11 May Financing of biotech companies so far in 2005: A Midwest odyssey
For a biotech company, raising money is a saga that never ends.
Just as you complete a round, you have to do two things: execute on the timely achievement of key milestones you identified for your new investors and look at the structuring of your next financing and where and who the money will come from. Most angel investors aren’t repetitive investors.
They are in for a single round whereas most VCs usually commit for two or more rounds but may exact a greater cost of financing as a result. As I have said in the past, the success of both the angel and VC investor is their ability to gain liquidity via a timely exit either through an IPO or the company being sold.
There’s also a third option these days, which is made more attractive by the Bush government.
This option – the dividend – is only good for companies with a chance for rapid revenue generation on a continual basis. As the tax rate for dividends has dropped significantly and is currently between 5 percent and 15 percent (depending on the type of corporation), this will drop to 0 percent in 2008 if changes aren’t made in the tax bills.
The “dividending” strategy probably isn’t going to be effective for most biotech companies focused on drug development as the development and regulatory time to the market is so long. However, it may be relevant to a specialty pharma company that acquires products and revenue from another company or a diagnostics or medical device company with a much shorter time-to-market horizon.
Having said all the above, IPOs have always been a good market barometer. In the first quarter of 2005, six biotech companies went public and raised $289 million, according to Burrill & Company. This isn’t an auspicious beginning and it is an indication that the IPO window is still open.
As seen above, only two of the companies had a share price above $10 per share, which is one indicator of IPO strength. Aspreva Pharmaceuticals was the only company to have a significant amount of money raised (i.e. above $75 million). So what makes for a successful IPO? It is a combination of factors including:
• Market timing
• Company credentials
• Management team and track record
• Prior investors and amount of investment prior to IPO
• Quality of underwriters
• Stage of product development (phase III is outstanding, phase II is very good and phase I is OK)
• Deals with Big Pharma companies (note: a licensing deal is good and a licensing deal with an equity investment is even better)
The first factor is an uncontrollable one and the second factor is somewhat more controllable.
We recently heard noise in the market about a local biotech company listing its shares to go public for more than $80 million. The IPO amount of money for Advanced Life Sciences is a great indicator (i.e. it’s above $75 million) and the managers (the Flavins) have been through the drill before with Medichem.
Also, Abbott Labs is an investor with the company (having licensed the company a key drug from its portfolio). These facts all lend credibility to a successful IPO. Still, until this deal hits Wall Street and is priced, the outcome won’t be known. Another key issue will be how the share price of the offering will track afterward.
Though I applaud the efforts here, the selection of the main underwriter as C.E. Unterberg, Towbin as a second- to third-tier investment bank and co-lead underwriter Think Equity Partners (a relatively new player to the biotech space) does not augur well for me. We have to be realistic about our options in the Midwest biotech arena and getting any kind of an underwriter with a name is a success.
I am reminded of Tom Churchwell’s remarks from a VC panel at the InvestMidwest conference, which was held recently in Kansas City. His remarks were in response to another west coast VC’s comment that most biotech companies on the west coast are in a unique situation in that they are getting multiple term sheets for the funding of their deals. This is allowing them to pick the best deal.
Churchwell commented that the situation in the Midwest is very different and most companies are glad to get one term sheet offer to begin with and they can forget about picking and choosing the best deal. The sad part is that he is right. Let’s take a look at how the biotech IPO market has performed since the end of last year.
Of the 41 companies tracked here, only five have share prices that show increases in the first quarter of 2005 and for the cumulative time period since going public. Of the latest crop of IPOs in 2005, only two companies show an increase in stock price.
Overall, the average IPO share price was down 16 percent for the first quarter of 2005 and down 7 percent since the time the company held its IPO. This isn’t a sign of robust times in our stock market and confidence in the sector. Is this saying the IPO market is faltering? How about other types of biotech financing?
According to Burrill & Company, overall biotech financing for the first quarter of 2005 was solid. Still, it was down as compared to last year. If we focus on just financings (not including Big Pharma partnering dollars), the first quarter was about $4.1 billion versus $5.7 billion last year (or a decline of 28 percent).
Partnering monies of about $2.2 billion were very solid versus last year’s amounts of $2 billion (or an increase of 7 percent). This demonstrates that Big Pharma is once again digging into the well for new products to fill its pipeline. Total financing (including partnership dollars) was $6.2 billion for the first quarter versus $7.7 billion last year (or a decline of 19 percent).
A key indicator for the Midwest biotech sector was VC activity in biotech. The first quarter showed a total of $781 million versus almost $1.4 billion last year (or a decline of 43 percent). Ouch!
Though we don’t yet have data to show how the Midwest fared in this area, I’m willing to bet that it was poorly. There are very few Midwest life science VCs in a current position with their fund to make active investments. This raw fact was evident to me as I made the rounds with several VCs when I was in Kansas City a few weeks ago.
Most of the Midwest VCs are near the end of their investment cycle and they’re not making active investments in new companies. Instead, they’re only investing in some limited investments in companies they have already funded. Only a few Midwest VCs are in a position where they have a new fund and are making active investments in new companies.
If you’re a Midwest biotech company looking for funding, you will either need to rely on angels or VCs on either the east or west coast or on government grants. The problem in the area of government grants is that the NIH has cut back substantially on its grants and scoring is getting much more difficult.
One good sign last week is the announced acquisition by Genzyme (one of the top five biotech companies) of the Midwest’s Bone Care International for $600 million. Genzyme’s acquisition price of $33 per share in cash was at a $10 per-share premium (or a 43 percent increase) of what Bone Care’s stock has been trading.
The State of Wisconsin Investment Board (SWIB), which held about 2.5 percent of Bone Care’s stock, represents a 230 percent increase for SWIB on its investment over the 3.5-year holding period, according to TheDeal.com. SWIB supposedly held up to 20 percent of Bone Care’s stock but had to sell off a large portion due to internal portfolio management guidelines.
The ramifications of the Bone Care deal are both good and bad for the Midwest. On the downside, there are only 25 publicly traded biotech companies in the Midwest. Two have been picked off this year: Orphan Medical (by Jazz Pharmaceuticals) and now Bone Care (also don’t forget Esperion and Cima Labs in 2003).
On the positive side, there are some new multi-millionaire investors who will hopefully use some of their new gains when this deal closes in the third quarter to reinvest in new biotech companies in the region. See you next week!
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