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Rough Waters Ahead?
Financing in the biotechnology and specialty pharma sector got off to a slow start in 2007, and it’s not obvious when – or whether – the pace will pick up as the year unfolds. Some of the blame in the first quarter of this year can be laid on jittery capital markets in general, but sector- and company-specific events also played a role.
Far from its usual effect, January’s annual JP Morgan Healthcare Conference had only a modest impact on the healthcare stocks. This important conference kicks off the new year, generally setting the mood for the months to come. True to form, the conference’s neutral tone was reflected by the behavior of biotech-related stocks, which exhibited the smallest of gains over the first quarter of 2007 – although in between times the capital markets experienced a considerable amount of turmoil.
Both biotech bellwethers grabbed the spotlight in the first quarter – but this time around, they were bathed in a harsh, unflattering glare. Genentech Inc. was plagued with troubling clinical results for its cancer drug Avastin, a negative ruling on its monoclonal antibody patent (Cabilly II) and a forecast of flattening product sales. Amgen Inc., for its part, took a hit on negative results for its colon cancer therapy Vectibix and its anemia therapies Epogen and Aranesp (where serious safety issues continue to dominate the headlines).
If the sector’s most successful companies are in trouble, what does that portend for the hundreds of other biotech and specialty pharma firms? Well, it could mean that they’re in for a rough ride this year. To point, in the first quarter of 2007, financing dropped 33 percent as compared to the year-ago period. Public offerings took a beating, as did private financings of public companies (such as private placements, rights issues, exercise of warrants, and debt offerings, among others). But surprisingly, venture funding soared, ending the quarter 70 percent higher than the year-ago time frame.
Initial public offerings (IPOs) – especially on U.S. exchanges -- were few and far between during the first three months of 2007. Indeed, no IPO-hopefuls dared to dip their toes in the frigid water in January. By February, however, it looked like the markets were thawing – and seven biotech and specialty pharmas came public. Two of those companies debuted overseas (BioLineRx Ltd. in Israel and Cellectis S.A. in France). Of the five firms that debuted in the U.S., two are headquartered elsewhere (3SBio Inc. in China and Rosetta Genomics Ltd. in Israel).
In March, another three companies completed IPOs – but only one of those (Tongjitang Chinese Medicines Company, which is located in China) sold its shares in the U.S. The others include Algeta ASA, which debuted in Norway, and Neuropharm Group plc, which sold shares in London.
This is not an encouraging way to start the year. But it’s not so different from last year at this time. Indeed, of the 10 IPOs on record for the first quarter of 2007, only six occurred in the U.S. That’s about on par with the year-ago period, when seven companies priced their IPOs, six of them in the U.S. and one overseas.
It’s not uncommon for firms located in Europe, Scandinavia and Israel to seek public listings in the U.S., nor is it surprising that they would also want to trade on local exchanges (the London Stock Exchange and Euronext, for instance). But the surge in Chinese companies intent on attaining a U.S. listing is something fairly new.
In early February 2007, for instance, Chinese biotech firm 3SBio debuted on Nasdaq, raising an impressive $119 million (including the sale of overallotment ADSs) in the process. This company develops recombinant protein-based therapies for sale in China: It’s already marketing its own versions of human erythropoietin (EPIAO) and thrombopoietin (TPIAO), and has six drugs in the pipeline, including second-generation, longer-acting products like NuEPIAO and NuLeusin. (The company has been selling its legacy drug, Inleusin [recombinant human IL-2] since 1996.)
In mid-March, specialty pharma Tongjitang Chinese Medicines Company raised $83.5 million in its IPO of American Depositary Shares (ADSs, where 1 ADS = 4 ordinary shares), which are listed on the New York Stock Exchange. This firm focuses on developing modernized (i.e., reformulated) versions of traditional Chinese medicines, which it will sell in China. These botanical and herbal remedies have a centuries-old history of use: Sales of Tongjitang’s lead product, Xianling Gubao (a formulation of barrenwort used to treat osteoporosis) already account for about three-quarters of the company’s revenues.
In mid-April Simcere Pharmaceutical Group – which makes so-called branded generic pharmaceuticals – also priced its IPO in the U.S., raising $181.3 million for itself and another $45.3 million for selling shareholders. Obviously, these offerings have attracted considerable interest from investors, many of whom are anxious to participate (one way or another) in China’s burgeoning economy.
