In Biotech, Private Cash Is King

Big investors are finding they can strike sweeter deals

After Rigel Pharmaceuticals Inc. (RIGL ), a young biotech company in South San Francisco, Calif., went public in 2000, its financing options seemed wide open. But by the time it needed cash for such projects as trials of a new asthma drug, the public market had turned cold, says Chief Financial Officer James H. Welch. Rigel did raise $31.5 million in late January, but only by placing 7 million new shares directly with about a dozen institutional investors at $4.50 per share--a big comedown from the $7 initial-public-offering price. "We needed to make sure we had adequate funds to get our products into [human trials]," says Welch.

Many listed biotechs are in the same boat. In 2000, they raised $18.5 billion in the public markets, $10.8 billion of that from secondary offerings, according to research firm Recombinant Capital. But in 2001, they got only $3.5 billion from the public markets. And the trend is not likely to improve soon. Recently, several companies, including Abgenix (ABGX ), Cubist Pharmaceuticals (CBST ), and Inspire Pharmaceuticals (ISPH ), have had high-profile product-development setbacks. And the debacle at ImClone Systems Inc. (IMCL ) has made investors nervous about biotech. ImClone's eagerly anticipated cancer drug, Erbitux, faces an uncertain future after the Food & Drug Administration questioned the adequacy of its clinical trial. "This is a hesitant market--and one that is suspicious," says Robert J. Towarnicki, CEO of Cell Pathways Inc. (CLPA ) in Horsham, Pa.

That public suspicion is giving private investors an opportunity. According to industry newsletter Venture Capital & Health Care, 33 VC funds that focus exclusively on health care raised a record $5.3 billion in 2001. Some of those funds are even taking stakes in out-of-favor public companies. Plus, many private equity funds are putting their money to work in both public and private biotech companies.

But private investors are funding only the most promising prospects. La Jolla Pharmaceuticals Co. (LIPC ), for example, raised $51 million in January, thanks in part to the buzz surrounding its drug for the autoimmune disease lupus that is in the final stage of human testing. Says Chairman and Chief Executive Steven B. Engle: "We were surprised at just how strong the interest was." Even so, the company had to use a PIPE--a private investment in public equities. In a PIPE, investors buy new unregistered shares at a discount. These become tradable public shares after a few months. Existing shareholders dislike PIPEs because they dilute the value of their shares, but biotech companies say they can't afford to wait until the public markets reopen. La Jolla was lucky: Its deal was oversubscribed and priced at a moderate 8% discount to the market quote for regular shares of around $8.

For companies without late-stage products---notably those with technologies for developing drugs--the reception is likely to be cooler. Dennis J. Purcell, senior managing director at Perseus-Soros BioPharmaceutical Fund, believes many may end up selling out or merging with other biotech companies. In December, Exelixis Inc. (EXEL ), a genomics company that is trying to develop cancer and other drugs, bought Genomica Corp., a struggling company that develops systems to crunch mounds of data generated by the mapping of the human genome. Exelixis paid just $110 million for Genomica, which had roughly that amount of cash on its balance sheet. "We essentially got the company for nothing," says Glen Y. Sato, chief financial officer of Exelixis.

The other option is for biotech outfits to partner with Big Pharma. But since Bristol-Myers Squibb Co.'s (BMY ) $2 billion deal for co-marketing rights to ImClone's cancer drug, biotech executives figure that big drugmakers will be more cautious and insist on exacting better terms. Either way, the tightness of investment cash right now is making the biotech business even riskier than usual.

By Amy Barrett in Philadelphia and Ellen Licking in New York

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