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Metabasis Just the Latest to Come Up Short in IPO Market

Metabasis Just the Latest to Come Up Short in IPO Market

Prices the Reflect Nature of Firms With Products Years Away From Market

BY MARION WEBB

Several San Diego biotech companies completing their initial public offerings at below the expected price range suggests that IPO hopefuls with drugs in early-stage development will also face challenges when pricing their deals, according to one analyst.

On June 16, San Diego-based biotechnology company Metabasis Therapeutics priced its IPO of 5 million shares at $7 each for proceeds of $35 million.

The pricing came in at the low end of its $7 to $8 range, with the stock closing at $6.66 on the Nasdaq on June 16.

On June 10, another San Diego-based firm, Digirad Corp., which makes medical devices, priced its IPO between the $12 and $14 range, closing on the Nasdaq at $11.77, or below its $12 IPO price.

“If a company drops below the IPO price on the first day it’s never good,” said Melanie Hase, a senior IPO analyst with Renaissance Capital in Greenwich, Conn. Digirad closed June 17 at $9.72.

But unlike biotech firms with early-stage drugs in development, medical device makers typically run solid businesses with products on the marketplace, she said.

Digirad’s digital cameras used by doctors in private offices to detect heart problems address a growing market given the aging population and a shift away from hospital to outpatient care. While that is appealing to investors, Digirad has yet to make a profit.

“For that, investors demand a discount,” Hase said, which is why it priced at the low end.

With biotech firms, almost all of which are money-losing enterprises with products at various stages in development that are often years away from commercialization, IPOs are even trickier.

Metabasis is among them. In 2003, it reported a net loss of $9.4 million on sales of $9.1 million.

The way leading up to the IPO was bumpy.

Metabasis lowered its expected price range twice , to between $7 and $8 from $8 to $9 a share, which is significantly lower than its initial range of $11-$13.

It also lowered the size of its IPO by 1 million shares, to 5 million overall.

“That’s pretty bad,” said Hase, adding that Metabasis’ failure to price as expected in the week of June 14 shows that “there wasn’t strong demand for the deal.”

Metabasis isn’t an early-stage company, but it has years to go in drug development.

The company has three experimental drugs in clinical trials: A Type 2 diabetes and a hepatitis B drug in Phase II trials; a compound targeting primary liver cancer is in Phase I.

None of the drugs are in Phase III trials, the last of three progressive stages of testing required by the U.S. Food and Drug Administration before a firm can file for drug approval.

Companies with drugs in late-stage clinical trials supported by good data, an experienced management team, and partnerships have the best chances of a successful IPO, Hase said.

Biotechs that don’t meet that profile face the challenge of having to differentiate their business plans from the other IPO hopefuls, and competing for investors’ interest, she said.

“Right now the outlook for early-stage biotech firms is not too positive,” Hase said. “On average many early-stage biotechs were forced to cut their valuations at 40 percent to 50 percent , that’s a lot.”

As of June 16, 25 life sciences companies , including 19 biotechnology and six medical device companies , have gone public, Hase said.

Among them are Acadia Pharmaceuticals Inc., Nuvasive Inc., Anadys Pharmaceuticals, and Santarus Inc. from San Diego.

Three more local biotechs are hopeful: Favrille Inc., which tests an immunotherapy for non-Hodgkin’s lymphoma in a Phase II trial; Salmedix Inc., which runs a Phase II trial with an approved blood cancer drug from Germany; and Senomyx Inc., which tweaks molecules to enhance flavors for food and drinks.

Another local biotech, Xcel Pharmaceuticals Inc., withdrew its IPO filing April 9.

Steve Burrill, a life sciences merchant banker from San Francisco, sees more biotech IPOs ahead, but he predicted the rate of IPO issuances will slow in the second half of 2004.

“We still see several more biotech firms get through the window before the end of year. Unless we see a ‘pop’ in the IPO market it will be a buyer’s market, and we will see pricing remain on the soft side,” Burrill said.

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