By Debbie Strickland
Special To BioWorld Financial Watch
The biotechnology sector appears to be on an upswing, with the Nasdaq Biotech Index shooting up 45.8 percent for the year to date through Aug. 25. That's about double the increase for the Dow Jones Industrials, up 23.4 percent for the year, and nearly four times the 12.4 percent year-to-date increase for the S&P 500 index.
Much of the index's gain has come this summer it jumped 32.6 percent just between June 1 and Aug. 25.
"The biotech sector has been healthy for 12 to 18 months, but largely ignored by momentum investors," said Farah Champsi, a managing director of San Francisco-based BancBoston Robertson Stephens. "The correction in Internet stocks, the excellent performance of biotechnology leaders, and certainly the effect of Genentech going public again has gotten the attention of investors who weren't traditionally biotech investors."
The market for new biotech offerings is lagging slightly behind the heightened investor interest, but expect to see more financings over the fall and winter, say industry watchers from investment banks that this year have seen after-market performance of their few new offerings soar, often by 50 percent or more. Of course, the number of U.S. biotech offerings this year through July was tiny only 13 so the sky-high percentage gains represent a small number of companies.
The firm that underwrote the largest dollar value of biotechnology offerings in 1998 Hambrecht & Quist LLC, of San Francisco, which helped the industry garner $218.5 million last year has roughly kept even with that pace in the biotech field. Yet, according to H&Q, the total value of all its healthcare IPO and follow-on underwritings thus far in 1999 is $197.8 million, less than a quarter of the firm's 1998 healthcare total of $814.3 million.
Meanwhile, in 1999, H&Q has underwritten $2.8 billion worth of offerings in technology industries, including Internet, communications, software and other information technologies. However, the disparity between healthcare and high-tech should not be read as an indication the firm is stepping back from healthcare, said Dennis Purcell, a managing director at H&Q and head of its life sciences investment banking.
"We consider the life sciences area very important strategically for the firm," he said. "Our commitment to the sector is as strong as ever." H&Q, he noted, has been an active player in this year's spate of biotechnology mergers and acquisitions. (See BioWorld Financial Watch, Aug. 23, 1999.)
H&Q has thus far this year managed to pick winners, such as Albany, N.Y.-based Albany Molecular Research Inc.'s $56.3 million IPO in February. The firm also served as a co-manager of a $54.6 million March offering for Stamford, Conn.-based ChiRex Inc. Both companies provide services for biotech and pharmaceutical firms and both have performed well in the after-market. Albany Molecular (NASDAQ:AMRI) closed at $30.75 on Aug. 25, a 53.8 percent boost over the IPO price of $20. ChiRex's performance was virtually identical its shares (NASDAQ:CHRX) closed at $29.25 on that same date, a gain of 53.9 percent over the $19 offering price.
BRS Snags Piece of Genentech Deal
BancBoston Robertson Stephens 1998's No. 2 biotech underwriter, leading or co-managing $177.3 million worth of offerings has racked up a much higher total for the year to date, including a co-managing role in July's $2 billion initial public offering of South San Francisco-based Genentech Inc. The firm also lent support to more routine biotech follow-on offerings, serving as lead underwriter for Abgenix Inc.'s $48.5 million offering and co-manager of Trimeris Inc.'s $33.8 million offering.
Both of those smaller offerings have performed well in the after-market, with shares in Fremont, Calif.-based Abgenix (NASDAQ:ABGX) rocketing 128 percent to close at $34.25 on Aug. 25, and Durham, N.C.-based Trimeris (NASDAQ:TRMS) gaining 79 percent to close at $21 on that same date.
"With Abgenix, they had met all their milestones, the execution was superb, and the industry is embracing human monoclonal antibodies," said Mark Simon, managing director and co-head of life sciences investment banking. "With Trimeris, there was a lot of excitement because they are leaders in the HIV fusion inhibitor area, and [the perception is that] products in this area have a reasonably high chance of attaining commercial success."
The Genentech IPO, of course, dwarfs every other deal in this or any other year, and the industry is not likely to see another one like it in the future.
"It was the ultimate franchise deal in life sciences," said Simon. "The notion that the flagship company goes private and then public in a matter of weeks is unprecedented."
Competition among underwriters to participate was keen, he said. "This was a $10 billion-plus established company with a terrific track record and a stellar reputation, and that's going to attract the world in terms of underwriting and investment bankers."
"Absolutely anyone would have liked to have been involved in that deal," agreed Joe Dougherty, senior biotechnology analyst at another of the offering's co-managers, Warburg Dillon Read LLC, of New York. "It was quite a major transaction."
J.P. Morgan & Co. acted as lead manager for the offering. Other co-managers included Goldman, Sachs & Co. and Merrill Lynch & Co. All are based in New York.
