Signals

Companies in the biotech and specialty pharma sector raised near record-breaking amounts of cash in 2006, but this value alone gives us a lopsided view of the sector’s health. While the total haul topped $26.5 billion, most of that money was raised by a mere handful of firms. Investors are obviously convinced that biotech stocks are worthwhile assets, but they’ve focused on top-tier, mature companies – like Amgen, Gilead Sciences, MedImmune and Celgene – with tangible earnings to report each quarter. In fact, these four companies alone raised nearly $8.5 billion in 2006, or about 32 percent of the yearly total. That leaves $18 billion for the rest (of which there are thousands on a global basis) – which appears to be just about enough to keep them going. So, while the poor may not be getting poorer, neither are they increasing their wealth in any meaningful way.

By Jennifer Van Brunt, Editor

In 2006, the rich biotech and specialty pharma companies got even richer, as enthusiastic investors snapped up shares of select publicly traded firms through follow-on stock offerings and convertible debt financings. These tried and true means for raising cash contributed billions of dollars to companies’ coffers.

On the other hand, investors remained wary of initial public offerings (IPOs), with most deals pricing at the low end or below the asking range. Still, some of the IPOs raised $100 million-plus in gross proceeds, and the shares of 62 percent of all the U.S.-based companies in the IPO Class of 2006 ended the year above water, so to speak.

Privately held companies discovered that they could raise money not only through the sale of equity but also through structured venture debt arrangements, a relatively new twist in the financing equation. Here, again, a small but select number of firms raised tremendous amounts of capital during the year, while the rest reported more modest venture investments.

Overall, then, we see that biotech and specialty pharmas raised $26.5 billion in 2006 (not counting revenues and payments coming from corporate collaborations), 40 percent more than companies raised in 2005. That makes 2006 the second-best year in the industry’s history, and the seventh consecutive year that financing has topped the $10 billion mark.

History has shown that even $10 billion is not enough to sustain all the companies in the sector – as we clearly saw in 2002, which was a devastating year for many struggling firms. In fact, it appears that the sector really requires between $17 and $21 billion to stay on an even keel. The total sums for 2003, 2004 and 2005 reflect this range. As well, if we consider 2006’s total – minus the $8.5 billion raised by just four companies in extraordinary deals – we arrive at a figure of $18 billion, well within the $17-$21 billion range.

Historically, biotech financing has run in cycles – with the peaks spanning 4-5 quarters, while the long valleys in between stretch for 12-13 quarters. (As illustrated by the graph above, peaks occurred in 1991, 1996 and 2000.) In recent years, however, a smattering of gargantuan financings has made the pattern harder to discern. It’s even conceivable that the cycles have disappeared, to be replaced by a steady background level of $17-$21 billion, enhanced by vast deals for a very small number of elite companies.

Hope for IPOs 

As we mentioned earlier, most IPOs in 2006 encountered a lukewarm reception from investors, forcing their bankers to slash the offering price and/or the number of shares to be sold. Moreover, the number of IPOs was down from the previous year: In 2006, 28 biotech and specialty pharmas came public, 21 of them in U.S. markets and seven on foreign exchanges. Together these offerings raised slightly more than $1.3 billion. In 2005, however, 31 firms completed IPOs, 17 of them on U.S. exchanges: Together, these newly public companies raised $1.5 billion in gross proceeds.

And, while most of 2006’s IPOs reaped relatively modest sums through these offerings, a handful managed to top the $100 million mark. In fact, the very first IPO of the year fits in this category: Altus Pharmaceuticals Inc., a clinical-stage company that was spun out of Vertex Pharmaceuticals Inc. in 1992, garnered $120.8 million in late January.

Other high-fliers were alternate fuels company Metabolix Inc., which attracted $109.5 million in November and peptide drug specialist Affymax Inc., which raised $106.4 million in December. Affymax’ IPO -- the last of the year – gave industry watchers hope that 2007 will prove kinder to these offerings: The company’s stock priced above its range and jumped 34 percent its first day out. As well, Affymax’ stock closed the year with a gain of 36 percent.
 

