While financial pundits and market-watching gurus are still not entirely convinced that the economic crisis that swept the globe in 2008 is finally behind us, most would agree that the macroeconomic environment today is significantly better than it was then. That’s certainly true for companies in the biotech and specialty pharma sector, where investors are becoming less risk-averse as the economy improves. Financings are up across the board – including a significant uptick in the number of IPOs. But even these newly minted firms are being watched closely to see if they prove their worth in the after-market.
On a good day, it’s tempting to think that the financial crisis that swept across the globe in 2008 and early 2009 is finally behind us. On a bad day, market pundits conclude that we’re in the midst of a double-dip recession. Concerns that recent growth in the U.S. economy has slowed affected the markets in late June, with the Dow shedding 10 percent and the S&P 500 losing 12 percent for the second quarter of 2010.
Yet the Dow ended the week of July 5-9 up 511 points – its best week in a year – buoyed by optimism regarding second-quarter earnings reports. The first of those hit The Street on July 12 – and it won’t be long before we know whether companies are now able to grow revenues and profits.
While the majority of biotechnology and specialty pharma companies have no revenues or profits to report, the macro-economic environment has affected them as well. The AMEX Biotechnology Index, for instance, dropped by 17 percent over the course of the second quarter of 2010, underperforming the Nasdaq Composite Index, which slid by 12 percent during the same time frame, as well as the Dow and the S&P 500.
Despite all that, biotech and specialty pharma companies were able to raise considerable amounts of cash during the second quarter – more than $8.5 billion from all sources (excluding revenues and payments from corporate partners). When added to the roughly $5.4 billion that these firms raised during the first three months of 2010, it’s clear that the sector, as a whole, is in fine fettle as it enters the second half of the year.
Indeed, biotech and specialty pharma firms raised slightly more than $13.9 billion in the first half of 2010 – already sailing past the full-year takes for 2008 ($10.8 billion), 2002 ($10.9 billion) and all years prior to 2000. Moreover, 2010’s half-year total puts it in the same category as three previous years that had the most lucrative six-month hauls: In 2007, companies raised more than $18.5 billion in the first six months and $26.5 billion for the year; in 2006, companies raised nearly $16.5 billion in the first six months and $26.5 billion (again) for the year; and in 2000, companies raised $15.9 billion for the first half and $31.4 billion for the year.
Does this mean that fundraising is on pace to set another annual record? It appears that way – but even if it falls short of the all-time high, it’s bound to break through the $20 billion level, if not the $25 billion one by the end of December.
Investors are still cautious about where they put their money, but over the last six months they have started to loosen their purse strings and are even able to tolerate a limited amount of risk. That includes investing in biotech initial public offerings (IPOs), which are up substantially from the year-ago period. In the first six months of 2010, 15 companies completed IPOs, which together raised $895 million. Eight of those IPOs took place state-side, four occurred in France, and one each happened in Israel, Australia and China. By contrast, in the first six months of 2009 only one company (HepaHope Inc.) priced its IPO, raising a mere $3 million by selling shares in Germany and Luxembourg.
In the U.S., at least, the members of The Class of 2010 got a lukewarm reception during their public debuts. Ironwood Pharmaceuticals Inc., a clinical-stage firm whose lead product had already completed two pivotal trials in chronic constipation, was first out of the gate in early February: It raised a remarkable $216 million – even though it was forced to price the shares at $11.25, well below the asking range of $14-$16. Many industry observers had hoped that Ironwood’s IPO would be a smashing success and usher in a new wave of winners. Instead, the fact that investors weren’t willing to pay even $14.00 per share for a relatively mature biotech signaled that risk was still part of the equation.
And so it continued throughout the spring. Three U.S.-based IPOs priced in March: Inflammatory disease drug maker Anthera Pharmaceuticals Inc., which delayed its offering in late February due to a weak market, took the plunge on March 1, selling 6 million shares at $7.00 each (far below the projected range of $13-$15) for gross proceeds of $42 million. (It raised an additional $4.2 million at the end of the month by selling a partial overallotment of 0.6 million shares.)
Class Of 2010: After-Market Performance (U.S.)
Company
(Symbol) |
IPO Date |
IPO
Price/Share |
7/13/10
Price/Share |
Percent Change |
Ironwood Pharmaceuticals Inc.
