Financings of the Fortnight Is Innocent Until Proven Guilty

Welcome to the jury service edition. We were called in to do our civic duty this week, and we were stunned when we made it through the voir dire and found ourselves on our feet, raising our right hand and taking an oath to well and truly try the cause before us.

Now impaneled for the first time and deciding the fate of a fellow citizen, your columnist is struck by how difficult -- and important -- it is to remember that a person charged with a crime is innocent until proven guilty. Everyone likes to think of himself or herself as open minded, but the real challenge is to keep the mind open in the pressure cooker of a criminal trial: sealed into a room, artificially separated from the outside world, and bombarded with new jargon, complicated timelines, and tangled facts, or egregious lack thereof.

We're also finding the process fascinating in the age of social media. All of us are constantly encouraged to be insta-pundits. Indeed, 140-character snap judgments are not just encouraged, they're lionized, but a juror's job is the opposite: You must banish the snap judgments. No, better yet, be skeptical of them, then gather them, shape them, and rework them into a coherent latticework of reason.

It's a weird out-of-body experience. It's also a lot like journalism, though with very different rules. While I've been deliberating with eleven others, my colleagues committed a small act of heads-up journalism, digging up notice in a Cephalon regulatory filing that the firm is starting its own in-house venture group. In case you missed it, here's our report. Cephalon joins Merck-Serono, Boehringer-Ingelheim and Shire, all recent joiners of the corporate venture club.

Any holdouts? The biggest, or so we thought, is the American Merck. Consider this response from Merck's SVP of worldwide licensing David Nicholson at last year's Pharmaceutical Strategic Outlook conference, when he was asked if Merck would ever create a biotech venture fund:

Look, there are some really fantastic VC folks out there and that's their business. Our business is discovering and developing drugs. At least to date, have we contributed to VCs and to their firms? Yes, absolutely. All parts of the various legacy companies of Merck have done that. That's something that we remain interested in. Are there concrete plans to set up a VC fund at Merck today? No. Does that rule it out forever? Who knows?

"Who knows" has arrived. Without fanfare, the big pharma has launched what it calls the Global Health Innovation Fund, a $125 million vehicle with five staffers who report into Merck's executive committee and chief strategy officer. The group's mandate is to invest beyond drugs: diagnostics, devices, information and health management tools, site-of-care services. The fund is run by Bill Taranto, who came to Merck from Johnson & Johnson, where he was most recently in charge of health care strategy and alliances. Taranto's been out stumping for the fund at conferences like this.

We asked about the fund's investments so far, and we got a tight-lipped response: Nothing yet disclosed.

Another holdout that comes to mind is Celgene. Though it's done one-off investments like the one Cephalon made in Japanese firm SymBio Pharmaceutical, which we describe below, Celgene doesn't have a venture group. But as we report in the upcoming issue of IN VIVO, executives certainly have been thinking about it -- and larger questions of how to tap into outside innovation -- as the big biotech grows more attuned to its size ($3.6 billion in 2010 sales), its dependence on one product (Revlimid, $2.5 billion in 2010 sales), and the pitfalls of having investors who want some of that cash back, dammit, instead of seeing it plowed into R&D (28% of fourth-quarter revenues) or marquee deals.

We're often accused of bringing you, dear reader, tasty little tidbits from the financial front. You can call us innocent, you can call us guilty, but you can't deny that you're reading another edition of...


Acetylon Pharmaceuticals: A few weeks back, we’d heard that oncology startup Acetylon was looking to tap a broad network of angels for an upcoming round of funding well into the double-digit millions -- a lot more money than can fit on the head of a pin. Now Acetylon has taken the first step, revealing in an SEC filing that it’s raised the first $12.4 million of a planned $30 million Series B round. Although it hasn’t revealed details about its investor group, CEO Walter Ogier said in a recent START-UP feature that Acetylon wanted to avoid working with traditional VCs. Rather, it planned to seek capital from friends and colleagues of its existing angel network, which includes The Kraft Group, a family philanthropic organization and holding company tied to the owners of the New England Patriots. The strategy appears to be working: The filing says 23 investors are already involved with the new round, more than twice the number involved in its $7.2 million Series A during 2009. (A $2 million convertible note followed last year.) Founded to investigate new drugs in the class known as histone deacetylase (HDAC) inhibitors, Acetylon is aiming to move its first drug candidate, multiple myeloma treatment ACY-1215, into the clinic. The company published and presented encouraging preclinical data about the drug in December. In a new wave of HDAC inhibitors in recent years, only two have been approved: Celgene's Istodax (romidepsin), which it nabbed in its takeover of Gloucester Pharmaceuticals; and Merck & Co.'s Zolinza (vorinostat). Both were approved for cutaneous T-cell lymphoma. -- Paul Bonanos

Tengion: Raise or fold: Those were the two options in the cards for organ and tissue regeneration firm Tengion. On March 1, two months away from running dry, the firm raised $31.4 million in a PIPE by selling 11.1 million shares at $2.83, a 13% discount to the ten-day average. Tengion also issued five-year warrants for another 10.5 million shares at $2.88. Tengion announced last month it only had enough cash to last through April, which would mark the one-year anniversary of the firm's 2010 initial public offering. The company priced 6 million shares at $5, though it wanted a stock price twice as high with fewer shares sold. The stock has since traded between $3 to $5 except for two days in mid-February, when it got a boost supposedly from rumored discussions of a stock-for-stock merger between Tengion and an undisclosed publicly traded company. But the price spike caused the potential buyer to pull out of those negotiations, according to Tengion. Device giant Medtronic was the big name in this week's stock sale. It bought 2.5 million shares and received a right of first refusal that expires Oct. 31, 2013 to Tengion’s Neo-Kidney Augment, a preclinical cell augmentation candidate designed to prevent or delay dialysis or kidney replacement by regenerating kidney tissue. Upon first glance Medtronic’s investment seems out of the ordinary, but Medtronic has been trying to build a regenerative biologics business. This past August it paid $118 million for Osteotech, which produces demineralized bone matrices, bone grafts, and structural allografts. -- Amanda Micklus

Advanced BioHealing: ABH is looking for a smoother road than what Tengion has experienced in the public domain. The Connecticut firm, also working on regenerative medicine products, has filed for an IPO with a $200 million placeholder. Just a placeholder, mind you, but it's at least a rough gauge of what the company and its advisors think of its prospects. It sells a bioengineered skin substitute called Dermagraft used to treat diabetic foot ulcers, and it would like to expand the product to treat venous leg ulcers. It's also working on a skin treatment for severe burns. This year started with a flurry of IPOs that mainly followed last year's trend of discounted pricing and, post-IPO, lukewarm reception for shares. It's something ABH's shareholders must be keenly aware of. Canaan Partners owns 41%, Safeguard Delaware 28%, and Wheatley Partners 15%. -- A.L.

