Investor enthusiasm for biotech offerings – which heated up in mid-April 2003 – continued unabated through the first quarter of 2004. Biotech and specialty pharma companies raised nearly $17.5 billion in 2003 (not counting revenues and payments coming from corporate collaborations), and extended their winnings through March 2004. In fact, it was the best first-quarter performance that the sector had seen since 2000 – and a remarkable recovery from the year-ago period.

All told, biotech and specialty pharmas raised close to $6.4 billion in the first three months of 2004 – nearly four times the amount these firms raised in the first quarter of 2003.

The biggest chunk of change in the first quarter of 2004 came from convertible debt financings, through which seven firms raised a combined $1.45 billion – about 23 percent of all cash raised from all sources (save corporate partners) and 57 percent of the money raised by public companies through private offerings. Thanks to low interest rates and rising stock prices, the convertible debt market became red-hot in May 2003 – and though it cooled off slightly later in the year, 29 companies managed to amass more than $6.8 billion in debt during 2003 – about 41 percent of all the money raised from all sources. Obviously, debt financing is still available for healthy companies and should remain so in the near term – as long as the stocks hold their own and interest rates remain steady through the summer.

As well, the public markets provided a huge boost to the sector in the first quarter. Sixteen firms completed follow-on stock offerings (most of them by selling shares via shelf registrations) – raising slightly more than $1 billion in the process.

Company	Number Of Shares Or Total $ Value (Date Filed)
Allos Therapeutics	$75M (common stock, preferred stock, depositary shares, debt securities and warrants) (3/04)
Atrix Laboratories	$150M (common stock, preferred stock and debt securities) (1/04)
Cell Therapeutics	$75M (common stock) (2/04)
Cephalon	$1B (common stock, preferred stock, debt securities and warrants) (2/04)
Digene	$90M (common stock, preferred stock and debt securities (2/04)
Dyax	7.5M shares common stock (3/04)
Hybridon	20M shares common stock (1/04)
Orchid BioSciences	$30M (common stock) (1/04)
Pharmacyclics	$100M (common stock, preferred stock, debt securities and warrants) (2/04)
Pozen	8M shares common stock (2/04)
Sequenom	$50M (common stock and warrants) (1/04)
Titan Pharmaceuticals	$50M (common stock and preferred stock (2/04)
Vicuron Pharmaceuticals	$200M (common stock, preferred stock, depositary shares, debt securities and warrants) (2/04)

And 13 more biotech companies are lined up to do the same in the second quarter – again via pre-registered stock, the preferred strategy for opportunistic fund-raising efforts.


But the IPOs in the first quarter of 2004 really rocked the sector. By the end of March, nine biotech and specialty pharma firms had completed IPOs in the U.S., and three (Ark Therapeutics Group Ltd., Basilea Pharmaceutica AG and Biocon Ltd.) had come public overseas. Together, they raised $970 million in gross proceeds. And companies haven’t stopped filing their IPO prospectuses, either: On April 21, specialty pharma Auxilium Pharmaceuticals Inc. filed for an IPO, marking the 18th company to join the queue.

The IPO window opened in the fall of 2003, allowing eight firms to complete their IPOs in the U.S. (Two others came public overseas). The after-market performance of the members of the IPO Class of 2003 was fairly lackluster, though, with only four stocks (Neurochem Inc., Pharmion Corp., Genitope Corp. and Myogen Inc.) closing out the year above their IPO prices. (For details, see the Signals article, “Financing Finally Flows.”)

Three of those stocks have managed to hold their gains in 2004: On April 21, Neurochem’s stock closed 92 percent above its IPO price; Pharmion’s stock closed 78 percent higher, and Genitope was up 16 percent.

The IPO Class of 2004 has also had a mixed reception on Wall Street. Of the nine U.S.-based stocks, six traded up their first day on the market. At the close of business on April 21, five of the IPOs – Santarus Inc., Anadys Pharmaceuticals Inc., Tercica Inc., Corgentech Inc. and Eyetech Pharmaceuticals Inc. – were trading above their IPO prices. The best performer of the 2004 group is unquestionably Eyetech, which jumped by 54 percent its first day out and now trades 82 percent above its IPO price. (For details on 2004’s stock offerings, both initial and follow-on, see the Signals article, “IPO Monitor.”)