(NASDAQ:IRWD) |
2/2/10 |
$11.25 |
$12.28 |
+9% |
Anthera Pharmaceuticals Inc.
(NASDAQ:ANTH) |
3/1/10 |
$7.00 |
$5.13 |
-27% |
AVEO Pharmaceuticals Inc.
(NASDAQ:AVEO) |
3/11/10 |
$9.00 |
$6.74 |
-25% |
CorMedix Inc.
(NYSE Amex:CRMD) |
3/25/10 |
$6.50* |
$1.79 |
-44%** |
Tengion Inc.
(NASDAQ:TNGN) |
4/9/10 |
$5.00 |
$4.00 |
-20% |
Alimera Sciences Inc.
(NASDAQ:ALIM) |
4/21/10 |
$11.00 |
$7.32 |
-33% |
Codexis Inc.
(NASDAQ:CDXS) |
4/21/10 |
$13.00 |
$8.44 |
-35% |
Genmark Diagnostics Inc.
(NASDAQ:GNMK) |
5/28/10 |
$6.00 |
$4.56 |
-24% |
* CorMedix’s securities were sold as units consisting of 2 shares and 1 warrant; the units split on 5/13/10 and the shares opened at $3.20 each.
** Calculation based on 5/13 opening price of $3.20.
Also in March, targeted cancer drug specialist AVEO Pharmaceuticals Inc. priced its IPO – once again having to shave its per-share price to $9.00 from a range of $13-$15. Last but not least, little-known specialty pharma CorMedix Inc. completed its IPO on March 25 by selling more units than originally intended (1.925 million vs. 1.725 million) at a price within its target range ($6.50; target range $6-$8). Thus, this last IPO, which caught most industry observers by surprise because CorMedix keeps such a low profile, turned out to be the least-risky of the quarter.
Four more biotechs came public in the U.S. during the second quarter of 2010: In April, regenerative medicine company Tengion Inc. raised $30 million by selling 6 million shares at $5.00 each; biocatalyst specialist Codexis Inc. raised $78 million by selling 6 million shares at $13.00 per share; and ophthalmic drug maker Alimera Sciences Inc. raised $72.1 million by selling 6.55 million shares at $11.00 per share. At the end of May, molecular diagnostics developer Genmark Diagnostics Inc. raised $27.6 million by selling 4.6 million shares at $6.00 per share.
In every case, these IPOs priced either at the bottom of or substantially below their ranges – demonstrating quite clearly that investors are still wary of biotech and specialty pharma initial offerings. In fact, although nine U.S.-based IPOs are still in the queue, not one has priced since Genmark’s May 28th debut. Perhaps investors are discouraged by the after-market performance of this year’s crop of IPOs (see the table above), or perhaps they’re just taking a breather over the summer and relaxing in The Hamptons.
Class Of 2010: After-Market Performance (Ex-U.S.)
Company
(Symbol; Country) |
IPO Date |
IPO
Price/Share |
7/13/10
Price/Share |
Percent Change |
CBio Ltd.
(ASX:CBZ; Australia) |
2/8/10 |
A$1.00 |
A$0.265 |
-74% |
Neovacs SA
(NYSE Alternext Paris:ALNEV; France) |
4/19/10 |
EUR4.80 |
EUR3.23 |
-33% |
AB Science-Promesses SA
(NYSE Euronext Paris:AB; France) |
4/26/10 |
EUR12.65 |
EUR11.84 |
-6% |
Deinove SA
(NYSE Alternext Paris:ALDEI; France) |
4/27/10 |
EUR8.33 |
EUR6.27 |
-25% |
Hainan Honz Pharmaceutical Co.
(Shenzhen Exchange:300086; China) |
5/26/10 |
CNY60.00 |
CNY50.30 |
-16% |
Aposense Ltd.