SymBio Pharmaceuticals: Plenty of Western biopharmas have found interesting compounds sitting on Japanese drug makers' shelves. SymBio turns that formula on its head. The Tokyo-based specialty pharma in-licenses foreign products and brings them to the Japanese market. It just raised a ¥ 2 billion ($24 million) Series E round, which makes the company sound ancient. Not so; it was founded in 2005 by the former head of Amgen in Japan, and it shepherded the lymphoma treatment bendamustine to approval in Japan last October within four years of starting a Phase I study. The F round was led by Cephalon and JAFCO, with Cephalon boosting by an undisclosed amount its 17.5%, which it gained in its 2009 deal with SymBio to take over bendamustine rights in China and Hong Kong. Cephalon also has US rights to the drug through a deal cut by Salmedix, which Cephalon acquired in 2005. (Salmedix got the rights from Fujisawa Deutschland in 2003.) There's a lot of ink devoted to SymBio in our colleague Mel Senior's IN VIVO feature on Japanese specialty pharma here. The story is four years old -- note the reference to a "burgeoning private equity sector" -- but quotes like this one from SymBio CEO Fuminori Yoshida are timeless: "Many [non-Japanese] companies in niche areas, looking for partners in Japan, visit Japanese pharma firms, take their executives to a nice restaurant, and think they have a deal. Twelve months later, nothing happens." -- A.L.

Image courtesy of flickr user mira66 under a Creative Commons license.

Look! Up In The Sky! It's Financings of the Fortnight!

It's a bird (yum!), it's a plane... no, sorry kitty, it was the year's first blast of biopharma IPO activity that we spied in the winter sky this past fortnight. As in 2010, there were several underpowered liftoffs, a couple failures to launch, and, if you'll pardon our mixed multimedia metaphor, very little catnip for public investors.

The first debut, Pacira Pharmaceuticals, went public just as our previous thrilling FOTF episode was going to press. The 2007 spin-out of SkyePharma PLC’s injectables business grossed $42 million by selling 6 million shares at $7, half the price of the low end of its anticipated $14 to $16 range. Since then, Endocyte and AcelRx Pharmaceuticals have also reached public orbit but, as with Pacira, only by bending to public market pressure and selling more shares at a lower price than they hoped for.

Other biopharmas couldn't get out at all. Clarus Therapeutics, a developer of reformulated oral testosterone replacement therapy, postponed its IPO on February 11; it hoped to sell 5 million shares between $11 and $13. And Italian antibody producer Philogen canceled its second attempt to list on the Milan stock exchange after partner Bayer HealthCare Pharmaceuticals terminated a license agreement for Philogen’s two Phase II cancer candidates, radretumab and darleukin.

It's worth noting that beyond biopharma, sequencing firm Fluidigm and diagnostic maker BG Medicine went public, as did Israeli company RedHill BioPharma on the Tel Aviv Stock Exchange, though its 51.6 million shekels ($13.6 million) raised were barely a blip. (Still, it's always fun to say, "That's a lot of shekels!")

Haircuts or not, companies at least are raising money. But what about investors? We've been following post-IPO stock performance, but it doesn't tell us much about the recent debuts. So now that the year's first IPO fusillade is over and no life-science debuts are pending, let's take a different measure. Of the 16 US biopharma companies to go public since the window re-opened in late 2009 (excluding PE-backed Talecris Biotherapeutics Holdings and biofuels company Amyris), the average step-up, defined as pre-IPO valuation divided by the private money raised, for the group is 1.65x. But that figure includes the outlier Cumberland Pharmaceuticals, which privately raised $16 million but had a pre-money IPO value of $291 million. That specialty pharma ended up with an IPO step-up of 12.5x, way above the mean. Remove Cumberland, and the average for the current class drops to 1.54x.

How does that compare to acquisitions? We found 21 biopharma acquisitions in the same period of time for which we could obtain venture data. Two were outliers: Marcadia Biotech, which raised $15 million from VCs and sold to Roche for $292 million in December; and AkaRx, which raised $11 million in venture and sold to Eisai for $255 million in late 2009. The rest of the group produced a step-up of 2x, slightly better than the IPO group.

Now, we fully realize that the IPO isn't an exit, it's -- let's say it together -- just another round of financing. So those IPO step-ups are strictly theoretical. That's why we'll keep monitoring post-IPO stock performance. By the time the lock-up ends, a new public company's stock price these days has often given its venture holders heartburn to go along with their haircuts. As of last week, the 15 biopharmas in the class of 2009-2011 had seen their post-IPO share prices fall an average of 5%. (Only four days public, AcelRx isn't included, but as of this writing it's lost 20% of its IPO price.)

At a time when markets are buoyant -- heck, even the Nasdaq biotech index is up 16% since the Jan. 1, 2010 -- the cumulative loss for the recent biopharma IPO class is disheartening. As Atlas Venture partner Bruce Booth tweeted this week, "It's tough out there."

Well then. So who’s on deck? Supernus Pharmaceuticals is a spin-out of Shire Laboratories’ drug reformulations unit with two extended-release versions of generic epilepsy medications in Phase III. Ambit Biosciences, a cancer company that has partnered with Astellas on its Phase II kinase inhibitor for relapsed/refractory acute myeloid leukemia, also submitted an S-1 in December. Other companies that filed in 2010 include Cutanea Life Sciences and Horizon Pharma.

Ready for liftoff? Remember, folks, in space no one can hear you scream, especially when you're reading...


Conatus Pharmaceuticals: Liver disease specialist Conatus announced a $20 million Series B round that remains open to additional investors. First-time backer AgeChem Venture Fund of Montreal joined Conatus’ existing investors, Aberdare Ventures, Advent Venture Fund, Bay City Capital, Gilde Healthcare Partners and Roche Venture Fund. The round builds upon the startup’s $27.5 million Series A from 2007. Formed by former executives at Idun Pharmaceuticals after Pfizer acquired that startup in 2005, Conatus’ funding needs increased last summer, when it bought at fire-sale prices Idun’s assets, which the Big Pharma left idle as a result of its reorganization. Nonetheless, Conatus says most of the new money is intended to support ongoing trials on CTS-1027, a Phase II hepatitis C therapy it licensed from Roche in late 2006. The former Idun pipeline includes emricasan, a Phase II candidate that was also investigated for hepatitis C, and other drugs designed to inhibit caspases, proteins that induce apoptosis. In conjunction with the new preferred stock round, Conatus also converted promissory bridge notes issued in the interim between rounds into Series B stock. AgeChem, which typically invests in therapeutics targeting disorders related to aging, took a Conatus board seat. -- Paul Bonanos

Optimer Pharmaceuticals: How's this for a movie tagline: "In a world of drugs versus bugs, the drug side just got richer." Optimer netted $73 million in a follow-on public offering that closed February 16, and it'll put at least part of the cash toward the launch of fidaxomicin. The narrow-spectrum antibiotic is aimed at Clostridium difficile, a gram-positive bacterium that infects the gut and causes severe diarrhea. Often acquired in hospitals and nursing facilities, C. diff infection often occurs after other antibiotics have been administered, upsetting the naturally occurring flora in the intestine. Optimer officials said recently fidaxomicin is expected to improve on the observed relapse rate of 20% to 30% in patients treated with standards of care vancomycin or metranidazole. With a priority review underway and a PDUFA date of May 30, Optimer could be looking at a roll-out of fidaxomicin in the second half of the year. In the secondary offering Optimer sold 6.9 million shares at $11.25 each, 10.5% below the closing price of its stock on February 10, the day it announced the offering. The cash raise, with Jefferies & Co. as lead underwriter, adds to the $68 million upfront Optimer is receiving from Astellas Pharma Europe for development and commercial rights to fidaxomicin in Europe and selected countries in the Middle East, Africa and Eastern Europe. Optimer retains rights in the US and Asia. Oh, and in the movie, we recommend that Jean Reno plays C. difficile. -- Alex Lash and P.B.

