IPO Glut May Keep Biotech Offerings From Leaving the Gate

Is the party over for biotech IPOs?

After a record spate of first-quarter fund-raisings, investors are are up to their ears in new biotech issues. Now, with big biotechs sinking well below their highs, the Nasdaq suffering through a 20% decline in less than a month, and the customary big gains in the IPO aftermarket drying up, several big biotech financings are on hold, suggesting that a very lucrative window may be closing on companies in the sector.

Biotech observers say delays in notable offerings stem from a glut of deals that has gummed up the IPO machine in a number of ways by: reducing investor demand, tangling offerings in regulatory red tape and making issues difficult to value. That could spell further problems for a biotech sector that's been hard hit over the last month.

Familiar Pattern

Biotech IPOs tend to follow a familiar pattern. When the market is up, companies rush to the markets for crucial funds to continue research on hoped-for blockbuster drugs. When the market turns, funding dries up with biotech bosses worrying about where to find their next stash of cash.

The market has surely been up over the last year. As a result some $10 billion was raised during this year's first quarter, according to Warburg Dillon Read, which led many of the offerings. That compares with $5.4 billion raised in all of 1999.

"Everyone I talk to is just overwhelmed with paper," says Peter Wen, fund manager for the Warburg Pincus Health Sciences funds, which holds about $60 million worth of biotech and related stocks. "Biotech management comes in three or four times a day. After seeing 10 a week, they become a blur."

Turning the Screw

Now, the market is turning big time. The Nasdaq slid some 1.8% Tuesday, following a 7.6% bloodbath Monday. Big biotech indices are some 40% off their 52-week highs, reached just March 6.

With the Nasdaq in retreat and biotech stocks suffering major declines, some planned fund-raisings are looking shaky, such as Rigel Pharmaceuticals and Drug Abuse Sciences, which delayed pricing their issues until this week. Others may be scrapped altogether, like Lynx Therapeutics (LYNX Quote), Adolor and Corixa (CRXA Quote), market experts say. (None of the companies mentioned in this story were immediately available for comment.)

Blame the 'Gubmint'

Some blame the Securities and Exchange Commission for exacerbating the problem by failing to review fund-raising offering documents quickly enough. "We've all been on pins and needles waiting for the SEC to grind out these documents," says Eric Roberts, managing director of health care corporate finance at Warburg, which is sponsoring nine of the 28 biotech IPOs to file with the SEC in the first quarter.

Roberts said the SEC is so backed up with applications that it takes six to eight weeks to process the paperwork and clear the fund-raisings, compared with four to five weeks last year. "Some deals may fall apart because they can't get SEC clearance before investors go away," Roberts said at last week's Biotechnology International Organization annual meeting in Boston.

An agency spokesman says there's "no evidence of a backlog as far as turnaround time with regards to initial comments going out."

Supply and Demand

Others say it isn't the SEC that's the problem but a more basic issue: investor demand.

"Companies in the queue may miss the window, but it's not the SEC's fault," says Russell Ray, Credit Suisse First Boston's head of global health care corporate finance. "A number of our competitors didn't get their issues priced, and I think it's because there isn't any demand. These deals would have been done if investors wanted to own them."

To be sure, Ray admits that pricing of IPO shares, which is typically done just before a stock comes to market, presents major challenges. With stocks falling sharply, it's difficult to assess a fair value to a new issue. For instance, it would be tough to get a high price for a new genomic company stock when comparable issues such as Millennium (MLNM Quote) and Incyte (INCY Quote) have fallen sharply in recent weeks.

"There's been a 50% across-the-board haircut in some cases," says Ray. "The new IPO calendar is affected by that, because the companies you use for valuations are all down. Fundamental evaluation of businesses is badly needed in this market."

Can't Get Enough

It isn't, however, the first time the biotech-funding window slammed shut and it won't be the last, although experts agree that this year's first quarter was the most bountiful. That's because the biotech industry as a whole has matured, with more products on or close to market than previous times when there were spates of fund-raisings, such as in the early and mid-1990s.

"In the last 11 years, there were only three windows where they could raise capital at good prices," says Dennis Purcell, senior managing partner at the Perseus Soros Biotech fund, a new private equity fund that is raising $700 million to invest in later-stage biotech companies. "It's important to get in early in the cycle."

For company executives, this window may indeed be shut. But there's always the next one. And investors can expect pleas for even more cash from cash-strapped biotechs next time around.

"You can never raise enough money," says Hubert Schoemaker, founder and chairman of Centocor, a major biotech company that sold out to Johnson & Johnson (JNJ Quote) last year for $4.9 billion. "When the cookie jar comes around, take as much cash as you can."