PIPEs channel capital to biotechnology

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."