Unlocking Biotech IPOs May Unhinge Sector's Rebound

Grab the aspirin.

The biotech IPO party this year is likely to lead to another kind of hangover come this fall: the dreaded stock-glut overhang.

Bulls Are Back Biotech bouncing

That's when lockups expire for a large portion of the IPOs floated in the spring. And with some huge expirations looming, there's no telling what will happen to a frothy biotech bull market that's moving much faster than last year's stumbling pace.

Lockups, a standard tool for attracting investors into risky high-techs, bar company managers, venture capitalists and other early investors from selling their stock, usually for six months after an IPO. The aim is to block the insiders from dumping the stock into the hoped-for IPO surge.

And there were a lot of biotech boomlets this year, raising some tempting selling opportunities for these early investors who typically get stock well below the offer price. Since November 1999, there have been 49 biotech company IPOs, according to Lehman Brothers, and many of them continue to trade well above their offering price, giving wide spreads for potential sellers.

Freedom

Strong Performer Aclara's ride

Take Aclara BioSciences (ACLA Quote). Investors who bought into this biochemical analysis company before its IPO will be free to sell nearly 70% of its stock, about 23.7 million shares, starting Sept. 18, according to unlockdates.com, a Web site that tracks such matters.

And given Aclara's stellar IPO, more than tripling from the stock's offering price of 21 in March, it seems likely that early investors will be looking to cash in a hefty portion of their stake. The stock closed at 46 5/8 Thursday, more than double the offer price.

Unlocked Biotech lockups to expire next month
Company	Stock movement		Stock to be unlocked
	Recent price	Market cap ($million)
Aclara (ACLA:Nasdaq)	46 5/8	$1,606	70%
IntraBiotics (IBPI:Nasdaq)	21	609	60%
Orapharma (OPHM:Nasdaq)	9	120	58%
Intermune (ITMN:Nasdaq)	37 3/4	826	39%
Source: unlockdates.com

Other September expirations include IntraBiotics (IBPI Quote), which has nearly 60% of pre-IPO stock eligible for sale, Orapharma (OPHM Quote), with a possible 58% of outstanding shares for sale, and Intermune (ITMN Quote), which has 39% of its pre-IPO stock in lockup, says unlockdates.com. And another 11 biotech lockups come off in October.

Pressure

"This could put a lot of pressure on individual stocks," says Brandon Fradd, principal of Apollo Medical, a New York biotech fund. Fradd says he "would be cautious about putting money into any stocks" facing heavy lockup expirations.

Still, experts say that the expirations don't have to flood the biotech market with paper. If companies and advisers identify potential sellers before the lockups expire, buyers can be lined up ahead of time. This approach could prevent individual stocks' catching colds and causing the mood-sensitive biotech market to succumb to a selloff plague.

"There is no doubt there is price pressure due to lockups expiring and investors interested in taking profits," says Eric Roberts, Lehman Brothers managing director for health care investment banking. Still, says Roberts, who managed a dozen biotech IPOs in the last year, "responsible management of lockups should avert a wholesale selling of stocks."

Furthermore, venture capitalists increasingly realize that wholesale selling of their holdings may backfire, causing companies and their advisers to avoid them, warns Roberts. "VCs know that if they damage the stock, word gets around that that's a dangerous VC to have," he says.

Worry

Some company officials say they're not worried about a collapse when lockups expire. Jim Ratigan, Orapharma's CFO, says it's "theoretically possible" that original VCs could dump their holdings come Sept. 6 when lockups expire, but, he adds, "the vast majority of shareholders aren't interested in selling."

"We haven't had any expression of interest on the part of VCs in that regard," says Ratigan.

That could be because Orapharma hasn't been a top-performing IPO. Unlike many IPOs, Orapharma's shares are trading under water, or below the offering price of 18, closing Thursday at 9. While that's probably well above what VCs paid for their early stake, many IPOs have doubled and tripled. Hence, some VCs may be tempted to hang onto Orapharma stock, waiting for it to appreciate.

It's the other IPOs some experts are worried about. With a record number of biotech companies going public this year and an attendant record number of IPO lockups coming off, there's no telling what's going to happen, particularly for a modern high-tech market characterized by new kinds of hypersensitive momentum traders and retail stock jockeys.

Dry Spell

It's been years since a lot of venture capitalists could realize their gains in early investments, since those gains are typically to be had when companies go public. The biotech IPO market has been dozing since 1995 and that's created a lot of pent-up demand by venture capitalists to cash in their chips.

These people say that a sale by venture capitalists of even a small portion of their holdings could substantially depress the market for recently issued stock. And that could dry up the IPO market itself, where at least a dozen companies have yet to float.

"VCs have been locked up forever," says Stefan Loren, biotech analyst with Legg Mason Wood Walker. "From what we've been hearing, people want out."