Editor

Is the window for biotech initial public offerings (IPO) open or closed?

Sheer volume would indicate it's open. Excluding DNA sequencing firms like Pacific Biosciences Inc. and Complete Genomics Inc., as well as revenue generators like Talecris Biotherapeutics Inc. and Cumberland Pharmaceuticals Inc.,12 biotechs have priced IPOs in the current window: Omeros Corp., Ironwood Pharmaceuticals Inc., Anthera Pharmaceuticals Inc., AVEO Pharmaceuticals Inc., CorMedix Inc., Tengion Inc., Alimera Sciences Inc., Trius Therapeutics Inc., NuPathe Inc., Aegerion Pharmaceuticals Inc., Zogenix Inc. and Anacor Pharmaceuticals Inc.

Yet most of the deals have priced below their range and struggled in the aftermarket – leading experts to debate whether they're good or bad for the industry as a whole.

"The easy answer is they're bad" because their poor performance scares away other biotech IPO hopefuls as well as potential investors, said Oleg Nodelman, portfolio manager and analyst at Biotechnology Value Fund LP.

But on the other hand, he argued, maybe every IPO that gets out is a good IPO, because it shows there is money out there.

Who's Buying

While there's money available, recent IPO pricers have found it's not easy to get. One complication, according to Anthera chief financial officer Chris Lowe, is that most of the biotechs going public are going to have to raise money again at some point. With stock prices remaining volatile, "buyers of IPOs have to balance the risk that the stock may trade lower due to future financing needs versus the opportunity to establish a large position at a fixed price in a promising company," Lowe said.

Lowe also noted that some public investors in IPOs are "behaving more like VCs" in that they want to invest just enough money to get the lead program to its next milestone. That forces companies to reprioritize: Zealand Pharma A/S recently decided to partner rather than internally advance its cardiovascular program based on feedback from IPO investors. And both Anthera and Omeros had to follow their IPOs with separate financings aimed at advancing promising earlier-stage programs. (See BioWorld Today, Sept. 22, 2010, Oct. 26, 2010 and Nov. 24, 2010.)

Another change from IPO windows past is the increasing sophistication and knowledge of the public investors buying biotech IPOs. While such smart money was once limited to a tightly knit "biotech mafia," Ironwood CEO Peter Hecht said his team met with upwards of 60 investors one-on-one and another 60 or so in group meetings on its pre-IPO roadshow, and there was "not a sucker at the poker table."

Also joining public investors in IPO investments are venture capitalists. VCs who back a biotech privately are almost a given to invest in the IPO, which ceased to be an exit long before this window. But Lowe said Anthera also received a lot of interest from VCs who weren't existing investors in the company.

Bryan Roberts, general partner at venture capital firm Venrock, attributed VC interest in PIPEs to the "relative value and risk" of early stage versus later-stage companies. "A lot of venture investors are saying, 'Wherever I can make money, I'm gonna try to make it,'" he said.

What's Selling

For better or worse, S-1 filing activity indicates the steady trickle of biotech IPOs is likely to continue. Is there anything these companies can do to increase their chance at success – aside from having late-stage products with lucrative partnerships targeting large markets?

Hecht doesn't believe there's a recipe companies can follow, since the biotech industry is built on exceptions. The few commonalities of successful IPOs that can be emulated – like "plan early" and "raise money long before you need it" – are already well known throughout the industry, he said.

Yet Nodelman said many IPO hopefuls don't follow these well known best practices. As far as planning early, he explained that the IPO process doesn't allow truly committed long-term shareholders to do due diligence on a company because of quiet period restrictions. Companies need to get to know potential IPO investors years ahead of filing for an IPO so there's plenty of time for diligence ahead of the quiet period, he said.

That's something Ironwood – arguably one of the most successful IPOs of the current window – took to heart. The company's last three private financing rounds included crossover investors, who invest in both private and public companies. Those firms had plenty of time to become intimately familiar with Ironwood prior to the IPO. And Hecht said Ironwood was attending banking conferences and meeting with public investors for about four years before actually going public.

Another IPO problem Nodelman cited is the way shares are distributed, with banks often using the shares to reward their best customers and most active traders. In the case of "hot" IPOs where shares are in high demand, this can result in each IPO investor receiving just a few thousand shares. That's not enough of a position for a serious long-term investor to bother with, and it can cause a lot of selling that tanks the stock soon after the pricing. His advice: "control your shares and put them in the hands of investors who are really long-term holders."

Nodelman also noted that the most successful IPOs, particularly in difficult IPO markets, tend to come from companies who could have sold themselves, but didn't rather than those who tried to sell themselves and failed. As an example, he pointed to Sirtris Pharmaceuticals Inc., which he said could have sold itself but instead went public in 2007 and then, a year later, accepted a hefty buy-out offer from GlaxoSmithKline plc. (See BioWorld Today, May 24, 2007 and April 24, 2008.)

"Please don't come to me when you've failed to sell yourself," Nodelman said. "Come to me and say, 'I've got a few buy-out offers at $300 million, but I think this company could stay independent and grow to $3 billion and who's ready to ride it up with me?'"

Nodelman added: "There is no such thing as an IPO window that is closed. For a company with valuable assets that is willing to properly finance themselves and bring in long term investors, there is significant appetite."