e-Therapeutics: The publicly traded British drug discovery firm netted £16.6 million ($26.7 million) on Feb. 15 in a placing with new and existing investors, including Invesco Asset Management, Gartmore Investment and Octopus Investments. The funds will be used to move e-Therapeutics's first potential products into clinical trials. In the placement one of the company's long-term investors, the UK hedge fund RAB Capital PLC, sold most but not all of its shares at a profit, CEO Malcolm Young told our "Pink Sheet" colleagues. The firm, which went public in 2007, placed 67.7 million shares at 26 pence each, a 2% premium to the closing price of 25.5p one day earlier. e-Therapeutics uses real experimental data to develop network analytics and identify a set of protein interactions thought to produce a beneficial effect. Compounds are then evaluated to see if they can produce that particular set of effects. It is a complex and laborious process of analysis, and not a simulation exercise or in-silico computer-added drug design, Young said. Compounds can also be evaluated for effects on healthy cells, so reducing the likelihood of side-effects. As an example, e-Therapeutics started to look for substances that would turn off the protection against apoptosis that cancer cells appear to have. Its researchers identified the regulatory proteins and promoters, then found a molecule that inhibited their protective effects. This compound, ETS2101, is expected to enter clinical trials later this year. The firm's advisor Panmure Gordon said that although Invesco will now hold 47.7% of e-Therapeutics, it does not intend to run the company or make an offer for the remaining shares, which under UK law would normally be required of investors that acquire 30% or more of a company. Instead, Invesco has obtained a waiver from the UK's Takeover Panel. -- John Davis

Versartis/Diartis: Versartis' $21 million Series B round and spin-out of its lead drug into a new company made for a lot of moving parts, but well worth tracking for at least two reasons. First, Versartis is in the middle of an asset-financing experiment that could point the way for other venture investors. The motto of this new movement could be, "Buyers want drugs, not companies." To that end, Versartis was initially a one-compound company funded by Index Ventures, the European firm out in front on asset-centric financing. But with a long-acting version of Type 2 diabetes drug exenatide on board, Versartis had the option to bring in two more compounds from Amunix, the extended-release technology firm that supplies Versartis' pipeline. With a second compound -- a human growth hormone treatment for kids -- in-house and ready for the clinic, Versartis' backers decided to spin the diabetes drug into Diartis and keep each entity focused on one drug. Theoretically, the separate structures will make each more attractive to potential buyers. Index and Amunix are clear that Diartis will be for sale once Phase 1b data is in hand, perhaps next summer. To push the HGH product forward, Amunix and Index rounded up new investors New Leaf Venture Partners and Advent Venture Partners for Versartis' Series B. Amunix is now the largest Versartis shareholder, according to Amunix co-founder Willem "Pim" Stemmer. -- A.L. and Chris Morrison

Amanda Micklus crunched numbers and wrote this week's intro. Thanks, Amanda.

Photo of LOLFOTFcat courtesy of flickr user LOLren.

Financings of the Fortnight: Follow-On Fever

This week's IPOs from Cumberland Pharmaceuticals and Emdeon may have garnered all the headlines. But for portents of a future biotech IPO market--as opposed to a market in IPOs for profitable, less risky companies like Cumberland and Emdeon--look instead to what seems to be an all-of-the-sudden-white-hot follow-on market.

But one more word about IPOs before we get to the FOPO-fever. We don't mean to suggest that this week's pioneers have zero impact on or relation to investors' appetites for riskier drug discovery and development plays. For now any connection is likely psychological, but not unimportant: investors are regaining their taste for new life-sciences companies. Soon enough they'll move down the risk continuum. One correspondent suggested to us that it was like eating dry roasted peanuts: "Once you start ...". We agree, but argue that VCs need to be building more pistachio-like companies if they really want to get the ball rolling.

These days though, investors are positively nutty (sorry) about biotech follow-ons. Since our last FOTF column two Thursdays ago--which highlighted FOPOs from HGSI (net $357mm) and Orexigen ($75mm)--the floodgates have opened. We've chosen to highlight Micromet and Mannkind (see below), but there were others as well, to the tune of about $600 million worth of follow-on shares sold. And that doesn't include PIPEs. At least a dozen deals in the past two weeks brought in a total of about $100 million.

Some of the big 'uns: This morning Seattle Genetics announced underwriters had exercised their overallotment option, bringing the biotech's gross haul to $136 million. Onyx raised at least $120 million (plus at least $200 million in convertible debt). And Inspire Pharmaceuticals grossed $115 million.

The prices on these deals were pretty good too; none of the firms that raised big money were languishing near 52-week lows. If investors' appetites for biotech follow-ons remain unsated, IPOs of R&D focused companies may not be too far behind.

That said, we're not holding our breath for a flood of S-1s. But investor interest in biotech shares has other, more immediate, ramifications beyond increased underwriting revenues for investment banks. As biotech capital markets begin to thaw, pharmaceutical acquirers may become more active, sensing a market that has hit bottom and realizing that biotech prey (and the prey's investor syndicates) may eventually have other exit options. More M&A will generate more interest from investors. And thus, the cycle begins again.

But let's not get ahead of ourselves. For now content yourselves with ...

Micromet: With $49 million on hand in cash and equivalents, Micromet enhanced its cash position by netting $75 million from a follow-on public offering Aug. 4 to fund development of its pipeline of four clinical-stage antibodies. Micromet priced its offering at $5 a share on July 30 – the stock had closed trading at $5.59 the day before -- and underwriters also sold the overallotment, taking the gross haul over $80 million. The Bethesda, Md.-based biotech plans to start a pivotal trial of its lead compound blinatumomab in acute lymphoblastic leukemia next year, and two weeks ago received orphan designation for the project in Europe. It recently regained North American rights to blinatumomab from previous partner MedImmune--surely increasing its development expenses even as MedImmune continues to pay to manufacture clinical supply. Micromet also has adecatumumab in Phase II for colorectal cancer with partner Merck Serono. Each antibody is also in Phase I in a different indication: non-Hodgkin’s lymphoma for the former and metastatic breast cancer for the latter. This is by far Micromet's biggest fundraising haul, reflecting the maturation of its BiTE technology pipeline. After going public through a reverse merger with CancerVax in 2006, Micromet raised cash three times through PIPE deals. Most recently, it sold 9.4 million shares at $4.25 a share (an 8% discount) to funds including Index Ventures Growth, Abingworth, DAFNA Capital Management and Merlin Nexus, grossing $40 million. A June 2007 PIPE brought back $25.3 million and a July 2006 deal yielded $8 million.--Joe Haas

