by Michael Lytton
The mood at the Hambrecht & Quist Life Sciences Conference earlier this month hovered between jubilance and pandemonium. The public markets for biotechnology have returned. The seven biotech IPOs which should close in January will raise approximately $450 million, equivalent to the total dollar amount of biotech IPOs for the fourth quarter of 1999. If one includes both IPOs and secondary public offerings, the biotech industry should raise $1.5 billion in January.
The most straightforward explanation is financial. The prices of the top 100 biotech stocks rose 87 percent in 1999. In the process, the size of biotech IPOs significantly increased, such that the bevy of current offerings will raise, on average, $50 million per company based on a pre-money valuation of $200 million.
In previous years, the comparable numbers were $25 million per offering, based on a pre-money value of $100 million. Although the "large cap" biotech companies may be fully valued by the market, the mid-cap ($300 to $800 million) and small-cap (less than $300 million) biotechs still have a way to go. Institutional investors who, based on the charter of their investment portfolios, need to be in health care, have turned overwhelmingly to biotech and away from health care services, HMOs and medical devices. Add to this a significant retail investor component in recent biotech offerings, fueled by the growth of on-line trading over the Internet.
The recent biotech public offerings fall into two categories: late-stage product companies and tool companies. Examples of the former in Massachusetts include Biopure, which is commercializing a blood substitute and completed a successful secondary public offering in 1999, and Antigenics, a cancer immunotherapy company which is due to close its IPO this month.
Examples of tool companies, which sell products which accelerate the process of drug discovery, include microfluidic chip companies such as Caliper and combinatorial materials screening companies like Symyx, each of which has recently completed a significant IPO. Also included in this category are recent IPOs by genomics companies such as Maxygen and Tularik, which use human genomic data to hasten the process of drug discovery.
The analysis could end here, based upon this spellbinding array of financial data and the power of "momentum" investing in a cyclical industry. It's important and interesting, however, to look at the strategic reasons for the shift back to biotech.
First, important technologies such as genomics and monoclonal antibodies have now matured, such that commercial products have resulted or are in sight. Genomics companies no longer offer raw gene sequence data but instead offer information about validated biological receptors which bind to newly discovered compounds.
While the genomics companies provide such information to pharmaceutical subscribers, they are also becoming product companies in their own right, using the information to launch internal drug development programs. Finally, the information is increasingly available to third parties on more reasonable deal terms, in part reflecting that the NIH-funded Human Genome Project should be completed during the first half of this year. With respect to monoclonal antibodies, these represent some of the year's most significant new products, as well as important ones to come. For example, Massachusetts-based Cubist's Daptomycin antibiotic is in Phase III trials and should be commercialized next year.
In addition to these scientific developments, biotech companies have learned how to hold on to their products (that is, not to license them to pharmaceutical companies) until a much later stage of development, thereby retaining more of the upside for themselves. They have done so through a variety of means.
For example, biotech companies now enter into innovative profit-sharing arrangements with contract research organizations (the companies that run clinical trials) to obtain the financing needed for late-stage product development and product launch.
The third phenomenon is the growing ability of biotech companies to present a more balanced and diversified risk profile to investors. Through its acquisition of Leukosite, Millennium Pharmaceuticals is now both an information company and a product company.
A fourth trend, although still early, is the ability of the Internet to improve the efficiency of the drug development and commercialization process. The administration of clinical trials, formerly a paper-driven process, is now becoming largely automated through the efforts of companies like Massachusetts-based Phase Forward, which provide on-line registration of patients, site selection, data analysis, and preparation of necessary FDA filings.
The phenomenon of disintermediation is happening throughout the supply chain for drug products, from drug ordering, procurement and delivery to inventory management to the ultimate sale to the group purchasing organization or consumer. On-line markets for medical and pharmaceutical products are also becoming common, through the advent of companies like Neoforma, which conducts auctions on-line for medical product suppliers and hospitals.
Thus, there are various strategic underpinnings to the current rally in biotech stocks. This should ensure that the rally will be sustained as the year progresses.
Reprinted with permission. All rights reserved. Mass High Tech Feb. 7-13, 2000.