The offering consisted of 20 million shares at $97 a share, for a gross of $1.94 billion to Roche Holdings Inc., of Basel, Switzerland, which in June had acquired the 33 percent of Genentech it did not already own. Upon completing the acquisition through a call option of $82.50 per share negotiated in an earlier agreement, Roche sold off about 16 percent of the company through an IPO. Underwriters later exercised their overallotment option on 2 million shares, adding another $194 million to the gross, for a total of $2.13 billion.
After-market performance has been spectacular. On Aug. 25, Genentech shares (NYSE:DNA) closed at $172.125, a 77 percent gain over the offering price.
Industry watchers give Genentech's high-profile offering partial credit for the industry's rally this summer. "Genentech has certainly been part of the picture," Dougherty said. "Having a really exciting top-tier, large-cap name out there that was new for people, and drew some eyes to the sector."
Biotech Support Mostly Solid Despite Mergers
Even though a number of biotech-friendly investment banks have been acquired in recent years, sometimes reducing or shifting analyst coverage, many firms say they are as committed to biotech under new corporate umbrellas as they were in the past.
"The view has been that with consolidation occurring in investment banks there would be a reduction in sectors like life sciences, which are highly cyclical," Champsi said. "That has been true for some companies that have been acquired. But for us at Robertson Stephens, BancBoston has been an excellent partner and has not changed our focus at all."
Minneapolis-based Piper Jaffray Inc., which was acquired by U.S. Bancorp in 1997 and changed its name to U.S. Bancorp Piper Jaffray Inc. on March 1, 1999, is likewise bullish and on the prowl for more biotech deals these days. As of July 31, the firm had already exceeded its 1998 biotech underwriting total of $66.1 million, with participation in two deals totaling $103.5 million.
"We're doing a lot more in the biotechnology field than the firm has in the past," said senior research analyst Peter Ginsberg. "We are very active on all fronts, working with large-cap, mid-cap and small-cap." With 18 employees dedicated to the sector, the firm has "expanded significantly," he said.
The firm led the underwriting team for BioMarin Pharmaceutical Inc.'s July IPO, which raised $58.5 million. BioMarin, of Novato, Calif., is developing as its lead product BM101, an enzyme replacement therapy for mucopolysaccharidosis 1.
"With BioMarin," said Ginsberg, "one key is the fact that the company is in very late-stage development; they plan to file for approval late this year, so this wasn't your typical IPO." Closing at $16 on Aug. 25, BioMarin's shares (NASDAQ:BMRN) were up 23 percent over the offering price.
Piper Jaffray also co-managed Invitrogen Corp.'s $45 million IPO, which closed in February and was led by Donaldson, Lufkin & Jeanrette Securities Corp., of New York. Warburg Dillon Read was also a co-manager in that offering, which has soared in the after-market, rising to $27.813 (NASDAQ:IVGN) on Aug. 25, an 85.4 percent gain. Invitrogen, of San Diego, specializes in products and services for genomics research, and last year ventured into the discovery field itself with the launch of its Invitrogenomics division.
BioMarin and VaxGen Inc., which raised $46.2 million in a late June IPO, represented rare therapeutics-oriented IPOs, but both shared the advantages of late-stage products and both were both spin-offs of other firms BioMarin of Toronto-based Glyko Biomedical Ltd., and VaxGen of Genentech. Brisbane, Calif.-based VaxGen's offering, led by Prudential Securities, has performed even better than BioMarin's in the after-market, closing at $18.188 (NASDAQ:VXGN) on Aug. 25 for a gain of 39.9 percent. The firm is developing an AIDS vaccine now in Phase III trials.
Warburg Dillon Read Looking For IPO Prospects
Warburg Dillon Read is another familiar name in biotech that has changed owners in the late 1990s due to mergers. In addition to participating in the Genentech and Invitrogen IPOs, the firm co-managed a $138 million follow-on offering for Vancouver-based QLT Phototherapuetics Inc. That deal alone beats the firm's 1998 biotech underwriting total of $103.3 million. Along with the Genentech IPO, WDR's 1999 tally to date is $2.3 billion in the sector.
The firm is seeking new deals with emerging companies, Dougherty said. "We are looking selectively at IPOs actually, but only with companies that we think will be highly successful going forward and with whom we will have continuing relationships," he said. "We look at our relationships with companies as ongoing ones rather than in terms of a transaction."
Warburg Dillon Read is the product of SBC Warburg's 1997 merger with Dillon Read & Co. Inc. Parent company Swiss Bank Corp., of Basel, Switzerland, then merged with the Union Bank of Switzerland to form UBS AG in 1998. As with Piper Jaffray and Robertson Stephens, merging has not eroded the company's support of biotech, Dougherty said indeed that support is only growing stronger.
"Healthcare and life sciences is one of our five focus areas, and one of the places we really put a lot of attention; in fact, it's the largest area of the bank," he said. "We're continuing to expand our efforts substantially." *