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Growing Biotech Firms Take Reverse Course in Going Public

Halozyme Therapeutics Inc., a biotechnology company valued as high as $860 million last year, began life as a small, publicly traded yacht company.

Seeking a way to go public, Halozyme completed a reverse merger in 2004 with Global Yacht Services Inc., which offered weeklong private yacht charters, deliveries to destinations worldwide and brokerage on vessels worth between $1 million and $1.5 million.

The merger of a biotech concern and yacht services firm would seem an unusual pairing, but the resulting exchange of needs allowed the yacht company to sell its dormant business to a private biotech firm eager to be listed on a public exchange.

Reverse mergers, used as techniques to allow private companies to acquire or merge with public companies, are common practice in San Diego’s abundant biotech community.

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Smaller private companies have relied on the practice as an alternative to initial public offerings, a market that has fallen on turbulent economic times.

“You can spend hundreds of thousands to get ready for an IPO and if the market turns bad there’s nothing you can do about that , it’s wasted money,” said Ken Aldrich, president and chief executive of International Stem Cell Corp., which went public in December 2006 through a reverse merger with Texas holding company BTHC III.

Originally developed as a quicker, less expensive alternative to initial stock offerings, biotech firms are turning to reverse mergers as a way to gain greater access to capital, increased visibility and an opportunity to utilize stock to make acquisitions.

Such was the case with Carmel Valley-based cardiovascular company Cardium Therapeutics Inc. In October 2005, Cardium raised $30 million in private equity financing a reverse merger with Aires Ventures Inc., a shell corporation that once operated as an African mining company.

The resulting financial support allowed it to acquire a portfolio of cardiovascular growth factor therapeutics from Germany’s Schering AG Group, and eventually to expand through a series of three acquisitions.

“It created an opportunity for us to do our next deals,” said Tyler Dylan, co-founder and chief business officer at Cardium.

By taking the company public, he said the firm was able to validate its work with investors.

International Stem Cell’s Aldrich said the firm wanted to have publicly traded stock as an aid to recruiting personnel and a possible aid in acquisitions, although the company has yet to make any investments.

International Stem Cell, along with dozens of other stem cell companies, have faced an uphill climb in convincing investors that stem cell research is a smart investment.

“We felt the valuations we were able to get in the public funding were greater than the VC market,” Aldrich said.

But reverse mergers have a history of stigmas, according to Jay de Groot, a partner in the San Diego office of Morrison and Foerster LLP and co-chair of the firm’s emerging company and venture capital group.

Pump-and-dump schemes, a type of investor fraud involving artificial stock inflation through false or misleading statements, and other unscrupulous brokerage practices have had negative impacts on reverse mergers.

“I think the view of many practitioners is 90 percent used to be frauds and now it’s about 50 percent,” de Groot said.

The Securities and Exchange Commission, which quickly caught on to the practices, introduced new rules in recent years governing reverse merger activities.

“It’s chilled the volume of these reverse mergers, but I think many people would argue in a good way,” de Groot said.

Data regarding the number of reverse mergers in today’s marketplace is hard to come by, but Ben Perkins, head of health care investment banking for Pacific Growth Equities, said life sciences firms have been considering more creative ways to go public in today’s marketplace.

“I think there will continue to be innovation from a financial perspective and folks will continue to identify ways of getting financing through alternative strategies,” he said.

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