Tel Aviv Stock Exchange:APOS; Israel) |
6/7/10 |
NIS27.30 |
NIS25.94 |
-5% |
IntegraGen SA
(NYSE Euronext Paris:ALINT; France) |
6/16/10 |
EUR8.40 |
EUR8.85 |
+5% |
Across the pond, the French biotech sector outdid itself: Not only was Neovacs SA’s mid-April public debut the first French IPO in two years, but three other firms followed suit in quick order. However, even these offerings got mixed receptions. For instance Neovacs, which is developing an immunotherapy platform based on inactivated cytokines, ended up raising about half the amount it had hoped for – and it did this by pricing the shares at EUR4.80, below the initial range of EUR5.20-6.00 per share. Cancer drug specialist AB Science-Promesses SA had to lower its expectations, too, pricing its IPO shares at EUR12.65 rather than within the target price range of EUR13.95-17.05 per share.
French biofuels and greentech firm Deinove SA fared slightly better in its late-April IPO by selling its shares at EUR8.33 each, the mid-point of its range (EUR7.50-9.16). And in mid-June, molecular diagnostics specialist IntegraGen SA listed its shares directly on the Alternext market of NYSE Euronext Paris following a EUR 6.72 million private placement.
Other biotech and specialty pharmas that debuted overseas during the first six months of 2010 included Australian firm CBio Ltd., which is developing a heat shock protein-based therapy that modulates the innate immune response; Hainin Honz Pharmaceutical Co. Ltd., a Chinese company that specializes in developing pediatric drugs; and Israeli outfit Aposense Ltd., a clinical-stage molecular imaging and drug development company, with a pipeline of potential therapies that target apoptosis.
Like their American classmates, the stocks of these newly public firms have generally taken a beating in the after-market too – underscoring the fact that investors are still not ready to jump into biotech IPOs with both feet. (See the table above for details).
The same can’t be said for stock offerings by already-public firms – which investors have embraced with enthusiasm this year. In the first half of 2010, 35 biotech and specialty pharma companies raised more than $1.8 billion through underwritten public follow-on stock offerings. The environment was so favorable, in fact, that two firms – antiviral drug developer Pharmasset Inc. and Discovery Laboratories Inc., which is developing therapies for respiratory diseases—priced two follow-on offerings in the first six months of the year.
That’s a far better performance than we’ve seen in recent years: In the first half of 2009, only 14 companies raised money through follow-on offerings; in the first half of 2008, a mere nine firms completed follow-on offerings.
Underwritten public offerings aren’t always the way to go for small companies with modest market caps – but fortunately they have other ways to raise money. The most popular financing vehicle in recent years has been the registered direct offering (RDO), by which a firm uses a placement agent to sell pre-registered stock to interested investors. These offerings avoid the downward pricing pressure of underwritten public offerings as well as the illiquidity of traditional PIPE offerings. The sums raised through RDOs are generally small and most offerings include warrants as well as shares.
In the first six months of 2010, 27 firms raised $350 million through RDOs. Interestingly, six of those companies went to the well more than once between January and June. Cancer drug developer EntreMed Inc., for example, has already raised money through three RDOs this year -- $2.5 million in January, $2.5 million in February, and $3.0 million in April.
This year’s double-dippers include specialty pharma ADVENTRX Pharmaceuticals Inc. ($19 million in January and $19.2 million in May); cancer therapy developer Cyclacel Pharmaceuticals Inc. ($7.2 million and $5.9 million, both in January); Palatin Technologies Inc., which is developing a drug for male and female sexual dysfunction ($2.6 million in February and $2.0 million in June); BioSante Pharmaceuticals Inc., which is devising products for female sexual health ($18.0 million in March and $15.0 million in June); and oncology and endocrinology drug maker Aeterna Zentaris Inc. ($15.0 million in April and $12.0 million in June).
RDOs were equally popular in the year-ago period: In the first six months of 2009, 30 companies raised $439 million through RDOs – and once again several firms were double- or even triple-dippers. Specialty pharma Spectrum Pharmaceuticals Inc., for example, raised $20.0 million in May, $10.0 million in mid-June, and an additional $21.0 million a few weeks later. And Hemispherx Biopharma Inc., which is developing drugs for viral and immune-based disorders, raised $15.0 million and $16.0 million through two RDOs, both in May. Other double-dippers in the first half of 2009 included Generex Biotechnology Corp., Xoma Ltd. and ADVENTRX Pharmaceuticals.
