By Jennifer Van Brunt


Today's initial public offerings (IPO) market for new companies is downright terrible. That sentiment seems to be the general consensus among market watchers, analysts and chief executives across broad sectors of the economy. Biotechnology companies have certainly been affected, but so have firms that specialize in other businesses — from building products and insulation to theme parks.

The general underlying factor that seems to tie all these sectors together is the size of the offering: Institutional managers just aren't interested in small IPOs. Although there is apparently a huge amount of cash available for investing — especially from mutual funds — the fund managers focus on large deals because they are so liquid. Plus, it's possible to buy a significant number of shares in a big IPO, meaning that the investment might actually have a positive impact on the fund.

On the other hand, small IPOs offer a limited number of shares, and at this point in time are not particularly appealing to fund managers. Except for some Internet-related issues — such as Inktomi Corp., whose IPO was modest, garnering just $39.6M on the sale of 2.2 million shares, but whose shares doubled in price on the first day out — stocks in the small-capitalization sector have suffered, while those in the large-cap arena have tended to prosper.

This year, the IPO market got off to its slowest start in a decade. And although it picked up some momentum in the spring, it's now back to dire straits. In fact, June was an especially bad month for IPO-hopefuls. According to the Wall Street Journal, 14 companies scheduled to make their public debuts in June either postponed those offerings or canceled them altogether. And almost half of the deals that did manage to complete (23 out of 53) did so well below expectations. Now that summer is full upon us, the tough IPO environment is likely to last until the early fall. Summer has historically been the slow season for IPOs, anyway; the post-Labor Day rally is something that market watchers have come to expect. However, the biotech sector — which is among the most volatile and risk-prone of all — doesn't always follow this trend.

Limited Successes

In June, one biotech-related IPO was completed, but it wasn't in the U.S. Chemunex SA completed its French IPO, on Le Nouveau Marche, raising $11.2 million in the offering. But since the Paris-based manufacturer of germ detection systems had already obtained a listing on Europe's Easdaq exchange in 1997, it's not even an IPO in the purest sense of the term.

In May, Madison, Wis.-based Ophidian Pharmaceuticals Inc. quietly came public on Nasdaq (OPHD). The company, which is developing drugs for treating infectious diseases based on avian polyclonal antibodies, didn't even announce its IPO success by press release. Bowing to bad market conditions, Ophidian had already pulled its pending offering in February this year, after having been in registration since August 1997. Then, apparently, it turned around and reactivated the filing almost immediately. This time, Ophidian was successful, raising $10.7 million through the sale of units (which have since split into shares and warrants) in early May.

And Gliatech Inc. raised some cash in its follow-on offering in June, although the Cleveland company sold 0.5 million fewer shares than it had registered in mid-May. At that point, based on the company's share price (NASDAQ:GLIA), the medical device manufacturer would have garnered about $37.5 million. In the end, it only gleaned about half that amount — $20.7 million (including proceeds from the overallotment option, which was sold in full). In saner times, investors would have snapped up the shares of a company that could boast recent success at the FDA. In May, the agency approved Gliatech's first product, Adcon-L, a carbohydrate-based polymer gel for reducing activity-related pain and inhibiting scarring after lumbar disc surgery.

But these are not sane times.

Biotech IPOs On Hold Or Worse

Biotech companies hoping to complete IPOs in this market are still in a holding pattern — if they haven't already postponed or withdrawn their offerings. Genzyme Molecular Oncology, for instance, has postponed its IPO indefinitely. The Cambridge, Mass., company, which is focused on gene-based approaches to cancer therapy and diagnosis, has been trying to come public for well over a year already. It first registered for an IPO in April 1997; it reactivated that prospectus exactly one year later, and was even scheduled to price the shares the week of June 8 and then again the following week. But by June 25, the company had bowed out, citing market conditions. Fortunately, Genzyme Molecular Oncology doesn't have to depend solely on the whims of the public markets. As a division of well established Genzyme Corp. (NASDAQ:GENZ), it is already in a fairly secure environment. As well, Genzyme Molecular Oncology has the support of numerous corporate collaborators, including big pharma firms Schering-Plough Corp., of Madison, N.J., and Merck & Co. Inc., of Whitehouse Station, N.J.

Other biotech companies that have been on and off the securities offering calendar over the last month or so include Abgenix Inc., Collateral Therapeutics Inc. and GenVec Inc. All three of these were all scheduled to price their shares the last week in June; as of the first day of July, none had managed to do so. Collateral Therapeutics, located in San Diego, has already downsized its offering, setting the pricing goal to $8 per share instead of the original target of $11 to $13 per share. The company is developing gene therapy products for treating cardiovascular diseases.

GenVec, of Rockville, Md., is also developing gene therapies for the heart — in particular, a product termed BioBypass that delivers to the heart a gene (for vascular endothelial growth factor) that will induce the body to build its own arterial bypasses.

And Abgenix, a subsidiary of Foster City, Calif.-based Cell Genesys Inc. (NASDAQ:CEGE), is waiting to find the right moment to price its IPO. The company, located in nearby Fremont, is using its technology for generating high-affinity, fully human antibodies to create potential products for preventing and treating transplant-related diseases, inflammation, autoimmune disorders and cancer.

Although Wall Street has alternately embraced and spurned companies that are focused on gene therapy approaches to disease treatment, it has every reason to view an antibody company as a good bet. After all, the FDA has recently approved a number of important new therapies that are composed of antibodies; these products join a now growing list of antibody-based therapies that already have proven they can generate substantial sales in the marketplace. Several weeks ago, the FDA approved Gaithersburg, Md.-based MedImmune Inc.'s (NASDAQ:MEDI) humanized monoclonal antibody Synagis for preventing severe respiratory syncytial virus infection in infants and children. And late last year, the FDA approved both Zenapax, Mountain View, Calif.-based Protein Design Labs Inc.'s (NASDAQ:PDLI) humanized monoclonal antibody for preventing kidney transplant rejection, and Rituxan, a chimeric monoclonal antibody for treating non-Hodgkin's B cell lymphoma developed by Idec Pharmaceuticals Corp. (NASDAQ:IDPH), of San Diego, and its partner Genentech Inc. (NYSE:GNE), of South San Francisco.

Stocks Are Treading Water

Market valuations of the biotech stocks are continuing to erode as the summer progresses. In fact, for the last three weeks or so, the stocks on average have been trading below their 1997 closing prices for the first time all year. On the last day of the second quarter, of the 312 biotech and biotech-related stocks that currently are listed in the last two pages of this publication, the average stock closed about three percent lower than it had on Dec. 31, 1997.

On the other hand, if one looks at the Nasdaq Biotech Index, a market value weighted index of 136 stocks, the group is doing somewhat better. Between Dec. 31, 1997, and June 30, 1998, the Nasdaq Index actually gained 4.7 percent. But even by that measure, the biotech stocks are underperforming their best period this year: On March 20, the Nasdaq Index hit a peak of 340, 11 percent higher than the 1997 closing value. (See the graphs below for details.)