VC-Backed IPOs Scarce At Best

After a series of disappointing drug trials and fallout resulting from genetically engineered food products, the biotech boom of 2000 has largely fizzled in 2001. However, some deals are still getting done, and new biotech entrants are making a push toward the public market.

To date, only three venture-backed initial public offerings by biotech companies were completed this year, netting $190.6 million, according to Private Equity Week publisher Venture Economics. Yet in 2000, 36 VC-backed biotech companies went public, totaling $3.2 billion in proceeds.

The largest VC-backed IPO so far this year has been from Wright Medical Group Inc. (NNM:WMGI), which went public July 12 and raised $93.8 million. The Arlington, Tenn.-based maker of reconstructive orthopedic devices was backed by Warburg Pincus. Wright Medical priced 7.5 million shares at $12.50, and the stock has since jumped 28% to $16 by late Wednesday afternoon.

Third Wave Technologies (NNM:TWTI) and Seattle Genetics Inc. (NNM:SGEN) were the other two VC-backed biotech companies this year to go public. They raised $47.9 million and $49 million, respectively, in the first quarter.

By contrast, the smallest offering last year was from microfluidic systems maker Cepheid (NNM:CPHD), which raised $30 million last June. After pricing 5 million shares at $6.00, the company has plummeted 55.8% to $2.65. Last year?s largest deal was from Lexicon Genetics Inc. (NNM:LEXG), which raised $220 million in its April 7, 2000, initial public offering. The gene and cell database company priced at $22 and is now trading at $9.02, a drop of 59%.

Modified Foods Are Passé

With agriculture-based biotech companies coming under fire from various constituencies around the world, the demand for genetically engineered crops is waning. Instead, demand is being placed on organically produced food products.

Last week, biotechnological pesticide manufacturer AgraQuest Inc. (Proposed NNM:AGRQ), filed with the SEC for a $75 million IPO, becoming the sixth VC-backed deal in the pipeline waiting to go public. As a group, these companies are sitting on $486.3 million in deal monies.

AgraQuest, which has selected Merrill Lynch to lead-manage its IPO and Stephens Inc. and First Union Securities as underwriters, last received financing in December 2000. The $15 million late stage round included such backers as BioAsia Investments LLC, Burrill & Co. and Rockefeller & Co., along with some undisclosed investors.

The Davis, Calif.-based manufacturer of environmentally friendly natural pest control products plans to use proceeds from the IPO for expanding its sales and marketing capabilities, research and development activities, and to enhance its manufacturing facilities. It also plans to use $5 million to repay a promissory note.

The company did not sell any of its products until the end of 2000, which meant the company incurred a net loss of $9.08 million that year, compared with a net loss of $6.08 million in 1999. Its first product, Serenade, has been approved for use on grapes, apples, pears, cherries, tomatoes, hops, several vegetables, peanuts and walnuts.

Ag-Biotech On Its Way Down?

“We feel the hey-day of ag-biotech has peaked and it?s going to be a downhill ride for them now because no new countries are moving to produce genetically engineered crops,” said Ronnie Cummins, the national director of the Organic Consumers Association, a Minnesota-based consumer group. “There are more and more new stories about the boom in organic products.”

AgraQuest argues that a formulation of Serenade is approved for use in organic agriculture. Its S-1 statement revealed: “As concerns over the effects of synthetic chemical pesticides and genetically modified crops continue to grow, we believe our products will be increasingly adopted into the integrated pest management programs of conventional and organic growers as well as by institutional and home users. We believe we will set the industry standard for natural pest management solutions.”

Holding 19 patents and two U.S. patent applications pending, AgraQuest has strategic collaborations with Agroscience LLC, Maxygen Inc. and American Home Products Corp. It competes directly with the pesticide units of Valent Bioscience Corp., EDEN Bioscience Corp. (NNM:EDEN) and Certis USA Inc.

Contact Frank Musero: Frank.Musero@tfn.com