Perspectives on today’s IPO candidates

Business of Biotech
Some speculation is coming back into the sector but most movement in public markets is specialist driven, not generalist driven. What will it take to get the generalist investors in? Unfortunately, most IPO stocks since 2005 have underperformed and have left a bad taste in the mouths of generalists. This has left generalists believing they cannot just come into the sector and purchase a basket of young biotechs.

Example of a successful IPO: Targacept filed an S-1 in 2004 after late stage VC rounds, then went on roadshow in 2005 and made a deal with AZ. Only after that ramp up did they go public. Like plowing the fields before planting the seeds, a biotech must develop relationships with future investors before the IPO. To this point, it helps having an analyst on board that can position your company at the forefront of the numerous other micro caps biotechs. The analyst provides the necessary attention that will be required beyond the initial pricing.

 
The effect of the IPO drought: The loss of competition of IPO vs M&A has made it a buyers market. Thus, Pharma is making some cheap proposals knowing that the exit for investors and employees is in their hands. The competition is reduced to a handful of big Pharmas and they are all thinking that they can get assets at a steep discount.

Funding the private companies: Many VCs are adapting a “dumbell” approach by investing in either seed stage or late stage companies. The early stage is high risk but requires low capital and the late stage offers visibility and somewhat lower risk but at a cheaper level than in the past. Companies in the middle may be left out.

When the opportunity arises: The IPO is not always the best option for a company due to timing of the company’s development programs. The bankers will pitch the rewards of an early exit today, but CEOs must consider the road a few years out as a public company that is expected to deliver on a conistent basis. Private company CEOs may underestimate the demands put on them once they cross into public hands. In addition, they should make sure the balance sheet is just as ready for the years ahead as the clinical data. And on a human level, make sure you CEO can handle the psychological demands that come with volatile stock price that may be down for extended periods.

Is using a bulge bracket bank important? Some would yes because you need to be with a group that interacts with volume on the buy side. A small boutique may not have those broad links to the funds. Again, this goes with getting a good analyst coverage. Furthermore, the bank may have resources to purchase a decent amount of shares and in effect become an active investor supporting the price. Having said all that, some boutiques have been able to integrate these benefits.
 
Why not just do a reverse merger? Most are messy and not palatable to the shell investors.

4Q09 projection: We should see many more S-1 filing in 4Q.

Positives for the industry (and why IPO interest may return):

Lots of cash at big biotechs to fund smaller companies
Lots of good science and people in these companies
Still many unmet needs and money to be made
Drugs for global diseases and for emerging markets are starting to be addressed
FDA is getting better
There will be another Gilead created

Negatives:
Timing – the buyside is still largely on the sidelines regarding risk
Failure rate of companies is still high, productivity low
Volatility remains
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