MannKind: Not giving up on inhaled insulin any time soon, MannKind has just raised $62.2 million in a follow-on public offering of 8.4 million shares including the full exercise of the overallotment. Chairman and CEO Alfred Mann, who has previously invested over $900 million of his own money into the company’s fast-acting insulin candidate Afresa according to an interview last year with IN VIVO, bought one million shares for $8.11 (the price equal to the market value immediately before the FOPO) while the remaining stock was sold for $7.35/share. Both prices are pretty good considering that in early March shares were trading around $2 and have gradually increased since MannKind submitted the NDA for Afresa on March 16, reaching a high of $8.54 on June 25, right around the time the company completed the purchase of Pfizer’s bulk insulin inventory for $3 million. Since it went public in 2004, MannKind has raised a ton of cash—$884 million, including the present deal-- through private placements and follow-ons. Most notably it brought in $401 million from a 2006 FOPO of 23 million shares, at the much higher price of $17.42 (at the same time it raised $115 million in debt). Now that Exubera has failed, and without companies like Lilly or Novo Nordisk in the picture, MannKind is the only firm left pursuing a late-stage inhaled insulin (MAP, which coincidentally also completed a follow-on recently, and Vectura/MicroDose each have candidates in Phase I). Afresa appears to have a tough road ahead and it’s clear the drug will require a REMS in light of the Exubera fall-out, as well as mandatory post-marketing studies if approved. MannKind remains in the hunt for a partner.--Amanda Micklus

Constellation Pharmaceuticals: Epigenetics player Constellation Pharmaceuticals made news this week, pulling in the third tranche of its Series A and hiring a new CEO, Mark Goldsmith, to replace acting chief and Third Rock Ventures Partner, Mark Levin. The biotech, which formed in 2008 with great fanfare, raised $14.8 million in funding from its backers last year, and closed on the remaining $17.2 earlier this month. No new investors were announced with this final tranche: in addition to Third Rock, Venrock and Column Group co-led the Series A, and Altitude Life Science Ventures also participated. The financing, which should last the company into well into 2010, will be used to push forward Constellation’s most advanced programs--still tightly under wraps—and to hire additional scientists, while building the management team. Goldsmith’s acceptance of the top spot marks the beginning of the long-promised moves by Third Rock partners away from the day-to-day management of the company. Goldsmith most recently was an entrepreneur-in-residence with Prospect Venture Partners, after stints as SVP of Genencor and CEO of Cogentus Pharmaceuticals, which officially closed shop earlier this year. A scientist-physician trained in microbiology and immunology, he’s had to immerse himself in the field of epigenetics, an emerging field of science that aims to understand how misregulation of a second layer of genetic information—the packaging of DNA into chromosomes—can result in human disease. His near-term goals, he says, are to advance the top projects (sorry no additional details yet but the focus is still on histone methyltransferases and histone demethyltransferases), enhance the platform (which he calls a product engine), and “put in place one high quality strategic corporate alliance.” He’ll have his work cut out for him. In addition to Constellation, another well-financed start-up, Epizyme, is gunning for the top spot as “the epigenetics company.” Like Constellation, Epizyme is also built around the discoveries of leading scientific thinkers, boasts top-tier managerial talent, and has A-List backers. (For more on both companies, check out this feature from March 2009's START-UP.) Beyond these two companies a number of start-ups are attempting to develop inhibitors to histone deactylases (HDACs), an enzyme family also implicated in epigenetics. And coincidentally the start-up Acetylon landed roughly $7 million in financing this week as well.--Ellen Foster Licking

XDx: Perhaps motivated in part by Human Genome Sciences’ recent positive Phase III data for lupus candidate Benlysta, Bristol-Myers Squibb last week led a $14.4 million venture round for molecular diagnostics company XDx. Earlier this year, Bristol partnered with XDx, tasking the Brisbane, Calif., biotech to identify biomarkers for systemic lupus erythamatosus. Bristol's Orencia (abatacept) is in Phase III trials for lupus, a disease that hasn't seen a new therapy in generations; a companion diagnostic could give Orencia a market edge if it is approved for lupus (it's currently sold for RA). XDx, which markets the AlloMap HTx assay to help identify heart transplant patients with low probability of organ rejection, has been working on applying its molecular expression testing technology to lupus since licensing gene expression intellectual property from the University of Minnesota two years ago. In addition to Bristol, the early-August round was financed by XDx’s existing investors: Burrill Venture Capital, Duff, Ackerman & Goodrich, Integral Capital Partners, Intel Capital, Kleiner Perkins Caulfield & Byers, Sprout Group, and TPG Biotechnology. XDx filed an IPO in October 2007 but withdrew it last September citing poor market conditions; the current financing is its seventh venture round. Between December 2004 and May 2007, the biotech raised approximately $72 million in Series D, E and F financings. XDx said it will use the Series G proceeds to support new and ongoing R&D projects and commercial activities related to AlloMap. CEO Pierre Cassigneul said the firm hopes to expand the market for AlloMap, which it says can reduce the need for invasive biopsies and potentially lower dosing of immunosuppressant drugs in transplant patients, and predicted the firm would break even financially next year.--Joe Haas

image from flickr user Joe Seggiola used under a creative commons license

Health Care IPOs: Is that A Breeze?

Just one day after Cumberland Pharmaceuticals priced its shares, Emdeon followed suit, setting industry watchers abuzz. Could it be it's time to resurrect the acronym IPO? (Just in case you need a reminder, it's pronounced 'eye-pee-oh' and stands for initial public offering and yes, we'll use it in a sentence.)

There was clearly more investor enthusiasm for Emdeon's New York Stock exchange offering than Cumberland's NASDAQ listing. Cumberland priced it's shares $2 below the estimated range, and opened flat in its first day of trading, resulting in an $85 million raise. In contrast, the health care IT company, which processes half of all electronic medical bills in the U.S., debuted at the top of the estimated $13.50 -$15.50 range, and increased by 10% the number of shares sold to meet investor demand. The upshot? The company (founded only in 2006) and its PE backers sold 23.7 million shares--just under 11 million and 13 million respectively--and raised a total of nearly $370 million in the process.

Did someone just open a window? Was that an IPO breeze we felt?

Michael Brinkman, managing director of healthcare investing at Piper Jaffray & Co. thinks so. In an article in BioWorld Today, he proclaimed "the market is open." Based on interviews with roughtly a dozen buy-side investors, Brinkman thinks there are buyers for good biotech IPOs right now, but cautioned said financiers might not say the same thing 90 days from now given the fragility of the market.

How 'bout that for confidence? As we said in this post we're hard-pressed to proclaim a renaissance of biotech IPOs based on Cumberland offering. And Emdeon's IPO doesn't change our opinion one bit. Neither company, after all, shares many traits with the majority of cash-hungry discovery and development firms in venture capitalists' stables.

Take Cumberland, not so much a biotech as a specialty pharmaceutical play, founded back in 1999 with little internal research capability. The outfit currently markets three approved but largely undifferentiated products, including an antidote to acetaminophen poisoning. Acetadote, and an intravenous version of ibuprofen called Caldolor. Sound like a biotech to you? (If you said yes, we have another factoid worth consideration: Cumberland is profitable.)

