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Mergers, Acquisitions Leading & #8201; ‘Exit Strategy’ For Biotech Companies

Investors and biotech companies say mergers and acquisitions continue to be a better exit strategy than initial public offerings.

Investors trying to get the most out of their buck as the industry matures say an IPO isn’t always the best route.

“Normally, we can get a better valuation by doing a trade, sale or merger than an initial public offering,” said Ivor Royston, managing partner and founder at Forward Ventures. “We get better returns. I see a continuation of mergers and acquisitions that has been so dominating over the last two years. We just don’t see that many IPOs.”

The value of IPOs in the biotech industry in 2006 was $944 million, up 50 percent over 2005, according to the Ernst & Young 2007 Global Biotechnology Report.

But just $80 million, or 8.4 percent, of the total raised by companies going public in 2006 came from the San Diego region. Cadence Pharmaceuticals Inc. and SGX Pharmaceuticals Inc. were the only two local biotech IPOs in 2006.

The San Francisco Bay Area had twice as many in 2006, according to the report, raising a total of $211 million , making up 22 percent of the amount raised by biotech IPOs in the nation last year.

IPOs in the Mid-Atlantic region and New England each made up 20 percent of the nationwide total raised from stock offerings in biotech.

Just Starting Up

Rich Mejia, Ernst & Young’s director of life sciences for Southern California, said San Diego’s low share of the total raised compared with other biotech hubs could be attributed to its startup nature.

“There were bigger transactions in those areas (and more of them in most cases),” Mejia said. “A more mature company with more products will have a more traditional (higher value) IPO.”

But Mejia said San Diego might not have to wait much longer. He knows of at least two life sciences firms , one with more than $200 million in annual revenues , in the process of filing to be publicly traded. He would not disclose the company names.

“There’s a couple getting ready to go,” he said, adding that they are both firms with a diagnostic emphasis.

San Diego has 57 public life sciences firms, including medical device companies, according to Biocom, the trade group representing more than 500 local life sciences firms. Fifteen of the public life sciences firms here trade on the Over the Counter Bulletin Board, for companies with smaller market capitalizations whose shares are not listed on a national exchange.

Orexigen Therapeutics Inc., which has an obesity drug candidate, went public in May, selling 7 million shares for $12 each.

NovaCardia, which develops drugs to treat heart disease, filed in March to be publicly listed.

Acquisitions, Not Innovations

Royston, who was a founding partner of the former Hybritech, the first San Diego biotech, said large pharmaceutical companies are increasingly interested in acquiring startups as their pipelines run dry.

“Drugs are going off patent, and there is stifled innovation,” Royston said. “There are good relations now going on between private biotech and large pharmaceutical companies.”

Mejia said it’s difficult for investors to gain value quickly in newly public stock, so being acquired is more attractive these days.

“There’s not an opportunity for investors to get liquidity, whereas with an acquisition, they get it right away,” Mejia said.

Mejia said investors have toyed with the biotech company model in recent years to speed profitability and drug development.

“Nobody realized it was going to take 12 years and millions of dollars to develop a drug,” he said.

Companies have wavered over whether it’s better to focus on a single lead drug candidate or have a larger pipeline to reduce risk.

“But then, people said, ‘Gee, to develop five at once, it takes five times as much money,’ ” Mejia said.

In the late 1990s and early 2000s, the industry had hope for genomics technologies as a faster pathway to development and, ultimately, the market. Genomics is the study of an organism’s genome.

“But that market went flat because no one knew exactly how to utilize the information,” Mejia said. “Everybody jumped on the bandwagon.”

Bright Future

With companies such as Cadence Pharmaceuticals raising $25 million in a single round of venture financing, then immediately garnering $54 million in a pharmaceutical partnership in February 2006, analysts say biotech’s future is looking optimistic. The company raised $54 million in an IPO in October.

“There’s just been so many bombs out there, it has made investors shy,” said San Diego-based Bud Leedom, the editor of the California Stock Report and a former Wall Street analyst.

Royston said it will be interesting to see how NovaCardia’s IPO turns out.

“Somebody might just come along and make them a better offer,” Royston said.

According to Ernst & Young, six of 10 biotech IPOs completed nationwide in the second quarter of this year were priced below their initial asking price. That means that the companies received less per share than they thought they would get. The deals in the quarter were between 7 percent and 46 percent below the asking price, Mejia said.

In the first quarter, there were four IPOs and all were priced below the asking price, Mejia said.

With that in mind, Steve Brozak, a New York-based analyst from San Diego’s WBB Securities, said now is the “best time” for an IPO.

“Investors in public companies are getting a better deal than the last round of investors, and the venture capitalists are happy about that because they’re able to monetize it,” Brozak said.


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