By Jennifer Van Brunt


Year after year, investment banking firm Hambrecht & Quist LLC (H&Q) has proven one of biotech's most loyal and successful financiers, and 1998 was no exception. Despite the apparent dearth of financing opportunities for the biotech sector especially in the last half of 1998 stock offerings underwritten by the San Francisco-based firm grossed about $219 million in total proceeds. But while H&Q-backed offerings grossed more than those underwritten by any other banking firm, H&Q did not dominate the IPO sector, nor did it take command of the greatest number of public offerings. In fact, H&Q did not even participate in an IPO in 1998, and it acted as the lead underwriter on only two follow-on offerings (Sunnyvale, Calif.-based Pharmacyclics Inc.'s [NASDAQ:PCYC] January follow-on and San Diego-based Amylin Pharmaceuticals Inc.'s [NASDAQ:AMLN] offering of registered stock to institutional investors in July.)

In years past, H&Q has continuously scored as the dominant underwriter in biotech's public offerings calendar, whether it be initial, follow-on or institutional offering of registered stock (a variation of a "plain vanilla" follow-on offering in which registered shares are sold solely to institutions). In 1997, for instance, it participated in more than one-third of all public stock offerings. And in 1996, the firm took a role as either lead underwriter or as co-manager in about one-fourth of all public offerings. But in 1998, that percentage dropped to less than 16 percent (five out of 32 offerings).

But then, 1998 was an unusual year, and no one bank took the lead in terms of total number of offerings. Even Robertson Stevens as either BancAmerica Robertson Stephens or, most recently, as BancBoston Robertson Stephens Inc. which ranked second in terms of total gross proceeds ($177 million), only participated in five offerings. It did, however, serve as lead underwriter in more offerings than H&Q. Robertson Stephens lead four offerings Fremont, Calif.-based Abgenix Inc.'s IPO (NASDAQ:ABGX) in July, San Diego-based CombiChem Inc.'s IPO (NASDAQ:CCHM) in May, Salt Lake City-based Anesta Corp.'s (NASDAQ:NSTA) follow-on offering in December, and Cambridge, Mass.-based Ariad Pharmaceuticals Inc.'s (NASDAQ:ARIA) sale of registered stock to institutional investors in May and acted as co-manager on a fifth Strasbourg, France-based Transgene SA's (NASDAQ:TRGNY) IPO in March.

For the most part, these public offerings occurred in the first half of 1998, when the biotech financing window was still at least partially open. But by the end of 1998, when most biotech stocks had lost their lustre, these newly financed companies had also slumped in the market. This translates to generally poor after-market performance for the members of the class of 1998. Only a few stocks Abgenix, Anesta, Coulter Pharmaceutical Inc. (NASDAQ:CLTR), of Palo Alto, Calif., Gliatech Inc. (NASDAQ:GLIA), of Cleveland, Icon plc (NASDAQ:ICLRY), of Dublin, Ireland, Abingdon, U.K.-based Oxford Asymmetry International plc (LSE:OAI), Pharmacyclics, QLT PhotoTherapeutics Inc. (NASDAQ:QLTIF), of Vancouver, British Columbia, and Transgene actually gained in value between the pricing of the offering and the last trading day of 1998. The rest lost ground. As a result, the underwriters' records for after-market performance suffered as well. Here, Robertson Stephens managed to come out on the positive side, with a 6 percent average gain in price for all five of its stock offerings. Those underwritten by H&Q, on the other hand, fared less well, losing an average of 24 percent by the end of 1998.

Looking Ahead

All together, there were 21 underwritten initial public offerings (IPOs) in 1998, which generated almost $622 million in gross proceeds. Of those, 15 occurred in the first six months of the year. In retrospect, this was a continuation of the latest biotech financing "wave," which started in June 1997 and continued to roll right through Independence Day 1998 before it crashed. But the IPO momentum did not spill over into the follow-on arena: Here, only six biotechs completed follow-on financings by the end of June 1998 (and only three more occurred by the end of December). In 1997, by way of contrast, there were 24 follow-on offerings between June and December (and 35 for the full year).

Given the current financing crunch, what can biotech companies look forward to in the coming months? According to Dennis Purcell, a managing director at H&Q and head of its life sciences investment banking, there's every reason to be optimistic. For one, last week's announcement that Warner-Lambert Co., of Morris Plains, N.J., is to acquire La Jolla, Calif.-based Agouron Pharmaceuticals Inc. (NASDAQ:AGPH) for $2.1 billion is a "very positive sign for biotech," he said. It signals that biotech products especially approved ones with sales records are still very valuable to big pharma. And this positive message should impact the second-tier biotech stocks including MedImmune Inc. (NASDAQ:MEDI), of Gaithersburg, Md., BioChem Pharma Inc. (NASDAQ:BCHE), of Laval, Quebec, SangStat Medical Corp. (NASDAQ:SANG), of Menlo Park, Calif., and San Diego-based Idec Pharmaceuticals Corp. (NASDAQ:IDPH). Those companies have made significant advances including having at least one product approved for sale yet their stocks haven't reflected the value that lies therein.

1999 A 'Crucial Year' For Small Biotechs

"Investors like success," Purcell continued, and the institutions have already begun to show renewed interest in the biotech group. "They see that approved products are very valuable to the pharmaceutical sector." But since the institutional money managers are constrained by the demands put upon them to demonstrate performance on a quarterly basis, if not more frequently, they tend to invest in stocks with a high degree of liquidity. They have to make their money work for them, and it has to work over the short term. This bodes well for quite a few biotech stocks, but certainly not all.

For the smaller companies, with very low market capitalizations and not much liquidity, 1999 will become a "crucial year," Purcell said. "There's still a struggle with the institutions' need for size and liquidity." One of two things will happen, he surmised. "Either the equity markets will become more accommodating, or we will see radical changes in [those companies'] business plans." *