Then there is Emdeon, another company with products and revenues--$444.4 million in the six months ending June 30, up 5% from the same period one year earlier. With its focus on linking health care providers like hospitals, pharmacies, and docs to private and public insurers, the start-up appears to provide a much needed solution to the overabundance of paperwork contributing to skyrocketing healthcare costs. And whatever health care plan is ultimately adopted by Congress, technical solutions like Emdeon's are a no-brainer and can count on bipartisan support from legislators. But Emdeon ain't biotech; it's information technology applied to health care.

It's not too surprising that the first US IPOs we've seen since ARYx raised money in 2007 are fully baked companies with products and revenues. Their less risky business plans fit the appetite of investors who are keen to avoid the gambles associated with drug discovery, especially after the financial jitters of the past year. Moreover, the offerings continue a trend started in February, when Bristol-Myers Squibb spun off its nutritional and infant formula maker, Mead Johnson, in an oversubscribed IPO worth $720 million.

For VCs, who've been saying for the past year (at least!) that they are building companies for acquisition not IPO, neither the Cumberland or Emdeon IPO is likely to spark a wholesale change in strategy. Let's be honest: neither company fits the profile. It took ten years to bake Cumberland, hardly a time frame that would capture VC interest. Emdeon may have only incorporated three years ago, but the technology has been around for far longer since it was cooked up by Healtheon, one of the grand-daddies of e-medicine.

And neither outfit listed venture backers as principal shareholders in their SEC filings (yes, we do read them). Aside from individuals, Cumberland's largest shareholder was S.C.O.U.T. Healthcare Fund, which is managed by Lawrence Greer, a Cumberland executive director. Emdeon's principal shareholders include private equity plays General Atlantic Partners and Hellman & Friedman.

Still, VCs are likely to welcome the news as a sign that the public markets, which have been frozen since well before the financial collapse of 2008, are finally thawing. Both offerings are a necessary first step if investors are ever going to return to funding more traditional biotech start-ups and are in-line with the increase in secondary offerings and traditional venture commitments we've been seeing recently (see our regularly Financings of the Fortnight edition for more on those deals).

Indeed, that's the reaction of many VCs we canvassed in a highly informal email blast after Cumberland announced its offering Monday night. One source replied:

"The venture industry is back to producing some high quality companies and public investors will realize they can buy these at relatively low prices, hold, and sell later at a higher price. The market is moving that direction again. IPOs will return, starting with the later-stage, lower-risk, lower-return companies, and moving towards earlier-stage, higher-risk, higher-return companies."

Who else is likely to test the IPO waters near-term? NycoMed, which earlier this week inked a deal with Forest Labs for its Phase III COPD drug Daxas, and also counts private-equity among its backers, is one possibility. Talecris, the blood plasma products developer that filed to go public last year and then shelved its offering because of a proposed merger with the Australian hemostasis player CSL, is another obvious candidate. Recall that planned tie-up fell through earlier this summer after the Federal Trade Commission opposed the deal. It's no secret the company's backers, Cerberus Capital Management and Ampersand Ventures, are eager for an exit. Need more prooof? In late July, Talecris filed updated registration statements with the SEC.

Notice some themes here? PE is looking for exits. Neither company is exactly a start-up biotech.

We'll likely know in a few months if the gentle breeze strengthens to a mighty IPO wind. Here's hoping.

(Image by flickrer rachelcreative used with permission via a creative commons license.)

Cumberland's IPO: Is It the Day After the Day After Tomorrow?

Well, well, Mr. IPO. It has certainly been a while. You don't call, you don't write ...

Cumberland Pharmaceuticals said late last night that it priced 5 million shares at $17 apiece for a gross haul of $85 million (the company will net closer to $75 million after expenses and "discounts" and could bring in more money with a 750,000 share greenshoe--ah, the IPO lingo returneth too). The IPO is the first "biotech" new issue in a couple years.

Cumberland isn't exactly a biotech, of course, it's a specialty pharma. It markets a laxative and an antidote to acetaminophen overdose, and recently gained approval for an IV formulation of ibuprofen. It licenses in drugs that are either already marketed or near-market, and isn't burning through wads of cash on drug discovery. In short, Cumberland is exactly the kind of small pharma that you'd think would be able to IPO after such a long break in the action.

We have been noticing the uptick in follow-on offerings (something we'll talk more about in our financings of the fortnight column later this week) and had wondered whether we'd see an uptick in IPO filings. Cumberland's success has been a long time coming--more than two years ago it estimated it would price the offering at $14-16/share, and a lot has happened since then, not least the approval of Caldolor (that's the injectable ibuprofen) in June 2009. Still, today's price is $2 less than the low end of the range the company was hoping for. But just maybe it will also contribute to this emerging thaw. (Emdeon, an IT services play--they do roughly half the electronic medical billing in the U.S.---which also plans to price it IPO this week, can only hope.)

Just don't expect a Spring flood.

image by flickr user slack12 used under a creative commons license.

While You Were Advancing

Despite Saturday's game three hiccup the Fightin' Phils advanced to the NLCS this weekend with a 6-2 win over Milwaukee to cap a 3-1 NLDS victory, taking the sting out of another Iggles loss at the Linc. (Celebrate while you can, Ramsey, St. Louis is tough coming off the bye week ... OK maybe not.)

It's nearly enough to take one's mind off the economic crisis--now spreading even further--and the potential impact that broader financial malady might have on the health care world. For those of you keeping score at home more than two out of three of our respondents agree that the industry universe is shrinking.

While you were dusting off your Beat L.A. signs from 1983 ...

• We get a lot of crazy ideas (support of Philadelphia sports teams can do that to blogger) so we're not normally ones to throw too many stones. But we simply can't get our heads around this 'fast track IPO' proposal described in this Guardian article from last week. Please, anyone, explain it to us. Does this make any sense whatsoever?
• OSI and Genentech report that Tarceva plus Avastin didn't improve survival in advanced non-small cell lung cancer patients better than Tarceva alone, though there was a clear improvement in progression-free survival.
• Genome sequencing is getting cheaper. Harvard's George Church, an adviser to Complete Genomics, the company that this morning announced it could lower the cost of sequencing your As, Ts, Gs and Cs to a cool $5k, called the price "shockingly low." In this economy, George? Call us when we can buy a kit at the Dollar Store.
  
• Biolex this morning bought OctoPlus's 50% commercial rights to the companies' Locteron interferon alfa, which is in Phase II in HCV. Octoplus gets $11mm upfront and up to $138mm in milestones. Meanwhile Biolex also said it raised $60 million in Series D funds in a round led by Clarus Ventures.
  
• Oh yeah. It seems Lilly is buying Imclone. You may have heard about this one. But why do we feel like there's going to be a some sort of Scooby-Doo-esque plot twist at the end of this too-long drama? As of 5a ET still no official word from the companies nor any last minute rubber mask reveals or muttering about getting away with it if it weren't for those meddling kids. Yet. [UPDATE: 7am, and it's official. the deal values Imclone at $6.5bb, or $70/share.]
  

game 2 photo from flickr user nickhall used under a creative commons license.

Venture Round: And now the bad news

It’s popular to suggest that the venture capital world is somewhat insulated by the turbulence on the public markets, but let’s get real. That’s not the case.