Indeed, RDOs have become an important source of financing for hundreds of publicly traded small- to mid-cap biotech and specialty pharma companies – but they aren’t the only financing vehicles around. Many firms still rely on private placements, sales of royalty streams, loans, lines of credit, exercise of warrants from previous placements, even the sale of net operating tax losses and research tax credits.
Well-heeled companies, on the other hand, can take advantage of their preferred status to raise great chunks of change through debt offerings. Although relatively few firms are able to raise money this way, the amounts they raise are large enough to skew the combined results for the sector. In the first six months of 2010, six firms raised nearly $6 billion through debt offerings. For the first time in ages, Amgen Inc. was not among them. Teva Pharmaceutical Industries Ltd., which markets the multiple sclerosis drug Copaxone (among others), raised $2.5 billion in a three-tranche debt offering of senior notes in June. Life Technologies Corp., a global biotechnology tools company for life sciences researchers, took second prize with its $1.5 billion debt offering in February. Other companies that completed debt offerings in the first half of 2010 included Genzyme Corp., Valeant Pharmaceuticals International, Patheon Inc., and Salix Pharmaceuticals Inc.
That $6 billion accounts for roughly 43 percent of the $13.9 billion raised by all companies from all sources in the first six months of 2010 – and as such, distorts our interpretation of the sector’s fundraising efforts. However, similar distortions happen nearly every year. In the first half of 2009, for example, four companies (including Amgen) raised $3.2 billion in debt – 38 percent of the roughly $8.3 billion raised by all companies from all sources. And in 2008, four companies raised about $1.5 billion in debt, a smaller amount to be sure but still sufficient to account for 25 percent of the roughly $5.9 billion that companies raised from all sources in the first half of the year.
If we set aside the debt offering totals for the moment, we find that biotech and specialty pharma companies raised about $7.9 billion total for the first half of 2010, roughly $5.1 billion for the first half of 2009, and nearly $4.4 billion for the first half of 2008. Thus, even without the inclusion of debt offerings, it’s obvious that financing has picked up considerably over the last few years.
Unfortunately, the uptick in financing came too late for those firms that had already been struggling to make ends meet before the global economy imploded in 2008. Even massive layoffs, restructuring efforts and the sale of once-precious assets weren’t enough to save these businesses. So, bankruptcies – once unheard-of in the biotech sector – started to become almost commonplace. In 2008, a dozen firms threw in the towel -- either by filing for protection under Chapter 11 while they reorganized, declaring insolvency under Chapter 7, or liquidating their assets under a mechanism called Assignment for the Benefit of Creditors (ABC), which is similar to a Chapter 7 filing. In 2009, that number jumped to 26. In the first half of 2010, however, only (!) seven companies declared bankruptcy. Does that mean that the worst is behind us? Perhaps – but companies with no revenue-generating products on the market, little-to-no investor interest, and less than six months of cash on hand are still extremely vulnerable to external forces.
Biotech Bankruptcies: 2008, 2009, and 1H 2010
Chapter 11
(reorganization);
Date |
Chapter 7
(liquidation);
Date |
Assignment of Benefit to Creditors;
Liquidation &
Dissolution;
Date* |
Immunicon
(6/08) |
Orchestra Therapeutics
(10/08) |
Ardana
(6/08) |
AtheroGenics
(10/08) |
CHAD Therapeutics
(1/09) |
Phoqus Pharmaceuticals
(7/08) |
MicroIslet
(11/08) |
Akesis Pharmaceuticals
(1/09) |
Spherics
(7/08) |
Accentia Biopharmaceuticals and its subsidiary Biovest
International
(11/08) |
Cogentus Pharmaceuticals
(1/09) |
Mistral Pharma
(8/08) |
Introgen Therapeutics
(12/08) |
Dynogen Pharmaceuticals
(2/09) |
Chemokine Therapeutics
(12/08) |
Vermillion
(4/09) |
DelSite
(4/09) |
MonoGen
(12/08) |
Isolagen
(6/09) |
Argolyn Bioscience
(7/09) |
Neose Technologies
(3/09) |
Northfield Laboratories
(6/09) |
Altus Pharmaceuticals
(11/09) |
DiObex
(4/09) |
Oscient Pharmaceuticals
(7/09) |
|
Eden Bioscience
(6/09) |
Biopure
(7/09) |
|
Genaera
(6/09) |
deCODE genetics
(11/09) |
|
Adaltis
(7/09) |
Vion Pharmaceuticals
(12/09) |
|
Epix Pharmaceuticals
(7/09) |
Hawaii Biotech
(12/09) |
|
Ambrilla Biopharma
(7/09) |
MiddleBrook Pharmaceuticals Inc.