The class of 2006: IPO aftermark performance  

Company	Symbol	IPO price/share (date)	12/29/06 price/share	% change
Omrix Biopharmaceuticals	OMRI	$10.00 (4/21/06)	$30.26	+203
Acorda Therapeutics	ACOR	$6.00 (2/10/06)	$15.84	+164
Vanda Pharmaceuticals	VNDA	$10.00 (4/12/06)	$24.65	+147
Osiris Therapeutics	OSIR	$11.00 (8/3/06)	$25.32	+130
BioMimetic Therapeutics	BMTI	$8.00 (5/12/06)	$13.19	+65
Alexza Pharmaceuticals	ALXA	$8.00 (3/8/06)	$11.39	+49
Achillion Pharmaceuticals	ACHN	$11.50 (10/26/06)	$16.11	+40
Trubion Pharmaceuticals	TRBN	$13.00 (10/18/06)	$18.01	+39
Cadence Pharmaceuticals	CADX	$9.00 (10/25/06)	$12.32	+37
Affymax	AFFY	$25.00 (12/14/06)	$34.04	+36
Metabolix	MBLX	$14.00 (11/10/06)	$18.94	+35
Altus Pharmaceuticals	ALTU	$15.00 (1/26/06)	$18.85	+26
Targacept	TRGT	$9.00 (4/12/06)	$9.05	~+1
Valera Pharmaceuticals	VLRX	$9.00 (2/2/06)	$8.10	-10
Emergent BioSolutions	EBS	$12.50 (11/15/06)	$11.16	-11
Novacea	NOVC	$6.50 (5/10/06)	$5.66	-13
Cleveland BioLabs	CBLI	$6.00 (7/20/06)	$5.04	-16
Catalyst Pharmaceutical Partners	CPRX	$6.00 (11/8/06)	$4.83	-20
Iomai	IOMI	$7.00 (2/1/06)	$4.98	-29
SGX Pharmaceuticals	SGXP	$6.00 (1/31/06)	$3.50	-42
Replidyne	RDYN	$10.00 (6/28/06)	$5.74	-43

Interestingly, Affymax was not the biggest gainer for 2006; in fact it wasn’t even close. Instead, Omrix Biopharmaceuticals Inc., which is developing biosurgical and passive immunotherapy products, took the lead, closing the year with a gain of more than 200 percent. Other companies whose stocks exhibited gains in excess of 100 percent include Acorda Therapeutics Inc., which announced positive Phase III trial results of its multiple sclerosis therapy; Vanda Pharmaceuticals Inc., which reported positive Phase IIIs for its schizophrenia drug; and Osiris Therapeutics Inc., a new stem cell therapy company whose product candidates are also performing well in the clinic.

Substantial gains like these are guaranteed to warm the heart of even the most skeptical investor. But these IPOs weren’t the only ones to pick up a little momentum before year’s end: As depicted in the table, almost two-thirds (62 percent) of the newly minted biotech and specialty pharma stocks increased in value by the last trading day of 2006 – again lending some hope that 2007 will be a good year for initial public offerings.

Double dippers  

While we don’t know yet whether that will occur, we already see that follow-on stock offerings are hot. In the first month of 2007, seven companies raised cash through follow-ons, and some of them were extremely well received by investors. Inverness Medical Innovations Inc., for instance, hauled in $273.6 million to support its broad-reaching diagnostics programs. Cardiovascular drug developer Cardiome Pharma Corp. raised $96.6 million. And Vanda Pharmaceuticals reaped $119.3 million in a follow-on that priced a mere nine months after it came public. (For details, see the Signals article, “The Class Of 2007.”)

Vanda Pharmaceuticals wasn’t the only newly public firm that went back to investors a second time for more money: In December 2006, Omrix Biopharmaceuticals’ follow-on stock offering raised $55.5 million to add to the $39.5 million it raised in its April 2006 IPO.

Seasoned biotech companies did some double-dipping, too: In 2006, Alnylam Pharmaceuticals Inc., Arena Pharmaceuticals Inc., and Advanced Magnetics Inc. each pulled off two follow-on offerings. These deals were among last year’s 43 follow-on offerings, which together raised nearly $5.2 billion in gross proceeds. The number of deals was down from 2005 (when 60 follow-ons priced), but the money raised was higher (2005’s deals raised nearly $4.3 billion).

That’s because many of 2006’s offerings raised huge amounts of cash. For instance, Arena Pharmaceuticals’ January follow-on garnered $179.8 million in gross proceeds and its December follow-on attracted an additional $174.7 million in new funds. Advanced Magnetics’ December financing brought in $130.4 million, and Alnylam Pharmaceuticals’ December follow-on raised $103.4 million.

Another 13 follow-on offerings topped $100 million, and a few even blew these away: Amylin Pharmaceuticals Inc., for instance, attracted $534.6 million in March; Vertex Pharmaceuticals garnered $330 million in September; and MannKind Corp. raised $400.7 million in December. (See the Signals article, “Bulls And Bears,” for a complete run-down of all the U.S.-based public offering that occurred in 2006.)

But the winner, hands down, was Celgene Corp., which raised an incredible $1.032 billion in a November offering of 20 million shares, executed to meet the demand for stock of index funds after it was added to the S&P 500 Index. Public offerings that raise more than a billion dollars are extremely rare in the biotech world. (Genentech Inc.’s “second IPO” in July 1999 and its follow-on offering in October 1999 each raised more than $1 billion, but the entire proceeds went to Genentech’s owner Roche rather than the biotech firm.)

Debt soars  

One-billion-dollar debt offerings are uncommon, too, but recently we’ve seen several big biotechs pull these off. For instance, Genentech raised $2 billion in debt financing in July 2005. Amgen Inc. topped that value easily in February 2006, when it secured $5 billion through debt offerings.

