Wall Street Interest in Biotech IPOs Fades, TargaCept Pulls

Early in the evening of Thursday, March 10, it seemed that TargaCept Inc. would price an IPO that had been postponed just days earlier. Lead underwriter Morgan Stanley phoned company management to report that institutional buyers were interested at $9 per share, which would have generated approximately $56.25 million (plus a possible $8.43 million green shoe). It was around $30 million less than TargaCept had originally anticipated, but still was far better than the 50%-plus haircut that other drug companies like Threshold Pharmaceuticals Inc. had been forced to accept.

;We wouldn’t have necessarily done it at $9, but it definitely might have been good enough,” says Jim Barrett, a general partner with TargaCept investor New Enterprise Associates.

Just a few hours later, however, Morgan Stanley called back in to say that the revised book was featuring a sale price of just $7 per share. The deal was off, particularly since the prospective $43.75 million didn’t even match the $50 million in cash that TargaCept was sitting on at the end of 2004. “We just felt that the company was worth more than that,” Barrett explains.

Last Tuesday, TargaCept requested that its IPO registration be withdrawn, citing “difficult market conditions that currently exist for initial public offerings in the life science industry.

The explanation was more specific than is standard practice (i.e., “…due to current market conditions [period].”), and underscored recent VC grumbling that the public markets are undervaluing life science issues. For example, Threshold Pharmaceuticals priced at just $7 per share, after filing to price at $14-$16 per share. Favrille Inc. had nearly as bad an experience when it priced at $7 despite a $12-$14 offering range, while Icagen Inc. had to reduce its expectations to $8 per share, down from $10-$12 per share. In all, there have been five VC-backed life sciences IPOs in 2005, and the best pricing was for Viacell Inc., which got investors to bite at the lowest end of its $7-$9 range (see chart).

Public market investors justify such behavior by pointing out that three of the five – Favrille, Icagen and Threshold – today are trading even lower than their IPO prices. Moreover, they say that there is increasing skepticism surrounding companies without commercialized products, which is problematic for a VC-backed life sciences crop jammed full of drug-makers. Even 2004 IPO darling EyeTech Pharmaceuticals Inc. has fallen well below the $30 per share mark (it was as high as $49.12 per share, after pricing its IPO at $21 per share). Wait for FDA approval, they say, and then Joe Investor will be glad to buy.

What is ignored, however, is that VC-backed life sciences IPOs have actually performed fairly well over the past 15 months. The 2005 quintet has a non-weighted average aftermarket performance of –1.67%, which easily outperforms the Nasdaq’s –7.34% over the same period. Moreover, 24 of the 46 VC-backed life sciences companies to go public in 2004 are trading above offering price as of market close last Wednesday, with another sitting even. When all 46 are included, the non-weighted average aftermarket performance is 6.33 percent.

All of this will certainly be taken into account by the 19 private equity-backed life sciences companies currently in registration for their own IPOs. More specifically, they will need to weigh the pros and cons of going public, compared to staying private and possibly needing more venture capital.

;Most companies that file for IPOs can get additional money from their existing investors, but there still tends to be a feeling that the public market prices – however low – are better than what’s available on the private market right now,” says a West Coast VC who declined to be named. “On the other hand, they might want to wait it out until the public markets embrace them again… and not have to immediately pay out the $1 million or $2 million in annual Sarbanes-Oxley expenses.

So far, TargaCept is the only VC-backed life sciences company to withdraw its IPO registration in 2005.

Email Daniel.Primack@thomson.com