(5/10) |
|
Alizyme plc
(7/09) |
Biovest International Inc.
(5/10) |
|
Cambridge Biostability
(7/09) |
Accentia Biopharmaceuticals Inc.
(6/10) |
|
York Pharma
(7/09) |
| |
|
Neurobiological Technologies
(12/09) |
| |
|
Haemacure Corp.
(4/10) |
| |
|
Neuropharm Group plc
(5/10) |
| |
|
AutoImune Inc.
(6/10) |
| |
|
Oncotech Inc. (U.S.-based, wholly owned subsidiary of Exiqon
A/S)
(6/10) |
* The Assignment of Benefit to Creditors (ABC) process and the Plan of Complete Liquidation and Dissolution are used by U.S.-based companies. Canadian companies use a similar process, filing a proposal to creditors under the Bankruptcy and Insolvency Act. In the U.K., companies enter into voluntary administration.
Reportedly, private firms that rely on venture capital to keep going have also seen their sources drying up in recent times, but we don’t find that to be true. Au contraire: The worst of it appeared to be over by the end of the third quarter of 2009, and for the first three months of 2010, global VC financing was up 23 percent from the year-ago period <<link to grph 3 on stand-alone page>>. Financing continued to improve during the second quarter of 2010, and by the end of June global venture funding was up 39 percent from the year-ago period ($3.1 billion vs $2.2 billion).
There were fewer big-ticket rounds ($50 million or more) than usual – but they were whoppers. In January, Prometheus Laboratories Inc., which is developing diagnostics and therapeutics to provide greater individualized patient care in gastrointestinal diseases and cancer, secured $260 million in financing – which consisted of a $210 million term loan and a $50 million revolving credit line. In March, specialty pharma Archimedes Pharma Ltd., which already markets specialist drugs in oncology, pain and neurology, raised $100 million to help it launch its lead product candidate (a fentanyl nasal spray for treating breakthrough cancer pain), which is pending FDA and EMA approval. San Francisco-based Achaogen Inc., a clinical-stage company developing antibiotics to combat multi-drug resistant bacteria, raised $56 million in a Series C financing in April. Last but not least, in April, German firm AiCuris GmbH, which was spun out of Bayer HealthCare, raised $75 million in a second round of venture funding to fuel its development of new drugs for infectious diseases.
We’ve also seem a steady increase in the number of young firms that are dedicated to the expanding field of molecular diagnostics, especially as it relates to personalized medicine. Venture capitalists, too, are quite enthusiastic about these business models. In the first quarter of 2010 alone these companies included (but were not limited to) Molecular Biometrics Inc. ($12.5 million in January); CancerGuide Diagnostics Inc. ($10.5 million in February); Navigenics Inc. ($18 million in February); Aureon Laboratories Inc. ($7 million in March); and Nodality Inc. ($15.5 million in March). Other endeavors that have caught VCs’ eyes include genome sequencing for the masses (which is getting faster and cheaper all the time) and biofuels.
In fact, the latest MoneyTree Report from PricewaterhouseCoopers LLC and the National Venture Capital Association (NVCA) explains that “The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, saw a 107 percent increase in dollars over the first quarter to $1.5 billion, marking the largest quarterly investment ever reported for the sector.” Obviously, biofuels comprise only a part of the cleantech sector, but the number of biotech firms rushing to join the burgeoning field is on the rise.
The biotech sector did extremely well in the second quarter of 2010, according to the MoneyTree Report: “Biotechnology again received the highest level of funding, rising 59 percent in dollars and 34 percent in deal volume in the second quarter, with $1.3 billion going into 139 deals.”
Why have we seen a bump in venture investing? Well, in the life sciences sector, the fact that the IPO window is ajar means that VCs can now think about exit strategies once again. So even if investors aren’t wildly enthusiastic about the current crop of biotech IPOs, it’s enough to prod the VCs into action.
What goes around comes around.