PIPEs
channel capital to biotechnology
May 30, 2003
Forget about Drano or Liquid-Plumr, the biotechnology industry has
discovered there's nothing better than a rising market to get its
financial PIPEs 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. In dollar terms, that represents
a 62 percent increase from the $348 million raised through 47 transactions
between Nov. 20, 2002, and Feb. 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 JulyThe 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.
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 Inc.'s cancer drug Velcade earlier this month
and Genentech Inc.'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.
While the pace of financings has picked up, Goldfarb says 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 toward 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 alliances. "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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