Biotechnology slowdown IPOs: The initial public offering market has been sour in biotechnology. Reasons include mixed clinical trials for drugs and skepticism of new biotechnology investments.

July 13, 1997|By Mark Guidera | Mark Guidera,SUN STAFF

In an article in the Business section of Sunday's editions, the name of a newsletter published by Steven Delco was incorrect. The proper name of the publication is the Delco Biotech Investment Letter.

The Sun regrets the errors.

The bull market may be on a roar, but promising biotechnology companies looking to go public have had to turn elsewhere this year to get in on the money action.

The sour initial public offering, or IPO, market for the biotechnology industry has sidelined several promising Maryland biotechnology companies' plans to go public this year, including Osiris Therapeutics Inc., a Baltimore company developing medical therapies using human tissue cells.


In fact, Maryland, which has one of the highest concentrations of such companies nationwide, hasn't seen any biotechnology company go public this year.

Reasons for the lackluster market, say industry experts, include mixed clinical results on drugs in development and a skittish attitude toward new biotechnology investments among money managers.

Also, biotechnology has faced intense competition for investor money from other high-technology companies that went public with products and earnings under their belts -- something start-up biotechs can't offer immediately.

"Overall, 1997 will be less generous to biotech companies headed to the public equity market," predicts Coopers ''TC Lybrand LLP in its recent annual report on the industry.

Also, says Steven Delco, publisher of the Delco Report, a newsletter covering the biotechnology industry:

"Investors have a lot more options in biotech. Before, the only thing to invest in were early-stage companies. But now you've got some mature biotech companies with products on the market and earnings. That's hurt the IPO market."

Nationwide, the initial public offering market for biotechnology is off almost 70 percent for the first six months of this year compared to last year, according to San Francisco-based Burrill & Co., a private merchant bank active in the life sciences sector.

By last year's midpoint, biotechnology outfits had raised more than $1 billion in the IPO market, according to Burrill; as of June 30, less than $300 million had been raised, Burrill says in a recent survey.

According to Burrill, just 11 U.S. biotech firms have gone public this year.

If that trend continues, biotech IPOs will be way off from 1995, a bullish year for the industry when 51 went public, according to Coopers & Lybrand.

Still, some experts and biotechnology company executives expect the new issues market to improve enough later this year to allow some offerings to progress.

Among those planned: Gene Logic Inc., a promising Columbia-based bio-informatics and genomics outfit, and BioReliance Corp., a Rockville contract research and manufacturing firm formerly known as Microbiological Associates Inc.

"The market conditions in the early part of the year were atrocious," said Dr. Michael Brennan, Gene Logic's president and chief executive officer. "But there is a sense that things seem to be improving and people are ready to look at new small cap issues."

Buoyed by a recent multimillion-dollar research and development deal with Procter & Gamble Pharmaceuticals and other deals in the works, his firm plans an offering in the fall.

BioReliance also intends to forge ahead with an IPO this year, but has yet to set a date.

It said in April that it expects to raise about $37 million for expansion and potential acquisitions.

Improving market

BioReliance President Capers McDonald and Brennan at Gene Logic see the $40 million raised in a June offering by Aurora Biosciences Corp., a California maker of high-tech drug discovery equipment, as the strongest sign yet that the slumbering IPO market is reawakening.

Delco, who runs Delco Scientific, a biotechnology and pharmaceutical consulting firm, also believes the market for new issues could improve later this year.

The key, he says, will be one or two FDA product approvals to revive investor confidence that was hammered this year when the FDA rejected West Chester, PA.-based Cephalon's drug to treat Lou Gehrig's disease.

"What happened with Cephalon cut the IPO tap off," said Delco. "But I think we'll see two or three new products hit the market in the next year."

For now, though, mutual fund managers, who typically buy up big stakes in new issues, are mostly steering clear of biotech issues because of the spate of mixed clinical and FDA news.

Another pressing problem for the industry: an unwillingness among big brokerages to designate analysts to cover biotechnology exclusively, says Thomas Neff, a partner in Three Arches Bay Health Sciences Fund, of Mountain View, Calif. The venture group holds a stake in Osiris.

That trend, says Neff, has crimped brokers' ability to understand emerging companies' complex scientific underpinnings and to champion potential winners in the IPO market.

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