Biotechnology slowdown IPOs: The initial public offering market has been sour in biotechnology. Reasons include mixed clinical trials for drugs and skepticism of new biotechnology investments.


In an article in the Business section of Sunday's editions, the name of a newsletter published by Steven Delco was incorrect. The proper name of the publication is the Delco Biotech Investment Letter.

The Sun regrets the errors.

The bull market may be on a roar, but promising biotechnology companies looking to go public have had to turn elsewhere this year to get in on the money action.

The sour initial public offering, or IPO, market for the biotechnology industry has sidelined several promising Maryland biotechnology companies' plans to go public this year, including Osiris Therapeutics Inc., a Baltimore company developing medical therapies using human tissue cells.

In fact, Maryland, which has one of the highest concentrations of such companies nationwide, hasn't seen any biotechnology company go public this year.

Reasons for the lackluster market, say industry experts, include mixed clinical results on drugs in development and a skittish attitude toward new biotechnology investments among money managers.

Also, biotechnology has faced intense competition for investor money from other high-technology companies that went public with products and earnings under their belts -- something start-up biotechs can't offer immediately.

"Overall, 1997 will be less generous to biotech companies headed to the public equity market," predicts Coopers "TC Lybrand LLP in its recent annual report on the industry.

Also, says Steven Delco, publisher of the Delco Report, a newsletter covering the biotechnology industry:

"Investors have a lot more options in biotech. Before, the only thing to invest in were early-stage companies. But now you've got some mature biotech companies with products on the market and earnings. That's hurt the IPO market."

Nationwide, the initial public offering market for biotechnology is off almost 70 percent for the first six months of this year compared to last year, according to San Francisco-based Burrill & Co., a private merchant bank active in the life sciences sector.

By last year's midpoint, biotechnology outfits had raised more than $1 billion in the IPO market, according to Burrill; as of June 30, less than $300 million had been raised, Burrill says in a recent survey.

According to Burrill, just 11 U.S. biotech firms have gone public this year.

If that trend continues, biotech IPOs will be way off from 1995, a bullish year for the industry when 51 went public, according to Coopers & Lybrand.

Still, some experts and biotechnology company executives expect the new issues market to improve enough later this year to allow some offerings to progress.

Among those planned: Gene Logic Inc., a promising Columbia-based bio-informatics and genomics outfit, and BioReliance Corp., a Rockville contract research and manufacturing firm formerly known as Microbiological Associates Inc.

"The market conditions in the early part of the year were atrocious," said Dr. Michael Brennan, Gene Logic's president and chief executive officer. "But there is a sense that things seem to be improving and people are ready to look at new small cap issues."

Buoyed by a recent multimillion-dollar research and development deal with Procter & Gamble Pharmaceuticals and other deals in the works, his firm plans an offering in the fall.

BioReliance also intends to forge ahead with an IPO this year, but has yet to set a date.

It said in April that it expects to raise about $37 million for expansion and potential acquisitions.

Improving market

BioReliance President Capers McDonald and Brennan at Gene Logic see the $40 million raised in a June offering by Aurora Biosciences Corp., a California maker of high-tech drug discovery equipment, as the strongest sign yet that the slumbering IPO market is reawakening.

Delco, who runs Delco Scientific, a biotechnology and pharmaceutical consulting firm, also believes the market for new issues could improve later this year.

The key, he says, will be one or two FDA product approvals to revive investor confidence that was hammered this year when the FDA rejected West Chester, PA.-based Cephalon's drug to treat Lou Gehrig's disease.

"What happened with Cephalon cut the IPO tap off," said Delco. "But I think we'll see two or three new products hit the market in the next year."

For now, though, mutual fund managers, who typically buy up big stakes in new issues, are mostly steering clear of biotech issues because of the spate of mixed clinical and FDA news.

Another pressing problem for the industry: an unwillingness among big brokerages to designate analysts to cover biotechnology exclusively, says Thomas Neff, a partner in Three Arches Bay Health Sciences Fund, of Mountain View, Calif. The venture group holds a stake in Osiris.

