By Jennifer Van Brunt


When Internet-auction company eBay Inc. came public on Sept. 23, it broke the longest dry spell for initial public offerings (IPOs) since 1985. But any hopes that eBay's successful IPO heralded the end of that drought were quickly dashed when new-issue underwriter Goldman Sachs & Co. decided to put off its own IPO due to unsteady market conditions.

According to Securities Data Co., of Newark, N.J., only four companies came public in September, raising about $91 million. That's the smallest amount for any month in the last 16 years.

Against this backdrop, it's not surprising that biotechnology companies are also unable to enter the market. But the dry spell for biotech public offerings — both initial and follow-on — has been even longer than for other sectors of the economy. It's now been a full two months since any biotech or biotech-related firm has been able to raise money from the public markets. Of course, this isn't the first time that the offerings window for biotech companies has been nailed shut. But it is the first time, at least since 1992, that it's lasted so long. Even during those stretches when it was impossible to complete an IPO, many already-public companies were able to raise cash through follow-on offerings. For instance, in 1995 there were no biotech or biotech-related IPOs in February, March, April or May. Yet during the same four months, there were five follow-on offerings. And in 1997, when there were no IPOs in April or May, there were still four follow-on offerings during that time period.

A few of the biotech companies that first filed for IPOs in the spring and summer of 1998 are still hanging in there, hoping to outwait the current dire situation. But even these companies are filing amendments to scale back their offerings. Centaur Pharmaceuticals Inc., for instance, which first filed its IPO prospectus in mid-June, has just amended it once again. On Oct. 1, the Sunnyvale, Calif., firm reduced the pending offering to 1.5 million shares at an estimated price per share of $11. Originally, the company had planned to sell 4 million shares — and selling shareholders had intended to sell an additional 1.6 million shares — at $13 to $15. Centaur, which is developing nitrone-related therapeutics for treating diseases involving oxidative stress, plans to sell most, if not all, of the shares outside the United States.

And Anthra Pharmaceuticals Inc. scaled back its offering from 2.7 million shares at an estimated range of $9.50 to $11.50 to 2 million units at an estimated price per unit of $5. The Princeton, N.J., company develops anthracycline-based cancer drugs.

Cambridge, Mass.-based Genzyme Molecular Oncology (GMO), which had been planning to go public for well over a year, finally shelved the IPO for good. But its shares are still going to trade on Nasdaq. The parent company, Genzyme Corp. (NASDAQ:GENZ), also of Cambridge, is going to distribute shares of GMO stock as a tax-free dividend to Genzyme Corp. shareholders. At the same time, it will release from escrow the GMO shares held by former shareholders of PharmaGenics Inc., which Genzyme acquired in June 1997.

Other Sources Still Strong

Meanwhile, biotech companies are continuing to raise cash by various other means at their disposal. Private placements of convertible preferred shares and debt financings have taken the upper hand for those companies already public. Still-private firms have found a welcome reception from venture capitalists, who are pouring more money into biotech start-ups this year than they have in some time. In 1995, a total of $452 million went into funding private biotech companies; in 1996, that jumped to $697 million; and in 1997, venture investments reached $790 million. By the end of September this year, however, even that sum has been surpassed, with private companies raising $894 million.

For the first nine months of 1998, biotech and biotech-related firms have raised about $4.17 billion, not counting the $205 million that has come in as developmental milestones from corporate partners. In 1997, biotechs raised $5.3 billion from public and private financings, with another $188 million coming from corporate partners in ongoing collaborations. That implies that 1998 will be a decent year overall for biotech financing — despite the fact that the public markets are closed and could remain so for the remainder of the year.

Stocks Start Reviving

Despite the market's fears about the world's economy, the biotech stocks have started gaining back some lost ground. They had been in freefall since the beginning of May, hitting a nadir on Sept. 4. Of the 309 biotech and biotech-related stocks that currently comprise BioWorld Financial Watch's universe, the average stock hit its highest trading price on May 8; at that time, the average stock was trading 13 percent higher than its Dec. 31, 1997, closing price. Since then, however, there's been a significant erosion. By Sept. 4, the average stock was trading 33 percent below its 1997 closing price. But by the end of the quarter, the group had risen by about 7 percent, although still in negative territory; on Sept. 30, the average stock was trading almost 26 percent lower than its 1997 closing price.

If one looks at the performance of the Nasdaq Biotech Stock Index, however, a different sort of picture emerges. The Nasdaq Biotech Index, which is market-value weighted, currently comprises 145 stocks. The representation of each stock in the index is proportional to its closing price times the total number of shares outstanding, relative to the total market value of the index. This index has been seesawing almost all year; however, it too hit a low point on Sept. 4, when it closed at 268.96. That's 11 percent lower than its 1997 closing value. It's also on the mend; on Sept. 30 the Nasdaq Biotech Index closed at 318.49, higher by 5 percent than its 1997 closing value. (See the graphs on p. 4 for details.) If the small-cap sector can continue to hold its own, the biotech stocks will probably be able to regain even more lost territory over the next few months. *