By Jennifer Van Brunt


Although Wall Street investors have adapted an overtly bullish stance the last several weeks, the initial public offerings (IPO) markets are still closed to all but a select few companies. Even though the major market indices are now back to about the same levels they had reached before this summer's bear market brought most stocks to their knees, market watchers predict that the IPO market will be sealed shut until at least mid-January. By the end of October, new issues had declined by 34 percent from the same period in 1997, according to Securities Data Co., of Newark, N.J. And they were down by 55 percent from 1996 levels.

Moreover, this phenomenon is global in scope. Around the world, IPO-hopefuls are having to sit tight or reformulate their business strategies. In France, for instance, the high-growth stock exchange Le Nouveau Marche has witnessed a 33 percent drop in its market cap since August. The Paris exchange recorded 27 IPOs for the first seven months of 1998 but only four more since then.

As dire as the current situation is, ever-creative biotechnology companies have demonstrated once again that there's more than one way to go public. Reverse merger is one route that seems to work; tracking stock is another. And then there's the ploy of selling shares to investors in overseas markets — like Switzerland — that might not be so severely affected by global turmoil.

On Nov. 4, Cell Pathways Inc.'s stock started trading on Nasdaq under the symbol CLPA. It opened at $16.50, but it wasn't an IPO in the usual sense. The then-private company accomplished this feat through a reverse merger with Tseng Labs Inc., a company founded in 1983 as a graphics chips firm. Years later, faced with competitive pressures, the Norristown, Pa., firm sold its assets in 1997 and scaled down to virtual size. It had no operations — but it did have a stock listing (NASDAQ:TSNG).

Meanwhile, Cell Pathways, of Horsham, Pa., had given up its plans to go public the standard way. The company filed its IPO prospectus with the Securities and Exchange Commission (SEC) in October 1997 — just when the global financial meltdown started. By April 1998, it had pulled the registration; the company then turned around in May and raised $18 million in a private financing and another $3.6 million from current shareholders. Together with the $17.6 million it raised from venture investors in June 1997, the company was able to claim a valuation of about $90 million. In June, it bid for Tseng Labs in a share exchange valued at about $177 million at the time. And now, Cell Pathways has about 24 million publicly traded shares — giving it a market cap of $396 million — as well as $45 million in cash to support its late-stage clinical trials of FGN-1 exisulind, which stimulates apoptosis, in cancer.

Although the reverse merger strategy for going public is not widely used in the biotech sector, a handful of firms take this path every year. In May 1997, for instance, privately held Vaxel Inc., a subsidiary of CytRx Corp. (NASDAQ:CYTR), of Norcross, Ga., became a public entity (NASDAQ:VXCL) by a reverse merger with struggling firm Zynaxis Inc., of Malvern, Pa., whose stock had been listed on the OTC Bulletin Board.

And In November 1997, privately held Discovery Laboratories Inc. merged with and into Ansan Pharmaceuticals Inc., a publicly traded subsidiary of Titan Pharmaceuticals Inc. (NASDAQ:TTNP), of South San Francisco. In June 1998, Discovery Laboratories took the further step of acquiring its own subsidiary, Acute Therapeutics Inc., moving into the latter's headquarters in Doylestown, Pa., and putting Acute Therapeutics' management in charge of the new corporate entity (NASDAQ:DSCO).

By the middle of this month, shares of Genzyme Molecular Oncology will finally start trading on Nasdaq under the symbol GZMO. The Cambridge, Mass.-based cancer division of Genzyme Corp. (NASDAQ:GENZ) had originally intended to go public through the normal IPO route. It first filed a registration statement with the SEC in April 1997, with the intention of completing the public offering to coincide with its acquisition of PharmaGenics Inc., of Allendale, N.J. (which was completed in June 1997).

The offering idled for exactly one year, at which point Genzyme activated the prospectus. But by late June 1998, market pressures forced the company to first postpone and then withdraw the offering. Instead, the public market for Genzyme Molecular Oncology will be created by distributing shares of its stock as a tax-free dividend to Genzyme Corp. shareholders, at the same time releasing from escrow the Genzyme Molecular Oncology shares held by former shareholders of genomics firm PharmaGenics. When Genzyme Molecular Oncology stock starts trading, the company will have about 12.7 million shares outstanding.

The route that Centaur Pharmaceuticals Inc. took to an IPO was different, also. The Sunnyvale, Calif., firm, which is developing nitrone-related therapeutics for treating diseases involving oxidative stress, sold 1.5 million shares at $11.00 each to a limited number of institutional and private investors, primarily in Switzerland. The company doesn't expect that its shares will be listed or quoted on any exchange or automated quotation system, although they may be traded from time to time in the Swiss over-the-counter market. Still, it accomplished the tough task of raising $16.5 million in an underwritten stock offering.

One sorry result of the year-long depression in stock prices — especially for biotechs — is that many companies are running out of cash. Especially in the last month or so, Nasdaq has notified one biotech company after another that it no longer meets minimum listing requirements to trade on the Nasdaq National Market. Some firms are able to stay the delisting — like Irvine, Calif.-based Cortex Pharmaceuticals Inc. (CORX) and Cambridge, Mass.-based Cambridge NeuroScience Inc. (CNSI), both of which submitted plans for achieving compliance with Nasdaq's listing requirements in October. Most afflicted companies, however, have ended up switching to the OTC Bulletin Board. Just in October, these included CellPro Inc. (CPRO), Vyrex Corp. (VYRX), DynaGen Inc. (DYGN), Innovir Laboratories Inc. (INVR), and Paracelsian Inc. (PRLN). In November so far, HemaCare Corp., of Los Angeles (HEMA), has also joined the OTC roster. For the same reasons, the American Stock Exchange put an indefinite trading halt on Oncor Inc.'s stock (ONC) on Oct. 2.

In September, Pacific Pharmaceuticals Inc.'s stock (PHA) was delisted from the American Stock Exchange and switched to the OTC Bulletin Board (PPHA). And now the San Diego company is in merger talks. Just last week, Pacific Pharmaceuticals announced that it had signed a letter of intent to merge into Procept Inc. (NASDAQ:PRCT), of Cambridge, Mass.

Analysts and industry watchers have been predicting massive consolidation in the biotech industry for years and years. Could the time be ripe? *