more of a mix [of fund-raising strategies] than we ever saw before. There was a time when all we saw were follow-on deals."

He stopped short of describing the financial market as tight.

"I think it's selective, and maybe [that means] tight," he said. "People have just gotten a better feel for this industry."

Some firms, such as Tularik, may seek to go public because they're not going to be able to raise money any other way, Dietz said.

Tularik has the benefit of "good management and good scientists, and maybe they could turn someplace else [for cash], but the reality is that if you do another private round, you're starting to get into valuations that are too steep," he said. "I wish them the best of luck out there, but they are going to have a set of challenges. It's just a difficult place to be."