Today’s guest columnist is Roger Longman, the Managing Partner of Pharma of FDC/Windhover and a contributor to The IN VIVO Blog. (http://invivoblog.blogspot.com/)
Historically speaking, the first half of 2008 has not been the worst period for biotech IPOs. But it’s damned close.
So far this year there have been at least two – BioHeart (which, after a year of trying, finally raised $5.8 million) and the Italian MolMed. In the corresponding period of 2003, no companies went public.
Without IPOs, the only real exit opportunity remains acquisition, a highly unpredictable event. And not a particularly common one: since 2005, according to Windhover’s Strategic Transactions Database, only 37 private companies have been acquired for more than $50 million – an average of about 11 per year.
Not that IPOs “even several years ago” really constituted exits, argues Jean-Francois Formela, a partner at Atlas Venture. VCs have had trouble for the last decade or so getting out of their investments through public offerings – six-month lock-ups and small floats made selling significant positions difficult.
But the problem has only gotten worse. As public investors have grown more skeptical of biotechs, they’ve forced companies to move further down the road toward commercialization, which requires higher levels of investment. A VC-backed IPO in the mid 1990s might have raised $25 million privately; since 2006, the average has been $91 million.
Not too long ago – last year, in fact — the IPO market was buoyed by so-called crossover investors, who, unlike managers of many public funds, have the ability to invest freely in private companies. They were looking to play the valuation gaps, both the gap between last private round and IPO and the gap between IPO and the price it reached when the stock started trading in earnest. Companies would bring in crossovers to top up the pre-IPO rounds and the crossovers would then take big chunks of the IPO.
But with the post-IPO disappointments of companies like Alexza (down 45% since IPO) and Orexigen (down 31%), or the failure of crossover favorites like Metabolex to ever get public, crossover investors are backing out of the private markets – and as they back out of private investments they’ve got less incentive to buy into new IPOs.
In fact over the past year the U curve of biotech investing has grown more pronounced. Buyers can still ascribe high values to early-stage companies, like Alnylam or Sirtris but then the value per data point begins to diminish pretty rapidly until a drug gets approved – or even after. Anesiva, for example, lost almost 50% of its value between the approval of its first product, topical anesthetic Zingo, and the drug’s launch last month.
So crossover investors are looking for, finding or even constructing cheaper and safer opportunities in the public markets – as Deerfield has done with its clever senior debt facilities for Array Biopharma, Exelixis and Zymogenetics. The deals might not produce blockbuster returns, but in this bear market – according to Rodman & Renshaw, 82 public biotech companies are trading with less than one year of cash, nearly 50 with less than six months’ worth of capital; and 33 trading below cash reserves – they’re covering the downside pretty well.
There are certainly exceptions. Portola, for instance, just raised another $60 million, mostly from crossovers like DE Shaw and Brookside Capital, though at its previous round price. Even so, with a private valuation probably north of $250 million, it’s tough to see how public investors would be willing to swallow much of a step-up for a company with plenty of clinical and market risk remaining. Likely goal for investors: acquisition.
So VCs, and indeed some crossover investors, are now looking to new channels for exits, or at least pathways to exits. One idea getting increasing currency: PE-backed private-company acquirers. They’d have access to plenty of capital, just not public capital. And they’d be looking to build businesses all the way to profitability, at which point the mega-venture could be sold to someone else – as Reliant Pharmaceuticals was sold to GlaxoSmithKline or Kos to Abbott – or it could go public, as Atlas’ Formela says, “the old-fashioned way – as a mature business with a track record and good visibility on earnings.”
Such a company might pay to acquire a more typical later-stage private company at some discount to a standard IPO price; the acquired company’s VCs would stay in the game, accepting similar levels of dilution they now have to take in exit-less IPOs – but when the IPO comes around, it’s big and liquid enough to allow everyone who wants to get out to do so.
Certainly there’s enough money in private equity to accomplish the strategy. The problem is finding enough assets to justify it. There aren’t many products which have a relatively straightforward clinical and regulatory path through pivotal trials and, at the same time, the kind of sales potential to reward the investment.
For now, the talk of this alternative path to liquidity through private equity is just that – talk. The only real prop to biotech valuations, public and private, remains Big Pharma’s desperate hunger for products.
Top Three
Guardian News & Media, the UK news publication group, purchased VC-backed ContentNext Media, the Santa Monica-based publisher of online media hubs such as paidContent.org, for an undisclosed amount. ContentNext received funding from Greycroft Partners in 2006.
The Blackstone Group and Providence Equity Partners are among the bidders for a stake in HKT Group Holdings, a spin-out of Hong Kong phone company PCCW, according to Reuters. Including plans for debt issuances, the business could be worth $8 billion. TPG Capital and Australia’s Macquarie Group are pursuing a bid as well. Because HKT seeks to take on more debt while maintaining investment grade status, PE bidders are considering “share financing,” in which loans are issued based on dividends and asset values instead of cash flows. Indications of interest are due Monday, Reuters reported. UBS is advising PCCW. Read PCCW’s Indication of Interest form (PDF)
Assurant Inc, a New York insurance company, hired Primus Asset Management to help it invest in leveraged loans, according to the New York Post. Pension fund CalPERS is weighing the possibility of investing in the asset class as well, the paper reported.
