Biotech IPO window met with cautious optimism

BOSTON – The “window” for biotech and specialty pharmaceutical initial public offerings (IPOs) has opened enough in recent weeks to blow a little fresh air into what had been a stagnant market, but investors and consultants say that it’s too soon to say that a recovery is under way.

Disappointing showings from IPOs in the past couple of weeks may not help, but optimism does seem to be flowing in, even if caution is still urged first.

“The reality is that while these transactions are getting done, they’re not going to create very much enthusiasm,” said John Borer, senior managing director at Rodman & Renshaw Inc., based in New York, an investment bank focused on companies in emerging growth sectors. Though they expressed concern, Borer and others who were interviewed, see signs that the expected turn around is beginning.

However, there are indications that caution should remain the watch word. Two companies went public Thursday: Blood-cancer treatment company Pharmion Corp., based in Boulder, Colorado, and NitroMed Inc., in Bedford, Massachusetts, which is focused on naturally occurring nitric oxide as a possible therapy for cardiovascular and inflammatory diseases. Homing in on a specialty area, the company’s lead drug candidate is specifically meant for African Americans with heart disease, who have a higher rate of that malady.

Both companies traded down Friday, with Pharmion closing at US$13 per share, compared to its initial offer range of $14-$16, and NitroMed ended the week at $13, compared to its initial range of $11-$13. Both companies had opening offers Thursday in the low end of their respective ranges.

Initial share prices might have been too high or perhaps the companies went public too early, although the stock market often seems to operate under its own set of secret rules that can leave even the savviest investors and strategists scratching their heads. There are, depending on how the companies are classified, at least 10 and perhaps a dozen biotech or specialty pharmaceutical companies that have filed for IPOs, but have not yet been priced. Whether the recent IPOs serve to widen the window or bring it crashing down won’t be known for a while.

“Frankly, the real answer will be seen next quarter,” said Larry Wittenberg, a partner at the Boston-based law firm, Testa, Hurwitz & Thibeault LLC, who specializes in biotech patents and intellectual property.

Sharing the stage with Wittenberg during a presentation at an investor conference last month, Peter Reikes, managing director of SG Cowen Securities Corp. indicated that the public market for biotech seems to be on the upswing, but there is “more hope than evidence.”

Early this year, analysts and venture capitalists predicted that the first quarter of 2004 would mark the turnaround after the bust of the last three years, following high-flying 2000 when there were 70 or so IPOs, depending on how “biotech” is defined. In between, the public market was essentially dried up with a tiny trickle of IPOs, even though from a scientific standpoint sequencing of the human genome brings with it enormous potential for medical advances and many companies have promising drugs in late-stage development. But biotech and specialty pharmaceutical companies might not have a product on the market for years, and there are drugs that make it into late-stage development, only to suffer a spectacular flameout — vexing conditions for potential investors.

Even so, venture capitalists have formed large life-science funds lately, said Lynn Sutherland, president of Sutherland Consulting Inc. in Chestnut Hill, Massachusetts, which offers strategic marketing and business development to early-stage life-sciences companies. For instance, MPM Capital LP last December started MPM BioVentures III, a $900 million health-care fund.

The public market is slowly coming back in Sutherland’s view, but the IPO market isn’t the only one to watch for the most encouraging signs of improvement. “These (life science investing) funds are another part of the picture. It’s not just IPOs,” she said, adding that a lot of investment companies planned ahead and so there is money available. That is translating into follow-on investments.

“I think that activity is encouraging, rather than the actual number of IPOs,” she said. At the same time, “the whole industry is maturing, so there are those (investment) opportunities.”

While there are differing viewpoints about whether the most recent IPOs are helping or hurting, those who watch biotech and specialty pharmaceuticals tend to agree that those markets are largely impervious to outside economic factors, like job reports and signs of broad revival in the U.S. economy. That leaves biotech in a less fragile position.

“I think biotech has more value,” Sutherland said. “We’re not making paper cups. We’re making things that could make a huge difference in changing people’s lives. People are beginning to see that it’s not just a dream anymore, that these rationally-based drugs, these molecular-based drugs are getting into the market, and they’re really working.”

Attracting early-stage investment is still tough, but that also is expected to change, if slowly. At a September conference at the Massachusetts Institute of Technology, Daphne Zohar, said optimistically, “early-stage funding will come back.” Zohar is founder and chief executive officer of PureTech Ventures LLC, which is based in Boston, and identifies scientific breakthroughs at research institutes and offers funding, management and business support to form companies around those breakthroughs.

She tends toward optimism, driven by the promise of science. While she noted in an e-mail exchange with IDG News Service that recent IPOs “were somewhat soft,” with shares selling at the low end of the expected ranges, “the fact that they exited at all is a good sign,” Zohar wrote.

She is also inclined to look beyond bad news that tends to affect biotech, which is extremely event driven.

New research released at the end of October said that Merck & Co. Inc.’s Vioxx painkiller could put some patients at a higher risk of heart attacks. That news came just a few weeks after Merck reported disappointing third-quarter financial results and with a bare pipeline for new products said it would lay off 4,400 employees. The same week that the Vioxx research came out, the U.S. Food and Drug Administration warned that drug-coated stents from Johnson & Johnson may cause blood clots and other side effects and linked it to more than 60 deaths.

“It’s certainly not helpful, but there’s always the roller-coaster of good and bad news in this sector,” she said by e-mail. “The question is how many people are helped versus harmed with these approaches. There’s always risk involved and the positives far outweigh the negatives in most cases.”

Or, as Wittenberg said: “Biotech investing is not for the squeamish.”

However, the industry’s maturation counts for a lot, with companies doing a better job of forging deals with other companies and of managing clinical trials and risk, Reikes said at the investor conference last month, where he also offered the opinion that “the (biotech) sector is better positioned today than it has been in the 23 years of its history.”