CurrentOfferings.com Story:

Biotech IPOs suffer relapse

By Andrew Morse, The Deal, March 26, 2004

After a brief surge of optimism, the market for new biotechnology shares began sputtering towards the end of the quarter with several disappointing debuts and a handful of delays. As of March 19, eight biotechnology companies, more than the entirety for 2003, had managed to sell their shares to the public this year. Though several early comers were well received, companies have had to slash prices to get recent deals done and still slipped below the lowered offering prices in initial trading.

The U-turn in sentiment is due in part to the declining quality of the biotechnology IPO candidates, many of which are years away from getting a product approved by the U.S. Food and Drug Administration. It also reflects an overall slackening in the stock market, dampening enthusiasm for the new issues.

"There's trouble in paradise," says Jeff Hirschkorn, senior analyst at Current Offerings Inc., an IPO research boutique. "Biotech is going to be spotty."

The factors determining whether a company was a winner or loser have been almost universal: how far along in its development the company is when it debuts and what the market's general health when it does.

The successes, such as Eyetech Pharmaceuticals Inc., priced their deals when their companies appeared poised to deliver on the promises of their new drugs. Boding well for Eyetech was a big partnership with Pfizer Inc., the world's largest drug company, and a late-stage drug it is preparing for the approval process.

The timing of the market was equally important. Eyetech, which went public Jan. 30, priced at $21, better than the expected $18 to $20. It promptly rose more than 50%. The pricing came just after the Nasdaq hit its 52-week high of more than 2,150 points. The index since has fallen almost 10% to about 1,960.

"The IPO market is hypersensitive to market conditions," says Jay Ritter, a University of Florida finance professor, after the market started to sputter. "The resurgence of the IPO market is running into some resistance."

Recently, three deals have had to price below their expected range and several have sputtered to levels below even their diminished offering prices. Several companies have delayed their offerings, including Alameda, Calif.-based Peninsula Pharmaceuticals Inc., while others, such as Montvale, N.J.-based Memory Pharmaceuticals Corp., have delayed their pricing.

The recent wrecks include Xcyte Therapies Inc. and Tercica Inc. Both companies, which went public on consecutive days in the third week of March, had to cut their prices to well below their expected ranges to complete the deals. Shares of both companies promptly slipped below, or "broke," their offering prices.

Analysts said the blame rests equally with the companies, which may have been too immature as businesses to cope with the withering reviews of investors.

Xcyte's most advanced products, for example, are multiple myeloma and HIV treatments that are only in the second of the three phases of human testing the FDA requires. Its most advanced drug being developed with a partner is an HIV treatment in Phase 1 testing in conjunction with Germany's Fresenius Biotechnology GmbH, a relatively small player.

But a stock market that began convulsing as it tried to price compounded the impact of its young product lineup. "It's a combination of both," says Walid Busaba, an associate professor of finance at the Ivey School of Business at the University of Western Ontario. "I'm sure there's going to be some tough times for some of these companies."