VC Deals
Hycrete Inc. secured $15 million in Series C funding from lead investors Mohr Davidow Venturesalongside NGEN Partners and RockPort Capital Partners, according to VentureWire. The company, based in Carlstadt, N.J., makes a concrete waterproofing materials.
Adnavance Technologies, a molecular diagnostic company, secured $1.8 million in Series B funding from its current investors, which include GrowthWorks Working Opportunity Fund, Canadian Medical Discoveries Fund and Business Development Bank of Canada. The funding was triggered when the business’s diagnostic test succeeded in distinguishing between MRSA MRSA and non-MRSA. Adnavance is headquartered in Vancouver, British Columbia.
Shopflick secured $7 million in funding led by Panorama Capital and Venrock. The Los Angeles-based company features emerging product and apparel designers with videos.
Presidium Learning, a Reston, Va.-based higher education technology services business, received its $7.5 million in late-stage funding, the company’s first outside investment, from Edison Venture Fund.
Trulia.com, a San Franscisco-based real estate search Web site, secured $15 million in funding led by Deep Fork Capital. Sequoia Capital, Accel Partners and Fayez Sarofim and Co. also participated.
ByteShield, a San Francisco-based anti-piracy software company, secured an undisclosed amount of angel funding from Gylling Invest AB and other angel investors.
Zend Technologies raised $7 million from TriplePoint Capital. The company, based in Cupertino, Calif., makes PHP-supported software.
MyoScience Inc, a Redwood City, Calif.-based aesthetic medicine startup, has raised $10.4 million in Series B funding, according to VentureWire. The round was led by Nexus Medical Partners, an included previous investors Accuitive Medical Ventures, De Novo Ventures and Saratoga Ventures. In June peHub.com reported the company had raised around $8.36 million toward that sum.
OpenCloud Limited, a Cambridge, UK-based telecom server supplier, raised a second round of debt and equity funding totaling $10 million from existing investors Advent Venture Partners, No 8 Ventures and Motorola Ventures, alongside Silicon Valley Bank.
Buyout Deals
The Blackstone Group and Providence Equity Partners are among the bidders for a stake in HKT Group Holdings, a spin-out of Hong Kong phone company PCCW, according to Reuters. Including plans for debt issuances, the business could be worth $8 billion. TPG Capital and Australia’s Macquarie Group are pursuing a bid as well. Because HKT seeks to take on more debt while maintaining investment grade status, PE bidders are considering “share financing,” in which loans are issued based on dividends and asset values instead of cash flows. Indications of interest are due Monday, Reuters reported. UBS is advising PCCW. Read PCCW’s Indication of Interest form (PDF)
CVC Capital Partners is the lead bidder in talks to purchase Lombard, a carve-out of British insurer Friends Provident, Reuters reported. Hellman & Friedman is also in the running; strategic buyer Swiss Life has dropped out. Lombard, based in Luxembourg, provides wealth management services.
Morgan Stanley Private Equity Asia is planning to buy $200 million in convertible bonds in E. Sun Financial, the Taiwan bank. The deal would give Morgan Stanley a 9.5 percent stake.
Cerberus Capital Management-backed Chrysler has denied rumors that it is in financial distress. Cerberus owns around 80% of the business, which recent drew down a $2 billion line of credit. The company last $1.6 billion last year.
Gulf Finance House, a Bahrain investment bank, is speaking to the Saudi shareholder of Injazat Capital, in hopes of acquiring their 60% stake in the Dubai PE firm, LBOWire reported. Gulf Finance House already own 40% of Injazat. The Saudi shareholder in question is Saudi Arabia’s Islamic Corp. for the Development of the Private Sector. The deal could close next week, the news service reported.
National Real Estate Partners (NRDC) is in talks to buy Hudson’s Bay Co., The Financial Post reported. NRDC already owns US-based department store Lord & Taylor and would combine it with the Canadian department store. The firm holds a 20% percent stake in Hudson’s Bay.
TPG, Wal-Mart and Carrefour are planning a bid for Russian retail operator Lenta, Reuters reported. Lenta will sell an 89% stake in two weeks, the report said.
AXA Private Equity, a Paris-based buyout firm, revealed it has a 10.5% stake in Carbone Lorraine, an electrical components and graphite business. AXA has the right to raise its stake to 22.5%.
Ziff Davis Media, previously backed by Chicago LBO firm Willis Stein & Partners, has emerged from bankruptcy and transferred ownership to its bondholders.
Chanticleer Holdings, a North Carolina-based BDC, will purchase Texas Wings Inc, a Hooters restaurant franchisee, for $106 million. Chanticleer purchased Hooters Inc for $55 million in March and will merge the companies. The deal includes the following capital structure: $53 million in cash, $37 million in common stock and $16 million in convertible notes.