But Chinese drug companies, like their counterparts in other parts of the world, face the specter of price controls: In August 2006, the government arbitrarily lowered the price ceilings on 400 drugs (not including Tongjitang’s Xianling Gubao), and further action could come at any time. Moreover, China’s State Food and Drug Administration (SFDA) is investigating corruption in the sector: Reportedly, some government officials accepted bribes from sponsoring companies to approve their drug applications. These events add further uncertainty to the future of drug development in China.
Investors have been as picky this year as they were last when it comes to biotech and specialty pharma IPOs. Together, the 2007 IPOs raised $559 million in gross proceeds, as compared to the $353 million raised by the IPOs that were completed during the first quarter of 2006.
As we noticed last year, however, investors had few qualms when buying stocks in follow-on offerings. In the first quarter of 2007, nine firms raised a total of $696 million in follow-on stock offerings, most of them clustered in January. That’s not bad, except for the fact that follow-on public offerings were far more plentiful and considerably richer in the first quarter of 2006 – when 17 companies raised more than $1.5 billion in these deals (and five of those offerings reaped more than $100 million in gross proceeds).
In 2007, only a handful of the follow-on offerings broke the $100 million-mark: In January, diagnostics giant Inverness Medical Innovations Inc. attracted $273.6 million in new funds and CNS specialist Vanda Pharmaceuticals Inc., in its first public offering since its April 2006 IPO, reaped $119.3 million in cash. (For details of 2007’s U.S.-based public offerings, see the Signals story, “The Class Of 2007.” For public offerings in 2006, see the Signals article, “Bulls And Bears.”)
Not only have there been fewer follow-on offerings in 2007 to date, but also there’s been a significant drop in the number of companies filing shelf registration statements. In recent years, shelf registrations have become de rigueur, allowing public firms the flexibility to sell pre-registered shares at the drop of a hat. The dip in shelf registrations could reflect companies’ and bankers’ concerns that investors are not particularly keen on biotech and specialty pharma stocks these days.
That may be true in the public arena, but the story for private companies is quite different. Here we see that private companies amassed nearly $1.9 billion in new financing over the first three months of 2007 – a 70 percent increase over the $1.1 billion they raised in the year-ago period.
Does this mean that VCs invested in lots more firms this year? Or that individual rounds are getting richer? Or both? Well, our records indicate that 81 companies around the globe reported venture financing in the first quarter of 2007, as opposed to 72 in the first quarter of 2006. The number of Series A rounds is up, too, but not by much (30 percent of 2007’s financings were for Series A rounds; 28 percent of 2006’s financings encompassed Series A deals).
That means that the value of individual rounds for selected companies has soared. Indeed, transatlantic specialty pharma EUSA Pharma attracted an unbelievable $175 million in its Series B financing in March 2007. The company is using some of this cash to acquire French drug company Opi SA, a move that provides an established infrastructure in Europe.
Other high-fliers were Seattle-based Omeros Corp., a systems biology-focused firm that raised $63 million in a Series E round in February and Targanta Therapeutics, an antibacterial drug developer that attracted $70 million in its Series C financing, also in February. January had a few hot deals, too: Ception Therapeutics Inc., which is developing a thermodynamics-based rational drug design platform, hauled in $63 million in a Series C round. Belgian firm Movetis NV, which licensed gastrointestinal drug products and technologies from Janssen Pharmaceutica, closed on a $63.6 million Series A financing in January. And French firm Novexel, a specialty pharma that was started with a portfolio of anti-infective drug programs and intellectual property from Sanofi-Aventis, reaped $64.9 million in a Series B round early this year.
This trend towards big-ticket financings of selected private companies was already evident in 2006, and it looks as though it may out-do itself in 2007. While many pundits claimed last year that the venture model was broken, those fears did not translate into fewer or smaller investments. In fact, the opposite occurred, with investments increasing both in the number of deals and the size of individual rounds. We’ve seen ample evidence in the last three months to indicate that big-ticket financings (although enjoyed by only a few) are here to stay.
originally published 04/21/2007 |