By Jennifer Van Brunt
Financing activities for the biotechnology sector got off to a slow start in 1999, but now seem to be picking up some steam. For one thing, a select handful of biotech and biotech-related companies have accomplished the considerable feat of raising money through public offerings. For another, many cash-strapped companies have been able to raise money through alternate financing vehicles of one sort or another from straight private placements to a bewildering variety of convertible preferred stock offerings, from debt financings to royalty-based deals. But overall, the biotech industry's ability to raise cash is still not up to par with last year. In fact, companies in this sector have raised only about 60 percent of what they did in the first two months of 1998. Most analysts have predicted that 1999 will be a tough year for the vast majority of biotech companies whose dwindling cash resources are a source of deep concern.
March has started out on a positive note for biotech companies seeking cash on the open market. Late last week, Abgenix Inc. (NASDAQ:ABGX) closed its follow-on offering, raising $45 million in the process. In doing so, the Fremont, Calif., company has accomplished what no other biotech firm has managed to pull off in quite some time: It raised money from the public markets twice in the span of less than one year. Abgenix, which is developing antibody-based therapeutics for various disease states, has also leveraged its XenoMouse technology for producing fully human antibodies through collaborations and licensing agreements with eight pharmaceutical and biotech companies so far. Abgenix has only been public since July 1998; it raised $23 million in its IPO, with the shares selling for $8.00 each. By the last day of 1998, those shares had appreciated to $16.25, a gain of 103 percent. This made it the top-performing biotech IPO of 1998; in fact, of all the public offerings last year, only Cleveland-based Gliatech Inc.'s (NASDAQ:GLIA) follow-on offering in June exhibited a better after-market performance (the shares gained 150 percent between the time of the follow-on offering and the last trading day of 1998).
Abgenix's new shares sold for $15.00 each, down slightly from the 1998 closing value and even lower than the stock's high of $18.125 on Jan. 29, 1999. But given the fact that the biotech stocks as a group also reached their zenith on Jan. 29, this stock performance is no surprise. Both the Nasdaq Biotech Index, which is market-value weighted and currently includes 157 biotech stocks, and the BioWorld Stock Index, which is not weighted and contains 290 stocks, peaked on Jan. 29 of this year. Since then they have fallen off considerably, but are still tracking at higher levels than when they started the year. (See the graphs on p. 9 for details of both indices.)
Even though Abgenix's successful attempt to raise money from the public markets sparks hopes that investor sentiment may finally be turning towards biotech once again, there are plenty of other companies that have shied away from the unpredictable public arena. Last month, three IPO-hopefuls postponed their offerings due to the unstable conditions these included Intracel Corp., of Issaquah, Wash., Phytera Inc., located in Worcester, Mass., and Biovector Therapeutics SA, of Toulouse, France.
Although there were no public offerings in January, the situation took a positive turn in February, when three biotech-related companies completed initial public offerings and another sold shares in a follow-on offering. None of these firms falls under the strict definition of biotechnology, and perhaps that's the very reason they were able to sell their stories to new investors.
First out of the gate was Albany Molecular Research Inc. (NASDAQ:AMRI), which raised $50 million in an IPO at the beginning of February. The Albany, N.Y., chemical services outsourcing company is a sort of specialized contract research organization.
And the Canadian drug firm AnorMED Inc., which raised US$20.2 million in its IPO on the Toronto Stock Exchange (TSE:AOM) in late February, is also developing a business that relies more on chemistry than biology. AnorMED, which is located in Vancouver, applies metal coordination chemistry how metal and metal-binding compounds interact with biological systems in its search for new drugs to treat cancer, AIDS and inflammatory diseases. The company's lead compound, Lambda, which it has partnered with U.K.-based Shire Pharmaceuticals Group plc, is in Phase III trials for treating the excess phosphate levels associated with kidney disease. Lambda's active ingredient is lanthanum chloride; the oral compound acts by binding phosphate in the digestive tract.
The third biotech-related company to make its public debut in February was Invitrogen Corp., of Carlsbad, Calif. Invitrogen, which makes products for the molecular biology research community, grossed $45 million from its IPO (NASDAQ:IVGN), while three selling shareholders reaped an additional $7.5 million.
The fourth company to raise cash through a public offering in February was drug-delivery specialist PowderJect Pharmaceuticals plc, located in Oxford, England. PowderJect (LSE:PJP) raised about $89 million in London through a placing and public offering in the middle of February. But the company's winning streak didn't stop there. It also signed a potential $100 million deal (including an equity purchase) with the Ares-Serono Group (based in Switzerland) to apply its needle-free drug delivery technology to protein drugs.
Alternate financing strategies are still the predominant route taken by public biotechnology companies in need of cash as they were in 1998. Last year, these various strategies, when lumped together, accounted for more than $3 billion in funds (from private placements, loans, debt offerings, rights offerings, exercises of warrants and PIPE financings), three times the $1 billion that companies raised from public offerings.
In 1999, so far, the same sorts of strategies still apply. Public biotechnology companies in need of cash, but unable or unwilling to attempt to sell shares on the open market, have already raised more than twice as much from these sources as they have from the public markets ($434 million [including PIPES] as opposed to $204 million. See the chart on p. 2 for details.)
But even here, the big winners are those relatively few biotech companies that are dealing from a position of strength rather than weakness. For instance, Idec Pharmaceuticals Corp. (NASDAQ:IDPH) just raised $115 million from the sale of liquid yield option notes (which includes the full overallotment option). The San Diego company just reported its first year of profitability; it also has a drug on the market. Idec tried to raise almost that much about $90 million in February 1998, just a few months after the FDA had approved its monoclonal antibody product, Rituxan, for treating non-Hodgkin's lymphoma. Idec ended up pulling its follow-on offering prospectus in early March 1998 due to unfavorable market conditions. Investors may have been uneasy with the company's prospects then; obviously, they have now put those doubts to rest.
Cephalon Inc., too, is banking on an FDA-approved product to help it raise cash in more than one way. The FDA approved Provigil for treating excessive daytime sleepiness associated with narcolepsy in December 1998. In late February, the West Chester, Pa., company (NASDAQ:CEPH) raised $30 million through the sale of revenue-sharing notes. Cephalon will use the cash to support commercialization of the product, and the investors get a 6 percent royalty on U.S. sales for up to five years.
Cephalon is not the first biotech company to raise cash on the promise of product royalty-based revenues to the investors. Shaman Pharmaceuticals Inc. (OTC Bulletin Board:SHMN), of South San Francisco, did it last year. But then, Shaman's product, Provir, for treating diarrhea in AIDS patients, was not approved for sale. In fact, it hadn't even been before an FDA advisory committee yet. And as it has turned out, that drug may never get to market.
Another company that was able to raise cash based on a strong product story is Aronex Pharmaceuticals Inc. (NASDAQ:ARNX), located in The Woodlands, Texas. In early February, the FDA accepted for review Aronex's new drug application on its lead product, Atragen, a liposomal formulation of all-trans retinoic acid for treating acute promyelocytic leukemia. Aronex parlayed this bit of good news into $13.1 million, which it raised from selected institutional investors. *