Vertis Communications Inc. has secured DIP lending from GE Commercial Finance in its pre-packaged bankruptcy. The Baltimore-based direct-mail advertising business is backed by Thomas H. Lee Partners and Evercore Partners. Under the Chapter 11 plan, the company will emerge as part of competing company, American Color Graphics.
GFI Energy Ventures, a private equity firm based in Los Angeles, has acquired a majority stake in Snelson Companies Inc, a Sedro-Woolley, Wash.-based industrial construction services business. Deal terms were not disclosed. GFI invests in energy-related service companies and is the co-general partner of OCM/GFI Power Opportunities Funds alongside Oaktree Capital Management.
Sun Capital Partners purchased two mills from Graphic Packaging International Inc. The Wabash, Ind., and Philadelphia-based mills produce recycled paperboard. They were sold in compliance with antitrust regulation from Graphic Packaging’s merger with TPG-backed Altivity Packaging LLC.
Threshold Pharmaceuticals sold a stake worth $18.3 million to Sutter Hill Ventures, HealthCare Ventures, LLC, Alta Partners and Three Arch Partners. The Redwood City, Calif.-based business is issuing more than 50 million new shares of common stock and the VC firms will hold more than 20%. The investment saves Threshold from being de-listed; the company’s stock took a hit when the FDA placed a clinical hold on one of its products.
PE Exits
Guardian News & Media, the UK news publication group, purchased VC-backed ContentNext Media, the Santa Monica-based publisher of online media hubs such as paidContent.org, for an undisclosed amount. ContentNext received funding from Greycroft Partners in 2006.
ImageKind Inc, backed by Holtzbrinck Ventures, Crosslink Capital, Second Avenue Partners, sold to CafePress.com Inc, an online marketplace backed by New Millennium Partners, PacRim Venture Partners and Staenberg Private Capital. Seattle-based ImageKind provides an online image printing and selling service for users. CafePress is based in San Mateo, Calif.
PE-Backed M&A
Active Network Inc purchased Hy-Tek Sports Software, technology and marketing business. Active Network is backed by Canaan Partners, ESPN Inc., ABS Ventures, North Bridge Venture Partners, Charles River Ventures, Comdisco, Tao Ventures, Performance Equity, Austin Ventures, DB Venture Partners, Dominion Ventures, Enterprise Partners Venture Capital, Hambrecht & Quist Capital Management, Kettle Partners, Liberty Venture Partners and Ticketmaster Inc.
Impinj Inc purchased the RFID business of Intel Corp for an undisclosed amount, paid entirely in equity. The operation, which develops silicon for chip readers, will be renamed Indy R1000. Impinj is backed by an initial investment from California Institute of Technology, and venture money from Arch Venture Partners, GF Private Equity Group, Madrona Venture Group, Mobius Venture Capital, Polaris Venture Partners, Samsung Ventures America, Unilever Technology Ventures, UPS Strategic Enterprise Fund, VentureTech Alliance, Viterbi Group and YFY Group.
Firms & Funds
First London Securities, a UK investment firm, is seeking to launch a €50 million ($79.2 million) tech and clean technology fund to invest in spin-outs from Humboldt University, a German Research school. The University spun out StudiVZ, the German version of Facebook, which was sold to Holtzbrinck Verlag, a German publisher.
Assurant Inc, a New York insurance company, hired Primus Asset Management to help it invest in leveraged loans, according to the New York Post. Pension fund CalPERS is weighing the possibility of investing in the asset class as well, the paper reported.
Kingdom Zephyr Africa Management Co. has held a first close on its second fund, VentureWire reported. The firm is jointly managed by New York firm Zephyr Management and Saudi investment firm Kingdom Holding Company. Its second fund has a $500 million target and has raised $325 million thus far.
Human Resources
Allen Morgan left VC firm Mayfeild Fund to make individual investments.
Sovereign Capital hired Taha Hasan as an investment manager and Tom Matthews as an investment executive. Hasan joins the UK firm from Summit Partners; Matthews from Macquarie Bank.
C.P Eaton Partners, a placement agency based in Rowayton, Conn., hired Jerry Elliot as its Chief Operating Officer, Chief Financial Officer, and Chief Legal Officer. Elliot previously served as Chief Operating Officer and Chief Financial Officer of Cengage Learning (formerly Thomson Learning).
C.P. Eaton Partners also added Peter Martinson, Nina Frandson, Dan Meade, Jr. and Brian Newman. Martinson, a former Macquarie Funds Management managing director, will serve as senior vice president in Lo Jolla, Calif. Frandson, previously a developer for American International Group, will serve as vice president in Rowayton, Conn. Meade will join as a vice president in Rowayton; he previously worked with Cramer Rosenthal McGylnn. Newman joins the firm as an Associate with prior experience at Goldsmith Agio Helms and CRT Captail.
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