Life science companies that have plunged into the IPO waters over the past few years have likely found the temperature, at best, tepid. Rather than being warmly embraced by the public markets, as was the case in the not too distant past, the reception new issues are more recently getting often amounts to little more than the cold shoulder.
And the numbers seem to bear this out. Since January 2005, 34 new life science issues have come to market through initial public offerings24 in 2005 and 10 through April this year. Of the total, 26 IPOs were biopharmaceutical issues with seven medical device IPOs and one diagnostic deal.
Virtually from the start of the going-public process, most of these issues have come up short by one measure or another.
As has been the case in recent years, the vast majority initially filed with public market valuations anticipated to be $300 million or more, an apparent necessity to attract the attention of the larger institutional portfolio managers whose fund size often precludes investment in smaller, less liquid companies.
This seems particularly true among biopharmaceutical issues where the S-1 filings for 23 of the 26 issues to debut since January 2005 have projected market capitalizations crossing the $300-million threshold. Such often inflated valuation expectations are rapidly corrected when these deals ultimately priceif they even get public. Of the 34 life science companies, only six have actually achieved the targeted $300-million valuation, and only five of them were biopharmaceutical deals.
Consequently, the funds that companies access through an IPO often fall far short of expectations. Companies that have gone public since 2005 have, on average, raised little more than 60% of their initial funding targets, with the gap between amount anticipated and amount realized only increasing year-over-year. Also, certain companies commit to completing the IPO despite raising less than 25% of initial funding targets. Under no circumstances can these companies’ venture investors consider these IPOs as exits.
These newly public companies often fair no better after the IPO, as their valuations continue to be challenged in the secondary markets. Of the 34 new life science issues, nearly 50% are currently trading below their IPO price.
This trend seems to suggest that many companies are willing to endure the going-public gaunlet regardless of the coststhat despite a far-from-ideal IPO scenario, being public in whatever form is more desireable than remaining private. And in certain cases a going-public event has provided these companies funds to remain in operation that otherwise would not have been available. And so companies seemingly have embraced the IPO track in the hopes that future pastures as a public company are greener.
Current activity involving reverse merger transactions in many ways provides an interesting parallel to current IPO activity and seems to further this notion.
The specifics of reverse merger transactions often vary widely and may take different forms. Yet common to all reverse mergers is a private target merging with public acquiror for operating control of the combined company and majority equity ownership. While some deals involve a significant cash component, many such transactions are coupled with a financing event.
Any number of reverse mergers take place, involving unlisted, often pink sheet companies with few reporting requirements. These types of deals are justifiably viewed with disdain. In contrast, the transactions considered here involve reporting companies that list on the OTC Bulletin Board if not on one of the major exchanges.
In light of the apparent dislocation created by current capital market trends, reverse mergers have seemingly gained increased legitimacy and credibility as a means to go public. Interestingly, since the beginning of 2005, 21 life science companies became public through reverse mergers, with activity accelerating over the period. In the first four months of 2006 alone, nine reverse mergers were completed with others in the pipeline. The capital accessed through the more visible of these reverse-merger transactions often exceeded the average amount raised through a traditional IPOs.
Among the more visible reverse mergers announced this year have been MicroMet’s merge with CancerVax, providing MicroMet with a NASDAQ national market listing and $50 million in cash; Cyclacel’s merger with Xcyte, giving Cyclacel $19 million in cash and a NASDAQ national market listing, with Cyclacel then bringing in an additional $45 million through a subsequent private placement; and most recently, Infinity Pharmaceutical’s announced merger with Discovery Partners Intenational, a transaction that brings as much as $75 million to Infinity, in addition to providing Infinity a public company listing.
And while these deals may be viewed as outliers, that respected companies with sophisticated venture investors are increasingly using reverse mergers to effect go-public transactions seems to suggest the strategy is perhaps gaining more mainstream support.
Why would this be so?