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Biotech start-ups finding alternatives to usual IPOs

"We chose the option that gave us the most certain liquidity."

Lowell Sears, Sears Capital Management

Starting a company and taking it public has long been the goal of many biotechnology entrepreneurs and the venture capitalists that back them.

Now, though, with the stock market unreceptive and pharmaceutical companies desperate for new products, some small privately held biotech companies are choosing a more certain if potentially less spectacular payoff: selling themselves to larger companies.

The latest example came on Tuesday, when Peninsula Pharmaceuticals, a four-year-old developer of antibiotics, agreed to be acquired by Johnson & Johnson for US$245 million. Peninsula, based in California, had filed for an initial public stock offering (IPO) but postponed it while negotiating the acquisition.

The deal follows one last month by TransForm Pharmaceuticals, a privately held Massachusetts firm, that also agreed to be acquired by Johnson & Johnson for US$230 million.

Other recent deals involving takeovers of private companies include Xcel Pharmaceuticals by Valeant Pharmaceuticals, Syrrx by Takeda Pharmaceutical, Idun Pharmaceuticals by Pfizer, Angiosyn by Pfizer, and ESP Pharma by Protein Design Labs.

Pharmaceutical companies, of course, have long acquired biotechnology companies, both public and private ones. But the recent deals tend to be larger than before.

According to VentureOne, which tracks the venture capital industry, the seven acquisitions of private biopharmaceutical firms in the first quarter were worth US$2 billion. While the number of deals is not unusual, that value exceeds the US$1.2 billion for all 31 such deals done last year.

The shift reflects a confluence of forces. Only four US biotech companies have gone public this year, and they typically had to reduce their offering price to get the deal done.

And since venture investors do not always sell all their shares at the time of the IPO, they must consider what may happen to a company's stock after it goes public. Biotech stocks have been slumping lately, in part because of the withdrawal from the market for safety reasons of Tysabri, a biotech multiple-sclerosis drug marketed by Biogen Idec and Elan that was supposed to be a blockbuster.

Those factors have changed the dynamics.

Peninsula hoped to raise US$70 million to US$80 million in an offering that would have valued it at US$290 million to US$340 million.

The Johnson & Johnson deal for US$245 million appears to be worth less. But Johnson & Johnson is acquiring only one of two antibiotics Peninsula is developing. The other one will be spun off into a new company that will be largely owned by the current owners of Peninsula. With market conditions as they are, moreover, it is far from certain that the Peninsula stock offerings would have succeeded at the desired price.

"We chose the option that gave us the most certain liquidity," said Lowell Sears of Sears Capital Management, a venture backer and a director of Peninsula.

Right now, it appears that pharmaceutical companies are placing a higher value on these small companies than public markets might. But that still is not as high a value as they might receive through a public offering during good times.

"We made a nice profit on this investment, but we didn't make 10 times our money, and for the good public ones, we tend to do that," said James Blair of Domain Associates, a backer of Peninsula.
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