Biotech startups starving from dearth of IPOs


Too many players chasing too little money are dashing the hopes of Bay Area biotechnology companies trying to raise money in public or private markets.

Since last June, no biotechnology or bioscience company has debuted on a U.S. public stock exchange, according to a new report by merchant bank Burrill & Co. of San Francisco. A handful of biotech startup companies planned to go public during the past three quarters but withdrew because of the weak stock market.

First quarter 2003 follow-on public and private offerings for biotech companies worldwide totaled $2.8 billion, down from $6.6 billion in the first quarter of 2002, the report states.

Locally, the last health-related initial public offering (IPO) was last May when medical device manufacturer Kyphon Inc. of Sunnyvale debuted on Nasdaq, raising $90 million. Kyphon’s stock (Nasdaq: KYPH) is trading in the low $8 range, off more than 40 percent from its $15 offering price.

One 20-year biotechnology market analyst says the cycle is familiar.

“The biotechnology sector has gone through these sorts of opening and closing of windows for as long as I’ve been familiar with the field,” says Jeff Bird, a partner with Sutter Hill Ventures of Palo Alto. “The opportunity to take [biotech] companies public presents itself every three to four years. And the last window, obviously, was sort of at the tail end of the technology bubble in the 1999-2000 time frame.”

Bird says biotechnology and bioscience venture-capital veterans are not concerned about the dearth of IPOs.

“I think many investors, who have been at this a while, work on an operating assumption based on history, which isn’t always a perfect predictor,” Bird says. “But based on history, they go about the work of financing and building [a biotech startup] without the benefit of a public market for a three- to four-year time period.”

Because the majority of biotechnology venture investment is on a seven- to 10-year time frame, Bird says an IPO window should open two or three times in a venture capital funding life cycle.

But, with the current war in Iraq and the prospects of a double-dip recession, all bets may be off, Bird says.

“To the extent that the economy is pretty much bleak — and the war contributed to that — one might question [historical precedent] and worry about longer periods during which the public markets may not be open,” he says. “It’s really hard to soothsay whether the opportunity is going to come. But in 2004 or 2005, the IPO market will most likely open up again.”

But some startup companies will need money before that time to survive. Without an IPO to raise capital, startups turn elsewhere for funds. Many turn to venture capitalists, says Rich Peers, an attorney specializing in early-stage companies at Heller Ehrman White & McAuliffe LLP in Menlo Park.

“I think biotechs, which naturally have a longer cycle, have fared a little bit better in this funding downturn than other technology companies,” he says.

Peers says the technology boom and bust didn’t bleed as deeply into the bioscience sector.

“Valuations just got out of whack for tech and now that it’s time to raise more money, you just can’t raise anywhere near those valuations today,” he says. “I don’t think biotech experienced such a dramatic increase in valuations that you saw from some non-life-sciences companies.”

Sutter Hill’s Bird says many venture capitalists are willing to pay up for bioscience companies with products they believe in.

“For most private equity investors in the biotech space, folks are sort of feeling that we’re in a time that we’re going to need to finance our companies using our own moneys and, hopefully, corporate deal making, which has always been a very important part of financing these companies,” Bird says.

Corporate deal making ranges from licensing a technology to a cash-rich big pharmaceuticals company to full-blown mergers and acquisitions (M&A) moves.

“Some types of M&A transactions in this category are financing vehicle rather than one company trying to acquire a product or technology,” says Bird.

He points to the February merger of Sunnyvale-based Hyseq Pharmaceuticals Inc. and Variagenics Inc. of Cambridge, Mass., to become Nuvelo Inc.

“Variagenics was a company doing interesting technological evaluations of clinical samples, but I really think it brought a bank of cash to Hyseq and therefore was used as a financing opportunity,” he says.

“In other cases, there are technology-rich, private companies that merge with public companies that are cash rich, but technology poor,” Bird says.

But a marriage of convenience does not always fulfill its promise.

“I haven’t seen a lot of successes,” says Heller Ehrman’s Peers. “You’d think it would be a perfect fit — you take money from a company with technology that doesn’t work and match it with a company with good technology but is unfunded,” he says. “But corporate egos sometimes get in the way.”

Sutter Hill’s Bird says the bioscience IPO and funding problem will work itself through.

“This is a temporary phenomenon. There are too many companies with not enough critical mass either in financing or intellectual property,” he says.