Cash-strapped biotechnology companies are fortunate the stockmarket has been enamored with biotech stocks. Now thatventure capital is tight, the market has become a key source offunds for later-stage private companies.

Investors are also finding that the market is a more attractiveplace to make a biotech play.

At least nine initial public offerings await completion; theyhope to raise about $286 million. Three IPOs completed thisyear have already grossed $183 million.

"A lot of people saw the market heat up and said the hell withdoing a mezzanine round," said Brook Byers, general partner atKleiner Perkins Caufield & Byers in San Francisco. "If you'regrowing a company, where else can you get $20 or $30 million?Thirty million can last you two or three years. You can only get$10 million in a mezzanine financing. The alternative is amega-corporate deal, and for $20 or $30 million you have togive up a lot."

There is a downside for companies that go public too early. Itmeans having to report to stockholders and making publicannouncements about issues such as proprietary research thatcompanies may prefer to keep under their hats, said Byers.

But even if companies "go public earlier than they should, ifthey have a broad technology platform it won't matter," Byerssaid.

Public offerings also can be more attractive for an institutionalinvestor than doing a mezzanine round through a venture fund."Institutional investors are saying, 'If I invest in a later privateround, I have to hold the stock until it goes public. ... If I buyon the initial public offering, I can sell whenever I want,' " saidByers. The institutional investor "gets full liquidity for a 20percent to 30 percent higher price."

Successful public offerings may lure money back to the fundsas venture players take companies public and make a returnon their investment, said Alan Walton, general partner atOxford Partners of Stamford, Conn.

But there's always the danger of a backlash against biotechstocks if companies go public before they're really ready, orsell their stock at too high a price, he said.

Two companies that have completed public offerings in thecurrent window illustrate the danger. RegeneronPharmaceuticals Inc. (NASDAQ:REGN) sold its IPO at $22 a shareand closed Wednesday at $13.50. Cephalon Inc. (NASDAQ:CEPH)sold its IPO at $18 and closed at $15.75.

Industry watchers have been warning of the danger ofcompanies going public at inflated prices since thePaineWebber-Bio-Technology Biopharmaceuticals Conference inMarch. IPOs for companies with no clinical data that result inmarket valuations much more than $100 million are bad foreveryone, said Byers.

"Price IPOs attractively and leave something on the table forthe next guy," said Parag Saxena, managing director of

-- Karen Bernstein BioWorld Staff Second of two parts

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