By Sarah Lacy
Private biotech companies and their investors opened 2005 like kids on Christmas morning: They hoped the window for initial public offerings that largely shut toward the end of 2004 would reopen, providing some much-needed cash for scores of growing companies.
Before the first days of February, things were looking pretty good. ViaCell (VIAC ) started conservatively, at $7 per share on Jan. 21, and it has traded up 43% since. ViaCell was a great start for the year -- a rare biotech IPO with a solid bank account and $32 million in revenues, thanks to a business storing infants' umbilical-chord blood for future emergencies. With four more traditional biotech companies ready to set their prices this week, the industry was ready.
Things didn't turn out so well, however. Icagen (ICGN ) of Durham, N.C., Favrille (FVRL ) of San Diego, and Threshold Pharmaceuticals (THLD ) of Redwood Shores, Calif., all went public, but their first days on Wall Street were a struggle.
PROFITS? NOT HERE.
Favrille, which is developing cancer drugs, started trading on Feb. 2 at $7 per share -- half the hoped-for $14-per-share price. Icagen, which is working on drugs to fight epilepsy, sickle cell anemia, and other diseases, opened on Feb. 3 at $8.05 per share, down from the expected $10 to $12. Trading for Threshold shares began Feb. 4 at $7, down from the target price of $14 to $16 a share. A fourth startup, CardioVascular BioTherapies, delayed its planned offering.
So what happened? As is often the case with biotechs, not one of the four is profitable. Moreover, Icagen was the only one with revenue -- and just $5 million in annual revenues at that, according to 2003 figures (the most recent filed).
That's not to say these companies don't have potential. Icagen has partnerships with several Big Pharma outfits, including Abbott Laboratories (ABT ) and Bristol-Myers Squibb (BMY ), and Threshold had received a fast-track designation by the Food & Drug Administration for one of its drugs. "I thought Threshold and Icagen had some of the finest technology I've seen, and to come out like that was disappointing," says Franklin Berger, an independent biotech research analyst, investor, and former head of biotech research for J.P. Morgan.
Imagine that, investors spooked by a lack of revenues. But if the trend continues, this could be another tough year for Wall Street-aspiring biotechs -- just like 2004. Of the 36 biotech IPOs done from October, 2003, through the end of 2004, 24 had to cut their prices to find buyers. Only 17 are still trading higher than their IPOs. Plus, only five have market capitalizations above $500 million. "Last year was a hard year to make money," says Thomas Dietz, co-CEO of investment banking firm Pacific Growth Equity.
Nonetheless, don't expect too many small outfits to be deterred. Fourteen have filed to go public -- and Dietz expects that number to double by the end of February. Why? There was an appetite for biotechs, and Dietz and others believe there still is, despite the disappointments. After all, 2004's IPO class was triple 2003's. And in 2002, no biotechs went public at all. "The buyers are out there and want to see the stories -- they're just selective," Dietz says.
For many biotechs, any IPO is a good IPO. Clinical trials are expensive, and venture-capital investors can't absorb all the costs. Unlike the high-tech industry, an IPO isn't time to cash in. Rather, it's another round of funding that may be necessary to keep afloat in this capital-intensive business. Once public, a follow-on offering is always possible.
LIVING WITH VOLATILITY.
"The bottom line is VCs are happy to get these companies out at any price," says Tom Salemi, editor of the Venture Capital Analyst-Health Care Edition, a Dow Jones publication covering the industry. "The only thing worse than a bad IPO is any private financing."
There's a silver lining in this situation. If a few dozen outfits make it to the public markets this year, it could mark an important milestone for biotechnology. Traditionally, big bubble years occur where investors get carried away, followed by three years of nothing. Two years of tempered success could signal that the industry is maturing, and that public investors are getting more biotech-savvy. "This is clearly a sign of sophistication," Berger says. "In up markets and down markets, investors have learned to adjust to the volatility and inherent dangers of the industry."
Before the back-patting gets out of hand, however, keep in mind that aside from Google (GOOG ) and a few others, tech IPOs haven't exactly come roaring back, either. That means investors looking for high-growth prospects have been more willing than usual to consider biotech, Dietz says.
If investors move back to their high-tech comfort zone, the execs of young biotech outfits could well end up looking back at the first week of February as having been their last chance to go public for some time to come.
Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau