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Biotechs Ponder IPO Strategy

San Diego’s life sciences community could see its first initial public offering materialize this year or early next, signaling renewed hope in a recessionary market that had all but lost its appetite for risk-laden biotechs.

But the biggest question still facing biotech companies in today’s environment is: How will the markets respond to their initial public offerings?

Kleanthis Xanthopoulos, CEO of privately held RNA drug developer Regulus Therapeutics, said his company isn’t taking any chances. At least not yet.

The Carlsbad-based biotech, a joint venture between RNA drug giants Alnylam Pharmaceuticals Inc. and Carlsbad-based Isis Pharmaceuticals Inc., is exploring the hot scientific area of microRNAs, tiny substances shown to regulate whole networks of genes. Its work has already attracted drug giant GlaxoSmithKline plc, which inked a partnership with the 35-person biotech worth $600 million.

Analysts have speculated that the company could go public, especially given its newly found independence from Alnylam and Isis. Regulus established itself as a C corporation in March.

“I certainly hope when we decide to become an IPO candidate company that we have looked at how the markets behave,” Xanthopoulos said last week. “I don’t, personally, want to be on the first wave.”

Taking the opposite tack and intending to be the next local company to enter the current IPO fray is Trius Pharmaceuticals, which aims to raise $86 million it will use to further develop a late-stage drug for treating severe bacterial skin infections.

The venture-backed biotech is testing a potent antibiotic known as torezolid that could compete with Pfizer’s Zyvox for treating acute and life-threatening infections, including the antibiotic resistant superbug methicillin-resistant Staphylococcus aureus, or MRSA. Sales of Zyvox reached blockbuster status of $1.1 billion last year.

Little Appetite For Risk

Bud Leedom, a San Diego investment analyst with the California Stock Report, said he’s encouraged by the recent IPO activity during the last few months, although much of it has been centered on bigger, more established companies.

“It’s definitely starting to pick up and that’s a good sign,” he said.

But Leedom and other analysts said the markets have yet to welcome many life sciences companies without products already on the market.

“If you’re a small biotech from San Diego and you have a couple Phase 2 products or so, you really don’t see a large appetite for that yet,” Leedom said. “There’s just not a tremendous appetite for risk.”

Even the more established life sciences companies, though, have experienced a lukewarm reception.

“I think people realize easy money has been done for a while now,” said industry analyst John McCamant, editor of the Bay Area’s Medical Technology Stock Letter. “Investors are very wary.”

In August, Cumberland Pharmaceuticals Inc. delivered the first biotech IPO in nearly two years, raising $85 million. But the Nashville, Tenn.-based company had expected shares to price between $19 and $21. Instead, shares priced at $17, and have wavered ever since.

Since its IPO debuted, the company’s shares have only reached $17 three times.

Seattle’s Omeros, the first biotech without an FDA-approved product to go public in more than a year, raised $68 million in its offering but also priced lower than anticipated at $10 a share.

Local biotechs say they’re all too aware of the difficulties in raising money during the middle of an economic meltdown. Venture-backed biotechs, McCamant said, could be experiencing even more pressure to go public from their investors, eager for a way to recoup their money.

“When you talk to the VCs they don’t have money to make new investments,” he said. “Their babies need new feeding.”

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