A Pack of Pharmas Is Poised for IPOs

It must be really tough sitting on the sidelines when you’ve seen eight venture-backed companies go public and investors have bid up the share prices by an average of 44 percent. So you’ll forgive the partners at New Enterprise Associates (NEA) for trying to take three companies public when they aren’t even – gasp! – profitable yet.

NEA and more than a dozen other venture firms have filed IPO registration papers for no less than six pharmaceutical companies. While all but one of the startups are in the red, NEA and the others may still find Wall Street receptive because of its quirky interest in drug stocks.

Biotechnology stocks are notoriously volatile, but they currently boast a number of unique advantages working in their favor that should play out well this fall, says Kalina Milyoteva, an analyst who covers the biotechnology sector for the online newsletter 123Jump.com.

For instance, many say that the FDA has managed to speed up its drug approval process, especially for products targeting life-threatening diseases. A faster regulatory process will grant a better success rate for these and other pharmaceutical companies, Milyoteva says. Plus, typically the fall season is the strongest period for biotech stocks and she says many companies in the sector are poised for a rally in the coming months, despite the ongoing gloomy economic reports.

“Venture capitalists putting money into biotechnology are aware of the stark reality that investments in the sector are high-risk and do not offer a quick buck,” Milyoteva says.

But returns can be reaped over a longer period of time, if you consider that it typically takes from five to 10 years and a lot money before a biotech venture brings a viable product to the market.

Investors won’t have long to wait as six venture-backed pharmaceutical companies are poised on the IPO launching pad.

* San Diego-based Xcel Pharmaceuticals Inc. filed to raise $75 million. The company, which initially filed for an IPO last year but withdrew it because of market conditions, has since 2001 received almost $120 million from investors, including NEA and Domain Associates. NEA, which has a stake in three of the pharmaceutical companies ready to IPO, invested $40 million in Xcel’s first two rounds, according to Thomson Venture Economics (publisher of PE Week).

* Myogen Inc., a Denver-based biopharmaceutical company, also filed for a $75 million IPO last month. The move comes on the heels of Myogen raising $40 million in August from NEA, JPMorgan Partners (JPMP), InterWest Partners and Sequel Venture Partners, bringing its total funding to $127 million. NEA also invested $18 million in two later-stage rounds in 1999 and 2001.

* The third NEA-backed company to file an IPO is Pharmion Corp. The Boulder, Colo.-based company is developing a product for hematology treatment and aims to raise $73 million in its IPO. Pharmion has raised $130 million in venture money to date and NEA has invested $33 million, taking part in two rounds.

* Another to recently file is Carlsbad, Calif.-based CancerVax Corp., which over the last four years has raked in more than $125 million in venture funding from Forward Ventures, China Development Industrial Bank (CDIB) and JPMP, among others. CancerVax, which is developing an experimental cancer treatment, seeks to raise $115 million in its IPO.

* Aderis Pharmaceuticals Inc., researching drugs to treat Parkinson’s, filed for $64 million IPO. Since 1995, Aderis has raised $47 million from CDIB, Sanderling Ventures and others.

* Finally, NitroMed Inc. of Cambridge, Mass., is set to launch an IPO in October that will raise $85 million. The company, which makes drugs to treat cardiovascular diseases, has raised $80 million in venture capital since 1993. Investors have included Healthcare Ventures, Morgan Stanley Venture Partners, Atlas Venture, and Rho Ventures, among others.

Without a doubt, these companies stand at the cutting edge of science. Of the six pharmaceutical companies aiming to go public, only one posted a profit last year, according to SEC filings.

Xcel reported a profit of $3.5 million last year on $450 million in revenue. But Aderis lost $13 million last year on $3 million in revenue. CancerVax had no sales and reported a loss of $32 million. Myogen reported a loss of nearly $28 million on sales of $2.3 million. NitroMed had revenue of less than $1 million and lost $16 million. And Pharmion listed nearly $5 million in sales last year and a loss of almost $35 million.

Standish Fleming, a partner with San Diego-based Forward, says CancerVax expects to have a product for sale in a few years. He says the IPO filing of CancerVax is not a knee-jerk reaction to the euphoria surrounding the resurging IPO in 2003.

“This isn’t about IPO hype,” Fleming says. “Instead, there’s a substantial level of confidence in the IPO market once again, especially with biotech companies.”

Plus, momentum may be building once again with the IPO. For the first four months of the year, just one venture-backed company launched an IPO. But as of last week, eight venture-backed companies have gone IPO. This year’s numbers are tiny in comparison to the heyday of the late 1990s, but some say that the many recent pharmaceutical companies that have filed to go public is a sign that the pace will pick up.

“The recent IPO activity and new filings is a good barometer of the overall health of the economy,” says Scott Wendelin, former head of investment banking at Salomon Bros. and now CEO of Prospect Financial Advisors, a Los Angeles-based financial consulting firm.

“Though the number of IPOs are small, they have incrementally gone up and so has their value,” says Wendelin, who adds that the pace of new filings should keep rising in 2004.

But not everyone is convinced this is a great time to test the IPO waters again.

Peter Chung, general partner with Boston-based Summit Partners, agrees there is a thawing in the IPO market with more companies expected this fall to file. Summit has had two companies in its portfolio go public in the last year: iPayment Inc. in May and Impac Medical Systems last November.

But Chung says the market is still recovering from the dot-com bubble, so don’t expect a return to the heyday of the late 1990s. “There is still a shortage of supply,” he says. “There aren’t that many companies that are ready to go public right now.”