Also, Gilead Sciences Inc. gleaned $1.3 billion through debt financing in April 2006 and MedImmune Inc. raised $1.15 billion in June 2006. These high-end convertible debt financings constituted a significant portion of the money raised through $100 million-plus debt instruments in 2006. (We did not include smaller convertible debt financings, some worth $1-$2 million, in this calculation.) All together, 12 companies raised a total of $9.875 billion in new debt – a massive increase from 2005’s $5.1 billion in debt financing as well as the $6.8 billion raised in both 2004 and 2003.

Selected convertible debt financings in 2006  

Company	Money Raised (including overallotment, if applicable) (Date)	Term	Conversion Price/Share	Annual Interest Rate
MannKind	$115M (12/06)	7 years	$22.47	3.75%
Angiotech Pharmaceuticals	$325M (11/06)	7 years	NA	3.75%
Millennium Pharmaceuticals	$250M (11/06)	5 years	$15.47	2.25%
United Therapeutics	$250M (10/06)	5 years	$75.23	0.5%
New River Pharmaceuticals	$137.8M (7/06)	7 years	$34.39	3.5%
Charles River Laboratories	$350M (6/06)	7 years	$48.94	2.25%
MedImmune	$575M (6/06)	5 years	$33.37	1.375%
MedImmune	$575M (6/06)	7 years	$33.37	1.625%
Enzon Pharmaceuticals	$275M (5/06)	7 years	$9.55	4.0%
Qiagen	$300M (5/06)	20 years	$20.00	3.25%
Gilead Sciences	$650M (4/06)	5 years	$77.52	0.5%
Gilead Sciences	$650M (4/06)	7 years	$76.22	0.625%
Angiotech Pharmaceuticals	$250M (3/06)	8 years	NA	7.75%
BioMarin Pharmaceutical	$172.5M (3/06)	7 years	$16.58	2.5%
Amgen	$2,500M (2/06)	5 years	$79.87	0.125%
Amgen	$2,500M (2/06)	7 years	$79.49	0.375%

Interestingly, fewer companies raised cash this way in 2006 than in the previous three years (18 companies in 2005, 23 companies in 2004 and 29 companies in 2003). These data suggest that the biotech sector’s top-tier companies are concentrating the bulk of the wealth, the same trend we’ve noticed in the public financing arena.

Obviously, convertible debt financings account for a major chunk of all the money raised by biotech and specialty pharmas – 37 percent of the money raised from all sources (except corporate partnerships) in 2006 and 68 percent of the cash raised by public companies through private placements of one sort or another.

Venture's winners

Venture investing continued the trend we’ve seen in other types of financings in 2006: A few deals were red-hot, while the majority attracted so-called “normal” levels of cash.

The winner in 2006 was San Diego-based Kalypsys Inc., which amassed $100 million in a series C round in late November. The company, which is using a pathway-based approached to drug discovery, has already entered the clinic with its lead product for metabolic disorders.

No other private firm raised that much cash in one swoop, but more than a few attracted at least $50 million per round. In the fourth quarter, these included cardiovascular drug developer Cerenis Therapeutics SA, which raised $53.5 million in a series B round in November; and Magellan Biosciences, a clinical diagnostics firm that raised $50 million in a series A round of venture equity and debt in November. 

Also in November 2006, Solstice Neurosciences Inc., a specialty pharma focused on developing drugs for movement disorders and cervical dystonia, garnered $85 million in a Series B round that consisted of venture equity and debt. And in October, Johnson & Johnson spin-off Macroflux Corp. received $75 million in “start-up” funds to help its efforts in transdermal drug development. (For high-priced venture rounds that occurred earlier in 2006, please refer to the Signals articles, “Was It Just A Summer Slump?”, “2006: Two Shiny Quarters,” and “Financing Off To a Good Start.”)

The increase in the number of big-ticket financings last year translates to a larger haul overall: Private companies around the globe raised nearly $5.5 billion in financing (including venture debt as well as standard equity deals) in 2006, 18 percent higher than the roughly $4.6 billion raised in 2005 and slightly more than the $5.4 billion raised in 2004.

Importantly, privately owned biotech and specialty pharmas have raised more than $4 billion each year for the last three – and this trend promises to continue in the future. While many observers last year claimed that the VC model was broken, those fears did not translate into fewer or smaller investments. In fact, the opposite occurred, at least in the biotech and specialty pharma sector, with investments increasing in both number of deals and the size of individual rounds.

And, while the public markets still shun early-stage companies – forcing VCs to keep these companies afloat longer than they used to prior to an IPO – there are other investors that find them attractive. Big pharmas, for instance, have stepped up their acquisitions of these companies in order to fill their pipelines – and analysts predict that increased M&A activity will continue through 2007 (at least). As well, new types of acquirers have emerged – including private equity firms and special purpose acquisition companies – giving VCs more exit options.

Indeed, as more financing options become available, the balance of wealth in the biotech and specialty pharma sector keeps shifting. And it affects all companies, large or small, private or public. We saw that shift clearly in 2006 – as wealth became concentrated in a relatively small number of firms. The rich are getting richer, all right – but what’s going to happen to the poor?

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