That trend, says Neff, has crimped brokers' ability to understand emerging companies' complex scientific underpinnings and to champion potential winners in the IPO market.

Analysts who do cover the sector are generally unable to keep up with the growing number of emerging companies -- 2,400 biotechs nationwide, 300 of which are publicly held -- and their complex science, notes Neff.

People also are looking for safer investments, Neff says.

"No one's very interested in biotechnology offerings right now," said Neff. "People look at biotech as dead money."

Instead, he said, investors are piling money into new issues of technology companies, such as Linthicum-based Ciena Corp., which have one or more products already on the market and strong revenue from sales.

Except for a few biotechnology companies, such as Amgen Inc., biotech industry revenues largely are generated by stock sales and R&D; agreements with big pharmaceutical concerns.

Biotechnology products, unlike telecommunications and other high-tech, require huge upfront investments and years of painstaking research before they are even considered for marketing approval by regulators.

In this short-term player-driven market, notes Neff, biotechnology's long-term outlook apparently doesn't fit investors "sentiment factor."

"The industry," said Neff, "is caught between the peak of greed and the valley of fear."


But G. Steven Burrill, who heads up Burrill & Co., notes some industry company executives are finding success raising money elsewhere than through IPOs.

Burrill says one of the largest sources of capital for the industry so far this year -- $1.4 billion -- has been partnership deals with major pharmaceutical houses.

L Maryland's Osiris and Gene Logic have found that to be true.

For example, James Burns, Osiris' chief executive, was able to nail down a research and product development deal last month with Novartis Corp., the world's No. 1 drug company in terms of revenue. The deal gives Osiris a $50 million revenue stream over five years to fund cell research.

That takes the heat off. Without a well-heeled partner, Burns said, he would have had to turn to venture capital or other private financing institutions to keep the company on track.

Also the deal should give Osiris a market edge when it does go public.

Similarly, Gene Logic also found a savior in big medicine last month when it struck a deal worth a potential $25 million with Procter & Gamble Pharmaceuticals. The two will work on determining how genes affect heart disease.

Another Maryland company that had planned to go public earlier this year, Rockville-based Pharmavene Inc., which develops compounds to improve drug absorption, shelved its public offering plans altogether.

Instead it found a buyer; Shire Laboratories Inc., a British drug company, paid $160 million -- significantly more than the $24 million Pharmavene hoped to raise in an IPO.

Whole or partial acquisitions, such as that, have been another trend overtaking the IPO market, say experts.

The reason for the deals, says Neff, is that big pharmaceutical companies are hungry for biotechnology's groundbreaking science and technology -- and efficiency.

"The pharmaceutical industry's in-house R&D; units are notoriously slow and inefficient. Biotech is just the opposite," said Neff.

The big story for the rest of the year, he says, could be further consolidation in the industry, not IPOs -- a trend which could favor those investors with stakes in the right biotechnology companies.

Biotechnology IPOs vs. total issues

Year .. ..No. of .. .. ..$ raised .. .. ...Total .. .. ..Total $

.. .. .. .biotech .. .. (millions) .. .. ...IPOs .. .. ..raised (mils)

1990 .. .. .10 .. .. .. ...$297 .. .. .. .. 213 .. .. ...$10,117

1991 .. .. .39 .. .. .. .$1,910 .. .. .. ...403 .. .. ...$25,147

1992 .. .. .43 .. .. .. .$3,676 .. .. .. ...605 .. .. ...$39,947

1993 .. .. .31 .. .. .. ...$852 .. .. .. ...820 .. .. ...$57,860

1994 .. .. .25 .. .. .. .$1,078 .. .. .. ...647 .. .. ...$33,842

1995 .. .. .29 .. .. .. .$1,281 .. .. .. ...584 .. .. ...$30,241

1996 .. .. .51 .. .. .. .$2,566 .. .. .. ...874 .. .. ...$50,013

1997* .. ...11 .. .. .. ...$391 .. .. .. ...297 .. .. ...$17,923

* First six months

Sources: Coopers & Lybrand, Burrill & Co., Securities Data Corp.

Pub Date: 7/13/97

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