PIPEs open
funding taps for biotech
May 23, 2003
Forget about Drano or Liquid Plumr, the biotechnology industry has
discovered there's nothing better than a rising market to get its
financial PEPEs flowing.
PIPEs, or private investment in public equities, have long been a valuable
financing mechanism for public biotechnology companies in need of cash,
but in recent months the pace of these deals has accelerated and their
size has increased. That's cheering investors, who had watched with
increasing worry as many biotechs burned through cash without being able
to raise more.
In the three months ending May 20, 58 biotechnology companies raised a
total of $563 million in 58 transactions. That's up from the 47
transaction that raised a total of $348 million between Nov. 20, 2002, and
February 19, 2003, according to PlacementTracker.com, an online
publication that tracks PIPEs.
"Across the board in the PIPE market there's been a big upswing in
the last couple of months, and biotech is a big part of that. Whenever
there is any significant uptick in biotech stocks, you see an uptick in
the PIPE deals," said Brian Overstreet, president and CEO of PlacementTracker.com.
"You are going to see a lot of activity, and I expect you will start
to see some of the bigger names come out and do deals."
Biotechnology stocks have indeed been on a steep climb since they hit
bottom in July. The American Stock Exchange Biotechnology Index rose 47
percent by May 20 from its 52week low of July 10, 2002. That compares with
a 3 percent loss in the Dow Jones Industrial Average and a 14 percent gain
in the Nasdaq Composite Index during the same period.
The rise in prices not only have industry observers saying the worst is
over, but predicting that the heating up of the PIPE market will be
followed by a resurgence of the secondary and initial public offering
markets in the second half of the year.
Bay Area biotechs raise cash
Among the Bay Area biotechnology companies taking advantage of the
improved market are South San Franciscobased Rigel Pharmaceutical Inc.,
which raised $46 million; Menlo Park-based DepoMed Inc., which scored $20
million and Redwood City-based Genelabs Technologies Inc., which grabbed
$8.1 million. The financing environment while not exactly robust does
reflect a change in the attitude of both investors and publicly traded
companies.
What's driven the rise in prices and the increased activity are
encouraging successes both in the clinic and at the U.S. Food and Drug
Administration. That includes the rapid way the FDA moved to approve
Millennium Pharmaceutical's cancer drug Velcade earlier this month and
Genentech's recent report of positive phase III results for its cancer
drug Avastin. Also helping the market is increased optimism among
investors following the end of the war in Iraq.
Lawrence Goldfarb, managing partner of BayStar Capital, a Larkspur-based
investment fund specializing in PIPEs, said that part of what's happened
is that many companies have gone through the "emotional process"
of understanding they need to raise capital. He said while the pace of
financings has picked up, private companies are accepting valuations
significantly lower than their previous rounds, and public companies are
accepting discounts of 10 percent to 25 percent of their current market
prices. They are also often sweetening deals with warrants or other
incentives.
"It's what I call a 'deer in the headlight syndrome,' " he said.
"It just takes a long time for the CEOs ... to emotionally understand
that just because they think their stock is worth X it doesn't mean
investors think it's worth X."
Biotechnology experts are encouraged by the recent activity and believe
that it will continue, barring some disastrous market event such as a
terrorist attack.
"We are past the darkest hour and looking straight towards the dawn
at the end of the tunnel. Things are getting much better," said Mark
Edwards, managing director of Recombinant Capital, a Walnut Creek-based
consulting firm specializing in biotechnology alliance. "The
temptation for several quarters now has been to shut your lab, because
nobody cared. I don't think that is an overwhelming desire anymore."
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