Three more companies priced their IPOs in April: Immunicon Corp., whose stock price jumped 19 percent its first day on the market and now trades 7 percent above its IPO price; Memory Pharmaceuticals Corp., whose price spiked 20 percent its first day and has risen to 32 percent above its IPO price; and Corcept Therapeutics Inc., which gained a mere 2 percent on the first trading day but now trades 10 percent below its IPO price.


However, the majority of the IPOs that have priced this year struggled to get out, either lowering the number of shares offered or drastically cutting the price per share – or both. As well, two companies – Acorda Therapeutics Inc. and Xcel Pharmaceuticals Inc. – withdrew their prospectuses and one other – Peninsula Pharmaceuticals Inc. – put its IPO on hold.

This difficult environment could spell trouble for the 18 companies that still hope to make public debuts: Obviously, investors are still exercising caution when it comes to buying into biotech and specialty pharma IPOs – despite the fact that practically all the newly minted companies have products in the clinic or even on the market. And the disappointing after-market performance of many of these stocks demonstrates clearly that investors have adopted a wait-and-see attitude as product candidates make their way through late-stage trials.

“Investors are very picky,” explained Edward Rudnic, chairman and CEO of Advancis Pharmaceutical Corp., which priced its IPO in mid-October 2003. And they’ve been like that for quite some time. “We were the first new S-1 filing for an IPO in about two years. When we filed it was right on the heels of Acusphere’s re-filing,” he said. At that point – post-Enron and Sarbanes-Oxley -- it wasn’t clear what was going to happen with the IPO market – or even whether there would be one, Rudnic said. “A lot of investors were not sure if there was going to be an IPO window.”

During Advancis’ road show, “investors were careful. They asked deliberate, pointed, in-depth questions. They had done their homework. It shows how concerned investors are about a company’s story… When we were on the road, investor sentiment was clearly for product stories.” And, he added, the situation is as true today as it was last fall.


Venture investors favor product-oriented companies, too. And they’ve become particularly fond of the specialty pharma business model –- which attracted about 33 percent of the $1.8 billion in venture capital raised during the first quarter of 2004. This number is significantly higher than in was in the first quarter of 2003, when specialty pharmas attracted about 5 percent of venture-backed funding.

Of the $604 million poured into privately held specialty pharmas this year, one company alone attracted nearly half the total. In late March, Jazz Pharmaceuticals Inc. raised $250 million in a Series B round from private equity and VC investors. (Only one other private company – specialty pharma Reliant Pharmaceuticals LLC, which raised $252 million in a Series D round in 2003 – has been able to top this eye-popping figure.)

The investors in Jazz Pharmaceuticals’ financing included a few names that are new to the biotech arena – especially lead investor Kohlberg Kravis Roberts & Co. (KKR), the legendary New York buyout company. What was the attraction? According to KKR’s Michael Michelson, “Our investment exemplifies one of our core investment philosophies, which is to back strong managers with deep industry experience.” Indeed, every member of Jazz Pharmaceuticals’ management team worked at Alza Corp. at one time or another, where they gained valuable product development and commercialization expertise.

The company intends to develop drugs for treating neurologic and psychiatric disorders – by improving and expanding the uses of known compounds as well as accessing products via licensing, acquisitions and collaborations. “We have the goal of building a commercial organization quickly,” explained Bruce Cozadd, executive chairman. “We will start out by in-licensing commercial and late-stage products to get up and running,” he said. But the firm doesn’t intend to rely solely on such products: “We will be developing products at all stages,” Cozadd added, including new products discovered in-house. “We will create new products [not new compounds] using the same approaches employed at Alza,” including methods for changing the agent’s pharmacology profile (i.e., delivery and formulation).

While quarter-million-dollar financings are as rare as hen’s teeth, there’s little doubt that the specialty pharma business model has become very attractive to risk-averse investors – whether those companies are privately held or newly public. And, unless that sentiment shifts radically, this business model should continue to dominate the emerging pharmaceuticals sector.