By Nancy Volkers

Special To BioWorld Financial Watch

The outlook for financings is expected - at least in some quarters - to brighten at least a bit this year, and already there has been evidence of some upswing. Ernst & Young LLP, in its 1999 report on the financial markets, said small-cap and mid-cap equities are likely to outperform large-cap equities on every horizon. Ernst & Young projects five-year annualized returns of 10.8 percent for small-cap equities, 9.7 percent for mid-cap, and 7.6 percent for large-cap equities.

"We've clearly seen a narrowing of the gap between mid- and large caps," said Jay Silverman, senior analyst at BancBoston Robertson Stephens. "That was kind of a classic post-earning phenomenon. I'd say there's a glimmer. I wouldn't say there's an opening of the waters."

The glimmer was evident recently for such firms as Trimeris and QLT Phototherapeutics, both of which completed large follow-on offerings. But Trimeris president and chief financial officer Matthew Megaro said the state of the markets was intimidating.

"Our sense is that it was a difficult market," said Megaro. "I know of a whole lot of offerings that aren't going forward. We had to go forward because we had a cash constraint, but it sounded pretty anemic out there."

In late May Trimeris, in Research Triangle Park, N.C., raised more than $30 million on an offering of 2.5 million shares of stock at $11.75 a share, with a 375,000-share overallotment. One week later, the stock (NASDAQ: TRMS) was trading at $15.50. Trimeris went public in October 1997, raising $34.5 million.

Said Silverman: "You have to have a very compelling story, something with a lot of near-term catalysts and hopefully get lucky, because this market is very finicky."

Trimeris' story was compelling. Its lead compound, T20, inhibits the fusion of human immunodeficiency virus (HIV) with host cells. Another compound, T-1249, uses the same mechanism but is active against T-20-resistant strains of the virus. Both have received fast-track designation from the FDA. T-20 completed Phase II trials in 12 U.S. centers; T-1249 is set to begin in Phase I trials.

Third Target Key For T20

"The only distinction in our story that seemed to catch [investors'] eyes is that we have products that appear to have competitive profiles," Megaro said. "There are two targets for HIV right now. T20 represents a third target. Resistance is a problem - at least half of patients have begun to fail. If you can hit the virus in three places, the chance it can mutate against all those is pretty rare."

T20 has the best safety profile of an HIV drug thus far, said Megaro. Its negative is that it's an injectable, though Megaro says many patients "don't want to take any more pills. They're already taking so many, they're ravishing their GI tracts."

Trimeris has other products in development against respiratory syncytial virus (RSV), human parainfluenza virus, hepatitis B virus (HBV) and hepatitis C, influenza and Epstein-Barr virus. The company has about 55 employees.

Megaro said T20's promise and safety profile attracted investors, but even those who did not invest are better informed about the company.

"We've had so many advances in the past year that we wanted to get out and tell people," he said. "We wanted to get them up to speed. For a lot of the funds we visited, our market cap isn't big enough, but as we get bigger they might remember us and want to invest. Often, you face institutional investors and they have their arms crossed and scowls on their faces, like they're saying, 'We don't need biotech.' But, more often than not, we left with them saying that we had an interesting story."

The offering brought Trimeris' market cap near $200 million, with more than 13 million shares of stock outstanding.

A show-stealing partnership in the HIV and HBV markets, however, came just last week, in the form of Triangle Pharmaceuticals Inc.'s potential $335 million deal with Abbott Laboratories for six antiviral products: four currently in development for HIV and HBV; and two HIV protease inhibitors.

The deal includes a $118 million Triangle stock buy by Abbott, non-contingent research funding of $31.7 million, and up to $185 million in milestone payments.

QLT Phototherapeutics, Inc., a Vancouver-based company specializing in the development and commercialization of products for photodynamic therapy, more than doubled its market cap with a follow-on offering on the last day of April.

The 18-year-old company (NASDAQ:QLTI; TSE:QLT) raised its valuation from US$60 million to US$200 million by selling more than 3 million shares at about $43.66 per share. Last week, the stock held near $43.

Seventy percent of shares were sold in the U.S., 20 percent in Canada and 10 percent in Europe, said Kenneth Galbraith, senior vice president of finance and chief financial officer of QLT. The bad markets didn't faze the company, he said.

"Overall," said Galbraith, "markets in April were reasonably strong for companies with large enough market caps. The thing that shocked us was the fact that there was such demand. There were a number of U.S. holders waiting to take a position with the company. You hear that there's no money for biotech, but for companies with good stories and good products, there's money."

The timing of the offering was strategically important for QLT to strengthen its balance sheet, said Galbraith.

"We're going through a strong growth phase, trying to get Visudyne [verteporfin] into the market," he said. "We weren't capitalized enough to fund the commercialization of Visudyne and also continue our pipeline. Also, we wanted to be strong enough to be opportunistic, should an opportunity arise that we felt was worth taking."

The company will file a new drug application for Visudyne this summer, and hopes to launch the product in the first quarter of 2000. The injectable drug will be used against age-related macular degeneration.

Galbraith believes the product is key. "People are searching for products that are really going to make a difference," he said. "Financial markets are probably looking for more substantial products now, to offset risk."

QLT's Photofrin is on the market in the U.S., Canada, France, Germany, Japan, and the Netherlands for bladder, lung, cervical, gastric and esophageal cancers. The company is hoping to expand the drug's label to include early-stage Barrett's esophagus (a precursor to esophageal cancer), rheumatoid arthritis and head- and-neck cancer.

Follow-on offerings seem to be rebounding. In May 1998 there were none, and this year there were at least five. But initial public offerings (IPOs) are still rare, though two companies took the plunge last month. BioMarin Pharmaceuticals, Inc., based in Novato, Calif., and VaxGen Inc., with headquarters in Brisbane, Calif., announced intentions to go public, with hopes of raising $58.5 million and as much as $53 million, respectively.

IPOs still are not strong and seldom do well.

"There have been a couple, but we're still getting over the Internet phenomenon," Silverman said. "That seems to be over temporarily - we don't know - but, if that's the case, people may come back because it is some of the same money. Things are definitely a little better, but that's coming off a very weak period."