Although biotechnology stocks turned in a dismal performancefor 1992, capital flowed into the industry at the same rate as itdid in 1991, a banner year for stocks.

Forty-one biotechnology companies completed initial publicofferings (IPOs) in 1992, raising a total of $1.2 billion(compared with $1.3 billion in 1991).

In January alone, 11 companies raised more than $538 million.February and March were also strong months, pulling in $188million and $161 million, respectively.

But the euphoria that greeted biotech offerings early in theyear dropped off dramatically after several companies,including Centocor Inc. (NASDAQ:CNTO) and U.S. Bioscience Inc.(ASE:UBS), received disappointing news from FDA in the spring.Public financing activity lagged through the fall.

As 1992 draws to a close, the IPO front has shown signs of lifeonce again. Successful offerings from Ligand PharmaceuticalsInc. (NASDAQ:LGNDA) and Cortech Inc. (NASDAQ:CRTQZ) inNovember and Creative Biomolecules Inc. (NASDAQ:CBMI) inDecember have opened what some analysts hail as a newwindow of financial opportunity for biotechnology companies.

Mark Edwards of Recombinant Capital, a consulting firm in SanFrancisco, said that biotechnology financing windows havehistorically been led by secondary offerings, not IPOs.

"There's a slew of secondaries about to reach the market, andthat could signal the beginning of another boom of publicfinancing," said Edwards. "But all the secondaries will make itharder for a company trying to do an IPO in the first quarter of1993."

According to Edwards, the glut of secondary offerings in late1991 sated the established companies' appetite for cash, sowhen investor fervor hit its peak in January, they were "caughtunawares." This left room for young companies, IPOs in hand,to raise phenomenal sums early in the year.

"When the financing window slammed shut at the end ofMarch, 30 companies were left holding their prospectuses," saidEdwards. "Some of these companies are considering comingback to try again, but they may face a good deal ofcompetition."

Analyst Jay Silverman of Wertheim Schroder & Co. in NewYork, said the recent rush to raise money betrays anunderlying skepticism and fear about 1993. "People arereaching through this window now because they're afraid," saidSilverman. "Companies feel if they miss this window, they mayhave to wait another eight to 10 months."

Silverman attributes the fear to some eerie historical parallels:

-- There was a year-end rally in 1991 as there has been in1992.

-- A financing window opened in late 1991-early 1992 just asit is now for 1992-1993.

-- The whole industry was waiting for news on a major drugfor sepsis in 1992, approval of Centocor's Centoxin, just as it isnow waiting for Phase III trial data on Synergen Inc.'s(NASDAQ:SYGN) sepsis drug, Antril.

"The fear that history could repeat itself is causing companiesto go public at lower valuations, with guarantees written in,"said Silverman. "They don't necessarily know anything specific,but they figure if there's even a 5 percent chance that theAntril data isn't good, they better get their money now."

Silverman said that if the Antril data (due to be announced inthe first or second quarter of 1993) is positive, it will buoy theindustry and companies could raise more with their IPOs thanthey can now.

But Wayne Mayhew, vice president and chief financial officerat Creative Biomolecules Inc. of Hopkinton, Mass., said thecompany did not consider waiting until the spring to see if goodnews creates a better market. "When those same kind ofresults were announced last spring, everything was negative,"said Mayhew. "We made a decision to do our IPO when it wasright for the company, as opposed to trying to guess thefuture."

Ligand, which like Creative Biomolecules had to retreat fromthe sour midyear market, also regrouped, brushed off itsprospectus and completed its IPO this year. But analysts arequick to point out that the Ligand deal incorporated a few extra"bells and whistles" to lure investors.

"The creative investment muscle has begun to flex again thisfall," said G. Stephen Burrill, national director ofmanufacturing/high technology at Ernst & Young in SanFrancisco. "But what you're seeing more of is deals withdownside protection built in, such as Ligand's and Cortech's."

Ligand's November IPO, which raised $41.25 million, offeredconvertible stock with a twist -- what Paul Maier, thecompany's chief financial officer, called an "internal rate ofreturn" feature -- that could mitigate some of the risk forinvestors.

"Basically, we've established a target price for the stock in 24months," said Maier. "The target price assumes a 20 percentrate of return for two years. From our IPO price of $11, thatworks out to be $15.84."

If after two years Ligand's stock price is not $15.84 or higher,shareholders will get additional shares of stock (up to amaximum of half a share more), based on a price-dependentsliding scale, to make up the difference.

"If the stock doesn't perform, the company will issue moreshares and the investor will get more stock " said Maier. Hesaid the internal rate of return concept helped generateinvestor interest in an otherwise "not real strong" market andcontributed to the successful completion of the IPO.

"We have found that investors are still more focused on thefundamentals of Ligand than they are on the internal rate ofreturn element," said Maier. "And we think that is theappropriate measure of any company going public. It was theright time for us."

But analyst Linda Miller of PaineWebber in New York said thatthe Ligand deal is a sign of a market that is still tough. "Whenthe market gets better, these kinds of concessions won't beoffered anymore," she said. "Some people are not willing totake the risk that the market will improve with good news in1993 because they figure, what if it doesn't?"

Miller said positive events in 1993, including good Phase IIItrial data from Synergen, Genentech Inc. (NYSE:GNE) andCentocor, could improve the funding environment significantly.But she points out that the chances are 50-50. "There's nocertainty whatsoever," she said.

-- Lisa Piercey Business Editor

(c) 1997 American Health Consultants. All rights reserved.

No Comments