Commentary: Biotech Startups: Take Your Time

Until products are close to approval, the public shouldn't share the risk

With biotech stocks up a collective 50% in the last eight months, it's no wonder the industry's rookies want to share the love on Wall Street. After a year-long drought of initial public offerings in the sector, two biotech companies went public in the past three weeks, and 14 more would like to join them. But so far, the market has slapped down the new issues. The first, Acusphere Inc. in Watertown, Mass., went public Oct. 8 at $14 a share and has since fallen below $10. Likewise, Advancis Pharmaceutical Corp. in Germantown, Md., has fallen from a $10 open on Oct. 17 to under $9. The effect on other biotech hopefuls "will be like throwing a wet blanket on a smoldering fire," says David Menlow, president of researcher

BRING ON the wet blanket. Sending biotech startups quickly back to the private markets would be best for both the startups and investors. Few of the 13 contenders have revenues, never mind earnings. And many of the drugs are still in early testing stages, leaving most far from winning Food & Drug Administration approval. Venture capitalists and pharmaceutical companies are far better equipped than public markets to sort out the strong biotechs from the weak at this stage of their lives. They also can shoulder the financial aftermath when, as often happens, hopes for the next miracle cure fail to pan out. And any biotech company that proves itself able to move a drug through the development process with private funding will return to Wall Street with a much stronger selling point: a tangible product.

Investors clearly think that's worth paying up for. In contrast with earlier biotech booms, they're now mostly scooping up shares of biotechs that already have drugs on the market or are close to filing for FDA approval. And the two biotech giants, Amgen Inc. and Genentech Inc., continue to attract investors as they clock double-digit sales and earnings growth this year. In short, investors are finally waking up to the cold reality of this industry: Promising early-stage drugs don't automatically sail through the approval process. "Investors are signaling that they're not willing to own the regulatory risk anymore," says G. Steven Burrill, chief executive of Burrill & Co., a San Francisco merchant bank that caters to the biotech industry.

THAT'S WHY OTHER initial public offerings so far seem unaffected by the poor reception in biotech. In recent weeks, companies in industries ranging from technology to apparel have completed successful offerings. And investors are eagerly anticipating likely offerings next year from hot technology companies such as search leader Google Inc. and Web-based software startup Inc.

Some of biotech's IPO hopefuls, apparently carried away by the biotech jump, are tripping themselves up by getting too greedy. Even after knocking down the price of its shares from $12 to $10, Advancis was asking for a valuation of $224 million -- three times greater than the value private investors placed on the company in its latest financing round in July. Yet prospects for Advancis, which is developing technologies for administering antibiotics, hadn't changed. "You can't ask for a hefty step-up in valuation without proving that your prospects have significantly improved," says Jay Markowitz, a biotech analyst for T. Rowe Price Group Inc. Advancis, now in a post-IPO quiet period, declined comment.

Even if biotech IPO sentiment doesn't turn around, startups have alternatives. Venture capital invested in biotechnology grew 10% in the second quarter of this year, to $602 million. Startups are also winning deals from bigger biotechs and pharmaceutical companies, which are seeking to license early-stage drugs. The biotech industry raised $2.1 billion through such partnerships in the second quarter -- nearly double the amount it raised in the first quarter. With that kind of money available, biotech startups can afford to take their time.

By Arlene Weintraub

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