Last week, we offered a potential "bright side" scenario. The likelihood that boutique investment banks will finally get the sunlight and the attention to grow large enough to support a small, revenue-poor industry like life sciences.

But such a development, while positive, will take a while. Until then, we’re looking at a number of potential negative impacts, many of which we’ll explore in our upcoming magazines.



Fundraising: Three words. Forget about it. If you’re not a top-quartile, blue-chip fund you’re going to have a terrible time trying to raise a new fund.

And those firms that have raised new funds aren’t off the hook. One venture firm with AIG as an limited partner still hasn’t heard whether or not the insurance giant's commitment will be honored.

Even those firms with limited partners not being bailed out by the government could face some problems down the road as they begin to call down portions of the fund. Some LPs may simply say, no, sorry we don’t have the cash—or even the appetite—any longer.

This might lead to fund reductions, similar to what we saw after the technology boom busted. But in this case, GPs won’t be giving capital back for lack of investment opportunities. They’d be doing it because of lack of support from LPs. (In fact, one professorial type told PE Hub that VCs should be nice and give some of their money back. We're not really buying that one.)

Early-stage investing: Big funds probably won’t be doing it. Why should they when they can have their pick of later-stage companies that will be hungry for capital. As for the angels, well, they’ll obviously be a little risk averse given the current situation. But they too will have the option of investing in “later” early-stage companies, the kind of companies that VCs backed until now. We’re not sure if angels can provide enough of the capital those more established start-ups need, but they’ll be given the opportunity to invest.

Mid-stage investing: So you have a product about to start clinical trials, which puts it on track for commercialization in five or six years, maybe, after some serious infusion of cash? Good luck with that.

Late-stage investing: This could be a blood bath. VCs with capital will be obligated to find bargains in this market. At this point, no one is willing to admit this, but we’re expecting some serious hammering on existing investors. To be sure, VCs can’t be too cutthroat since they too have companies that will require outside capital, but if they can get a late-stage company at early-stage prices then they have to do it. And look for more and more PIPEs. (BTW, we ass-U-ME-d incorrectly last week. The Angiotech deal involving Ares and New Leaf Ventures is not dead yet. We're told something may indeed happen.)

Exits: It’s been said that we’ve been through IPO droughts before, and that’s true. But this isn’t just a drought. Somebody blew up the pipeline and poisoned what's left in the reservoir. As for the corporate buyers, yes, pharma and medical device companies SHOULD be buying. But will they? And if they do what sort of prices will they be seeking. Just as venture firms have to answer to LPs, corporates have shareholders who demand value when it’s available.

In fact, VentureWire Lifescience released some sobering statistics today. We’re back to 2003.

Health care companies have created $3.01 billion this year through IPOs and M&As, down from $8 billion at this point in 2007, a 62.2% drop. That's the worst nine-month performance in five years. Through September 2003, life sciences companies had produced $1.33 billion in M&A and IPO liquidity.

It’s worth pointing out that health care accounts for most of the liquidity activity since the entire venture industry generated $4.3 billion from sales and IPOs in the first three quarters of this year. PriceWaterhouseCoopers Money Tree report offers a similarly glum outlook.

Readers of START-UP already know our take on the acquisition of privately held biopharma companies. Colleagues Ellen Licking and Chris Morrison supplied an exhaustive study in the current issue.

So yes, we’re not dead yet. (We're keeping with the Monty Python theme.) But keep an eye out for the cart hauling dead folks. Oh that reminds us, we see one more significant development.

The Rise of Secondary Buyers: We already reported on their rise in our July START-UP. But, whether it's portfolio companies or stakes in general partners that LPs no longer want, secondary buyers likely will have an easy time finding bargains. Firms like Saints Capital will prosper.

Are we missing any?

Venture Round: The BEAT Goes On

When we wrote about CardioNet's IPO back in March, we had no idea it would hold such historical importance.

CardioNet, trading under the symbol BEAT, remains the last venture capital-backed company to go public this year, including both life sciences and technology plays. And we have to admit its doing the VC-crowd proud.

But the company is doing so well one could argue it may have sold more shares than it had to.

You may recall the cardiac monitoring company entered into a unique structure with investors back in spring 2007 when it raised $110 million in a Series E. Investors were given stock that converted into common shares during the IPO. The company's management took a bit of a gamble as there were repercussions if the company didn't get out in a timely manner.

Well, it did go out at the lowest price allowed by the deal--$18 per share. As we noted back in March, the conversion of those shares depended upon the IPO price. Had CardioNet gone out at $23 per share, which it initially had hoped to do, those Series E investors would have held 5.9 million shares.

But if CardioNet went out anywhere between $18-$20, the Series E shares converted to 7.2 million shares.

Today, CardioNet shares are trading at $27.50, making it a darling among IPO stock pickers, with a nearly 53% gain in three months.

It's interesting that if CardioNet priced its IPO at $23, more than four dollars below where it's trading today, the company would have had to hand over one million fewer shares to its Series E investors.

We're being a bit facetious, of course. CardioNet's stock didn't really take off until the company posted better than expected numbers in mid-April. So this is the case of a company doing what it needed to do to go public, and then going out and proving its value to shareholders.

At the time, the company clearly wasn't getting traction at $23 per share. In fact, $18 per share seemed rather generous. It apparently wasn't.

While we're engaging in some 20-20 hindsight, Boston Scientific--which acquired a sizable stake in CardioNet through its purchase of Guidant--sold off 1.5 million shares at the time of the IPO, recouping $27 million.

Had it held on, its stake would be worth more than $41 million today.

***

Edmund de Rothschild Investment Partners more than doubled its assets under management for life sciences by closing on €150 million last week for its third life sciences fund. The Paris-based firm previously raised €80 million and €26 million for its second and first funds, respectively, according to VentureWire Lifescience.

The firm expects to invest the new fund in 15 to 20 life science companies across all stages of development, including biopharmaceutical, medical device and diagnostic companies, mostly in Europe.

According to the firm, its investors include most of Edmond de Rothschild Investment Partners' life science existing investor base, including La Compagnie Financière Edmond de Rothschild, La Caisse des Dépôts and Amgen. Other investors include health insurance companies, public pension funds, social institutions and institutional investors.

***

Attention any other venture firms in the market with new funds, save the postage. Washington State Investment Board isn't interested, according to a recent post on Private Equity Hub.

***

Three Arch Partners, still investing its 2004 vintage fund, probably won't be in the market for a new one until next year.

***

Fresh from the "I made a seven minute presentation to a bunch of lawyers and investors, and all I got was a lousy...." file.

As always, if you have any private suggestions, tips, or if you really, really, really hate the idea that we'll be running this column on Wednesdays instead of Fridays email me here.

(Image courtesy of Flickr user RWK through a Creative Commons license.)

High Noon at Myogen

Most VC meetings provide a feel-good story for the portfolio CEOs—usually a variation on the business resurrection theme. The Atlas Venture retreat, which just finished up in St. Tropez, is no exception.

But it’s rare to hear one as compelling, or as compellingly told, as the story Bill Freytag related at the Atlas meeting of the showdown between Myogen’s management and its venture board.

