Two public offerings Tuesday, one a follow-on and theother a debut in the capital markets, highlight recentpositive trends in biotechnology investing and may signalthe industry's return to favor following almost three yearsof drought.
Cephalon Inc., of West Chester, Pa., raised what analystsdescribed as a "phenomenal" $74.7 million through thesale of nearly 3.54 million shares at $22.50 per sharewhile Sequana Therapeutics Inc., of La Jolla, Calif.,pulled off a "positive" initial public offering (IPO) of 2million shares at $9 per share, bringing in net proceeds ofabout $16.5 million.
"You have to go back to 1991" to find a follow-onoffering comparable to Cephalon's, said Peter Drake, ananalyst with Vector Securities Inc., of Deerfield, Ill. "It'sphenomenal."
As for Sequana, Drake said the stock's opening per shareprice, lower than the $12 to $14 the company originallyproposed, reflects the current buyers' market facingbiotechnology IPOs. But "the fact the deal got done ispositive," he said.
Both public offerings, analysts said, demonstrate thatbiotechnology investing has become more selective thanin past years when the industry was sold as a group. Andinvestor caution, endemic over the last three years,apparently has been replaced with a new enthusiasm.
"The [financing] window is open," said Edmund Debler,an analyst with Mehta and Isaly in New York, "but it's byinvitation only."
Cephalon's performance revealed the power of positivelate-stage clinical trial results, such as the company'ssuccessful Phase III studies released in early June forMyotrophin as a treatment for amyotrophic lateralsclerosis (ALS), or Lou Gehrig's disease.
Sequana, on the other hand, entered the IPO market withthe weight of past biotechnology company failures on itsshoulders. With only a few big institutional investorswilling to take another chance, they controlled the price,analysts said, driving it down far enough to ensure plentyof upward mobility.
The strategy paid off as Sequana's stock(NASDAQ:SQNA) rose Tuesday as far as $2.25 per sharebefore ending the day at $10.25, up $1.25, a 14 percentjump.
A Bullish Market For Biotech
"It's a very substantial sign," Drake said, referring to themarket's reception for the two public offerings. "Itsupports a bullish environment for the biotechnologygroup over the next six to 12 months."
Cephalon's follow-on offering originally consisted of 2.5million shares, but was expanded Monday toaccommodate its Japanese drug development partner,Kyowa Hakko Kogyo Co. Ltd., of Tokyo, which wantedto buy 1 billion yen (about $11.4 million) worth ofCephalon stock.
Cephalon's sale of 3.54 million shares grossed $78.9million, which after expenses gave Cephalon $74.7million. Following the offering the company has 22.1million shares outstanding. It's stock (NASDAQ:CEPH)closed Tuesday $23.50, up 13 cents.
Kyowa Hakko, which has collaborated with Cephalonsince 1992 and is developing Myotrophin in Japan,bought about 540,000 shares for $11.4 million. Theequity investment was the Japanese company's first inCephalon.
Debler said Cephalon appears to be "in the driver's seatwith enough capital to take it to profitability."
Cephalon had about $95 million in cash at the end of thesecond quarter, June 30. With the money raised in theoffering, it now has nearly $170 million. Companyofficials expect a net loss for 1995 of about $35 millionto $40 million, which indicates Cephalon has four yearsof cash.
If Myotrophin and modafinil, a drug in Phase III clinicaltrials for narcolepsy, get approved in the U.S., analystshave said Cephalon could reach profitability in about twoyears.
Myotrophin is a recombinant human insulin growth factorthat is being co-developed in the U.S. with Emeryville,Calif.-based Chiron Corp. Cephalon anticipates filing anew drug application for Myotrophin by early 1996.
Modafinil is a synthetic compound believed to affectalpha-adrenergic receptors in the brain. Cephalon expectsto release results late this year of the first of two Phase IIIstudies.
Genomics Company's Debut A `Success'
Although Sequana Therapeutics' IPO didn't draw therave reviews that Cephalon's follow-on offering did, aMehta and Isaly's analyst, Paul Boni, described thegenomics company's debut as successful.
Boni noted that based on the "technology value" of othergenomics companies, such as Human Genome SciencesInc., of Rockville, Md., and Incyte Pharmaceuticals Inc.,of Palo Alto, Calif., Sequana's stock has room to grow.
Sequana, rather than sequencing human genes at randomlike other genomics companies, developed a method ofidentifying genes linked to specific diseases such asasthma, diabetes and osteoporosis.
The company has gene discovery collaborations withGermany-based Boehringer Ingelheim GmbH, GlaxoWellcome Inc., of London, and Corange International, ofLondon and Bermuda.
When Sequana proposed its IPO it registered to sell 3million shares at between $12 and $14 per share. Itreduced the number of shares to 2 million and the priceper share to $9, grossing $18 million.
Among reasons for the share and price reductions,analysts observed, is that few big institutional investorswill risk funds on new biotechnology companies, givingthose that take the chance significant power over theopening price.
In Sequana's IPO, Fidelity Investment's SelectBiotechnology Fund and J.P. Morgan Capital, both ofNew York, along with Vulcan Venture Inc., of Seattle,bought a combined 55 percent of the new publiccompany's stock.
At $9 per share, the big firms' investments may be abargain considering the technology value of competitors.Technology value is the difference between marketcapitalization (price per share times shares outstanding)and cash on hand.
For Human Genome Sciences (NASDAQ:HGSI) _based on first quarter 1995 figures and a closing stockprice Tuesday of $23.50 _ the technology value wouldbe about $275 million. For Incyte (AMEX:IPI) _ basedon second quarter 1995 figures and a stock price of$16.13 _ it would be more than $110 million.
At $9 per share, Sequana's technology value is only $30million. n
-- Charles Craig
(c) 1997 American Health Consultants. All rights reserved.