Freytag, then Myogen’s CEO, told the story of a board meeting in the middle of the deadly 2003 IPO drought. To get its pulmonary arterial hypertension drug ambrisentan developed, Myogen needed the kind of money only an IPO could deliver – and for which Freytag and his team had found, despite the extraordinarily dry weather, some investor interest.

But at the board meeting, the VCs said no. IPOs were impossible, several maintained. It was “slash and burn time”--cut research radically, pare back the company, and prepare to unload the business. One apparently stood up, pointed a finger at Freytag, and said: through the whole history of the company “you haven’t created any shareholder value!”

Which was in fact literally correct. For the last several rounds, the company had raised money at the same $7 a share price—though since the VCs controlled the financings, the blame could hardly be laid at Freytag’s feet.

Freytag is a mild-mannered man—you certainly wouldn’t expect him, or frankly the kind of managers you’d assume would gather around him, to play the Gary Cooper role in some business version of High Noon. But according to Freytag, “I said, ‘Time out,’ that the management needed to caucus. And we left the room.” In the hallway, Freytag says he told his managers that it was “D Day.” Did they really believe that, given the resources of an IPO, they could develop ambrisentan and its follow-on, darusentan—and build the company around it? Their unanimous answer was “yes.”

The group went back to the board room—“I was shaking in my shoes,” said Freytag, who realized that contradicting the venture board could mean his job. “We’ve heard your advice,” he recalls saying, “but we’re going to go forward with the IPO.”

In fact, Freytag probably had little real reason to be nervous: the board faced a management team united in its opposition to them and would hardly want to inherit the responsibility for running the company. And indeed the board backed down; the IPO went ahead, raising $81 million at $14 a share, and opened the window for a host of other IPO candidates. Myogen went on to sign a $100 million ex-US deal on ambrisentan with GlaxoSmithKline and finally to sell to Gilead for $2.2 billion--the ultimate happy ending for investors.

Freytag says he’d thought he’d end up in venture capital and talked to a number of VCs about joining a firm. But when Aspreva CEO Richard Glickman surprised the board by resigning this past summer, Interwest partner Arnie Aronsky asked Freytag to run the company.

It’s a very different kind of challenge for Freytag: with $325 million in cash and marketable securities at the end of the second quarter, annual cash flow of about $150 million a year, and a drug whose clinical value outside of transplant has so far been surprisingly difficult to prove while its patent-clock races toward expiration, Freytag is hardly likely to try to face down the board in favor of product development. (For an analysis of Aspreva’s original strategy in in-licensing Roche’s CellCept, click here.) There are probably better uses of Aspreva’s cash—and plenty of unloved biotech R&D programs around to soak it up.

IPOs: Just Another Facet of the M&A Auction

It's pretty much official now: filing an S-1 is just another part of an M&A auction.

BMS' acquisition of Adnexus, like Merck's recent acquisition of NovaCardia, demonstrates that Big Pharma, when nudged a bit by the prospect of a target hitting the public markets, is prepared to pounce.

We won't get into the details of the $415 million (plus earnouts) BMS/Adnexus deal right here--plenty of other blogs have covered the deal well (see the WSJ Health Blog or Pharmalot). Plus we're going to cover the Big Pharma biologics (and next-generation biologics) land grab in depth in the next issue of IN VIVO. And on top of all that, we're going to have Bristol's CSO and president of R&D Elliott Sigal, MD, PhD, up on stage at this week's Pharmaceutical Strategic Alliances shindig, and we'll surely get into the deal then.

But lets take a peak into the near future (tomorrow's PSA talk from Roger Longman) and look at both flavors of biotech exit; acquisitions and IPOs.

In 2007, M&A continues to climb in both total value and number of deals, while IPOs seem to have reversed a downward trend both in terms of valuations and pre-money step ups.

So which companies in the IPO queue are teeing up M&A exits simultaneously? Adnexus and Bristol's previously struck $240mm deal made BMS the biotech's logical acquirer--BMS' lack of a large molecule discovery engine greased the skids a bit for sure. Who else is angling for a public exit that could provide pharma with a similarly lacking discovery platform?

Maybe Archemix, the aptamer play without any significant Big Pharma ties could fill that kind of hole. And while Ablynx has yet to file for an IPO, its recent broad strategic alliance with Boehringer Ingelheim both gives it the pharmaceutical validations prerequisite for public investors and sets BI up as a logical acquirer should the biotech go that route.

Can't Keep Quiet About This

Perhaps lost in the headlines about Emphasys Medical Inc. filing to raise up to $86.3 million in an IPO is the important fact that this company, the leader in the race to develop the first interventional treatment for emphysema, this month submitted the results of VENT, its 321-patient pivotal trial, to the Food and Drug Administration.

It’s all there in the S-1.

VENT, which stands for Bronchial Valve for Emphysema PalliatioN Trial, was a randomized clinical trial conducted at 31 centers in U.S. Its goal was to demonstrate the clinical benefits and safety of the Emphasys Bronchial Valve.

According to Emphasys’ S-1, the treatment group got EBV treatment in one lung along with optimal medical management including pulmonary rehabilitation. The control group received only optimal medical management treatment and pulmonary rehabilitation.

The endpoints were (drawing from the S-1):

Physiologic Improvement: FEV1, a co-primary endpoint of the study, measures the volume of air forcefully exhaled by a patient over time.

Exercise Tolerance: A patient’s exercise tolerance is used as a proxy for the patient’s ability to function on a daily basis. VENT used two tests of exercise tolerance. A co-primary endpoint of the study was 6MWT, which measures the distance a patient can walk in six minutes. Cycle ergometry, one of the secondary endpoints in VENT, measures the maximum workload exerted by a patient on a stationary bicycle.

Quality of Life: VENT used a standard, pulmonary-disease-specific questionnaire called the St. George’s Respiratory Questionnaire, or SGRQ, as a secondary endpoint in the study. Patients answered questions related to frequency and severity of symptoms, activities that cause or are limited by breathlessness, the impact the disease has on social functioning and any attendant psychological disturbances resulting from the disease.

Breathlessness: VENT used a standard questionnaire called the modified Medical Research Council Dyspnea Scale, or mMRC, as a secondary endpoint. The mMRC asked patients to report on when they experience breathlessness and what causes it.

Oxygen Consumption. Many patients utilize supplemental oxygen to reduce breathlessness. In the VENT trial, patients reported how much oxygen they consumed on a daily basis.

And the results, according to the S-1, are……:

The patients treated with the EBV in the VENT study demonstrated statistically significant improvements, measured by meeting a p-value equal to or less than 0.025, in both of the co-primary efficacy endpoints, FEV1 and 6MWT, as well as in three of the four secondary endpoints.

FEV1 showed a 6.4% difference relative to the control at a p-value of 0.0047, and the 6MWT demonstrated 5.6% improvement relative to the control at a p-value of 0.0073. We demonstrated improvement in all four secondary endpoints, with the improvement in three of these endpoints, cycle ergometry, quality of life and breathlessness, meeting the hurdle for statistical significance.

As for safety, the primary safety endpoint was a major complications composite at 180 days. The composite included death, respiratory failure, pneumonia distal to the valves, massive hemotysis, prolonged pneumothoraces and empyema.

At the six-month follow-up, the treatment arm MCC rate was 5.9% compared to 1.0% for the control arm, and from six months to one year, the treatment arm MCC rate was 4.5% compared to 4.0% for the control arm.

There's plenty more in there so we encourage you to take a look.

The IN VIVO blog didn't even try to reach Emphasys executives or investors for comment. It is, after all, quiet period time. But the action of filing for an IPO without having heard from the FDA says enough about their confidence in the results. It'll be interesting to see whether final word from the FDA will be needed for this IPO to happen.

But a happy ending to both sagas will be good news for patients, interventional pulmonologists and investors in companies developing devices to treat lung disease. IN VIVO, the magazine, will be profiling another significant player in this area, Asthmatx Inc., in our next issue.

Going, Going.....Google

Two bits of follow up on previous posts about the health care IT space.

AthenaHealth absolutely hit one out of the park with its IPO.

Shares opened at $18 and nearly doubled, hitting $35.50. This could be a big win for its VC investors including Oak Investment Partners, Venrock Associates, Draper, Fisher Jurvetson and Cardinal Partners. All together the four owned 65% of the company prior to the opening. IN VIVO Blog talked about the importance of this IPO back in June.

Meanwhile, speculation abounds that Google, in a bid to bolster its presence on the Web, is eyeing an acquisition of health care Web site leader WebMD. Last month, IN VIVO Blog admitted to being slightly underwhelmed by the early glimpses of Google's health offerings.

Apparently, we're not the only ones. Dan Penny, director and lead analyst for publishing Outsell Inc., a market research firm focused on the publishing industry, writes:

Implications: The discovery in 2005 that 12% of individuals would consult Google before seeing a doctor has sent a message to the search giant that it should be doing something with health information, but it doesn't seem to know how to add value to an area where others have stolen a march. Google Health, as it stands, is a confusing experiment that offers little more than an old-fashioned portal for health information. Google now realises that it needs to do more than aggregate, because the boom in online health information has sent users flocking to WebMD and similar sites, such as AOL Health and RevolutionHealth. A year ago, the idea of Google acquiring WebMD would have seemed rather bizarre, but since the purchase of YouTube, Google has proven its willingness to spend, and to spend on content as well as technology. Moreover, its rival, Microsoft, bought Medstory earlier this year in a clear attempt to secure some of the healthcare vertical for itself.

Oh yeah, and Google's health care push probably wasn't helped by the fact the fellow in charge of the effort is leaving.

Now back to your regularly scheduled programming....

CardioNet's Not So Big Surprise

Riddle us this. When is news not news at all? When it’s involving CardioNet Inc.’s Friday filing for an IPO.

See, this filing was essentially a done deal when CardioNet secured $110 million from investment banks and hedge funds in the spring. In fact, that financing isn’t entirely complete until CardioNet goes public because the participants in that round won’t receive their shares in the company until after the IPO.
It sounded strange to us at the time, but here’s how CEO James Sweeney explained it in our April START-UP article:

In exchange [for the $110 million], the providers of the capital obtained mandatorily convertible preferred stock that will convert into common stock in the company on the eve of a successful IPO. They'll get a discount on the stock; anywhere between 10% and 25% depending upon the success and timing of the IPO. Sweeney says no debt was issued. Investors only got the promise of common stock upon the completion of the IPO.

Therefore, the valuation of the company for this deal won't actually be set until it goes public. "This is a very new product," Sweeney suggests. "In fact most of the people we sold it to hadn't seen it before."

So CardioNet and its investors didn’t set a valuation for the $110 million. Why? With no value for the last private round, Sweeney suggested the company could more favorable negotiate terms for the IPO. Sounds fine, if everything goes well and the company goes public at attractive terms. But if this company can’t go public, the terms of the private round will be “punitively expensive,” according to one investor.

Putting all these financing machinations aside for a moment, CardioNet’s wireless system looks to offer a real opportunity for innovation in health care. We’ll just wait and see how all this financing sorts out.

If you want to read more on this financing, please check out the article. But here’s one more interesting point. It looks as if this road show is entering its fifth or six month. Citigroup Global Markets and Sun Trust Robinson Humphrey, which served both as co-placement agents for the $110 million round, now are serving as underwriters for the IPO. Citi is also listed as an underwriter.

IPO Cabal? Not Really.

"Everybody knows," one prominent VC told us, "that biotech IPOs are controlled by six people.”

He may be stretching a point (not everybody knows it; there might be slightly fewer, or a couple more, fund managers in control; and control is a highly relative concept)—but, in broad strokes, no one in the financial world really disagrees. To get public, most biotechs need to convince at least some of these investors to buy in—and because they need to do so, these investors can keep the price low—in a very narrow band of market value.

So who are these investors? Among 'em are Kris Jenner of T. Rowe Price, Bill Slattery of Deerfield, les frères Baker from Baker Biotech, and Adam Koppel of Bain. But the point is--the list ain't long. (More on this in the May issue of Start-Up).

So if there are billions of dollars washing around in the market, why are there so few biotech IPO investors that matter?

One reason--somewhat counterintuitive--is that biotech IPOs look less like public venture capital than they used to. In the old days, and particularly in the gravity-defying genomics-enamored market of 2000, companies could go public with very early-stage assets. Trying to figure out whether they'd succeed was an almost complete crap shoot, and so due diligence was comparatively less important. Good for uncovering fraud; or managerial incompetence, perhaps. But not much help with figuring out whether a drug would work, or whether doctors would prescribe it if it did. In 2000, the average fund manager--indeed, the average individual investor--wasn't at a huge informational disadvantage to the knowledgeable investor (there were other disadvantages, of course--like whether he could get a piece of a hot IPO, which would be generally reserved for favored fund managers).

No more. Biotechs virtually can't go public without late stage assets--and those are ripe for due diligence. The usual IPO roadshow -- 20 minutes with the management per investor -- doesn't allow for any real understanding, which leaves just a few experienced investors that anyone who wants to go public must spend time with, and who have probably seen plenty of similar companies come down the pike. In this world, experience counts. And can be used to keep IPO prices down.

Some companies are trying to get around this problem by packing so-called crossover investors -- who can invest in both private and public companies -- into their mezzanine rounds, giving them time to get to know them and thereby seeding the IPO with long-oriented investors who can make their money both on the private-to-public step-up as well as on further public appreciation. But there aren't a lot of those opportunities.

In the first place, some venture investors don't want to bring in crossovers into their mezzanine rounds when their object is to sell the company, not take it public.

And high-quality companies that could go public have sometimes put themselves into positions where they can't. Take Perlegen, which just yanked its IPO filing (and shook up its management team): it had plenty of crossovers among its investor group. But it couldn't pull of the offering, most importantly because its lead drug/diagnostic didn't work. And yet it wasn't getting much traction anyway. The company had raised $256 million privately and, in a world where pre-money IPO valuations are averaging $150-200 million, no one wanted to take that kind of haircut on price.

In short, there may be an IPO cabal. But the peculiarities of biotech keep it in business.