Investors Focus on a Batch of Biotech IPOs

This article published with permission from The Burrill Report.

Investors focused on upcoming initial public offerings from biotech companies this week, including a proposed $2.8 billion bid that if completed would be the largest biotech IPO ever.

Otsuka Holdings, Japan’s number two drugmaker by revenue, has confirmed that it is planning to sell up to 94.5 million shares at about 2,400 yen, or $29 a share, to raise $2.8 billion to fund its global expansion and drug development efforts. The diversified company plans to start trading on the Tokyo Stock Exchange on Dec. 15 after setting the offer price on Dec. 6. If completed, it will be the world’s biggest biopharmaceutical initial public offering to date, topping Merck KGaA’s 1995 $1.7 billion offering, according to Thomson Reuters data.

Otsuka Pharmaceuticals is the largest of 145 subsidiaries and affiliates that make up Otsuka Holdings, an umbrella company formed two years ago. The pharma sells everything from prescription drugs to consumer products, ranking fifth among Japanese pharmaceuticals in terms of prescription drug sales. The estimated offer price would value Otsuka at more than 15 billion, ranking it on a par with Eisai Inc., the U.S. pharmaceutical subsidiary of Tokyo’s Eisai Co. Ltd., behind Takeda Pharmaceutical Co. Ltd., Astellas Pharma Inc., and Daiichi Sankyo Co. Ltd.

Otsuka’s most recognizable drug, the schizophrenia drug Abilify, generated more than $4 billion in revenues in 2009. Three quarters of that revenue is generated in the U.S. where it is partnered with Bristol-Myers Squibb Co. (NYSE: BMY) and has patent protection until early 2015. That patent is currently being challenged by Israel’s Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA) and Apotex Inc. of Toronto, with a decision expected shortly, according to analysts who expect Otsuka to beat the challenge. Bristol-Myers shares were trading at $26 Tuesday, while Teva’s American depositary shares were at $50.41.

Still Otsuka’s research-and-development expenses grew 12% in 2009, mostly on drug development, and the company has lagged behind its peers in terms of seeking new products and revenue outside the company. Most of the money raised in the IPO will be used to beef up its R&D and used to expand all parts of its business globally.

Despite the opening of the IPO window, U.S. capital markets have had a chilly reception for most life-sciences companies trying to go public. While they embraced DNA sequencing firm Pacific Biosciences of California Inc. (NASDAQ: PACB) when it went public two weeks ago, its competitor Complete Genomics Inc. (NASDAQ: GNOM) had to scale back its deal price more than 30% to go public. The company pared its price to $9 a share, down from its hoped-for range of $12 to $14 per share, to sell 6 million shares and raise $54 million. Unlike many of its peers whose business model is to sell their next-generation sequencers, Complete Genomics’ model involves offering sequencing services. All are racing to be the first to offer the $1,000 genome. (Read more on the story here.)

Shares of Pacific Biosciences were at $12.12, while Complete Genomics shares were trading at $7.

Venture-backed Ikaria Inc., a Clinton, N.J.-based biotech with treatment for respiratory failure in newborns, also planned its debut this week. But after cutting the price of its offering by 38% and still not getting a good response, it decided to withdraw it. Unlike many life-sciences companies in the IPO queue, Ikaria is profitable. However, the company’s profits slipped during the first three quarters of 2010 to $7 million, down from $15 million a year earlier.

Molecular diagnostics firm Rules-Based Medicine Inc. of Austin, Texas, also pulled its IPO, citing adverse market conditions, according to a recent regulatory filing. Cutanea Life Sciences of Malvern, Pa., another biotech firm set to IPO this week, decided to postpone it until market conditions improve.

Venture capital investing picked up steam after several quiet weeks. Personal genetics firm 23andMe Inc., of Mountain View, Calif., raised $22 million to close a series C round from new investor Johnson & Johnson Development Corp., and current investors that include New Enterprise Associates and Google Ventures.

San Diego startup Aires Pharmaceuticals Inc. completed a $20 million series B equity round led by MPM Capital, which includes existing investor ProQuest Investments. The company also granted Novartis AG (NYSE: NVS) an exclusive option to acquire the company following the successful completion of a Phase II clinical study of Aironite, an inhaled nitric oxide prodrug, to treat pulmonary arterial hypertension. The agreement also includes a right to an exclusive worldwide license under pre-agreed conditions. The deal with Novartis could be worth as much as $250 million if all options are fully exercised and milestones successfully reached. Novartis American depositary shares were trading at $55.87.

Syntaxin, a U.K. biotech developing novel drugs to control cell secretion, has raised $29.1 million in a series C financing from new investors Lundbeckfond Ventures, Ipsen and Seventure, which joined existing investors Abingworth, SROne, LSP, Johnson & Johnson Development Corp. and Quest. The money will be used to continue development of its technology platform, as well as progress its lead internal acromegaly program into clinical proof of concept studies.

Arbor Pharmaceuticals Inc., Raliegh, N.C., completed a $34.8 million financing that included a $17.5 million investment in the form of series B preferred stock led by Signet Healthcare Partners, and the remainder in the form of a term loan provided by several of the investing parties. Participants in the financing included JW Asset Management, and Arch Healthcare Fund. Arbor is a specialty pharmaceutical primarily focused on the pediatric market that currently markets three products for various hearing conditions.

Finally, Eli Lilly & Co. (NYSE: LLY) will acquire Avid Radiopharmaceuticals Inc., a Philadelphia-based diagnostics company that develops molecular imaging compounds, for up to $800 million. The acquisition of Avid also provides Lilly with a diagnostics development platform covering several disease areas, including Parkinson's disease and diabetes.

Lilly will pay $300 million upfront for Avid for an upfront payment of $300 million, and up to $500 million in additional payments contingent upon potential future regulatory and commercial milestones for florbetapir, a molecular imaging agent under investigation for detecting the presence of amyloid plaque in the brain. Avid recently submitted a marketing application for florbetapir to the U.S. Food and Drug Administration. Lilly's shares were trading at $34.36.

In other market-moving news:

Stocks ended lower this week, spoiling a five-week long winning streak. The threat of rising interest rates in China prompted investors to lock in profits and exercise caution about the strength of equities in the coming weeks. The malaise that hit the capital markets also spilled over to healthcare stocks, with all biotech indexes closing the week in the red.

Two of biotech’s top five companies by market cap bucked the trend and registered modest gains. Biogen Idec Inc.’s (NASDSAQ: BIIB) shares closed the week up 2.7%, while Celgene Corp.’s (NASDAQ: CELG) shares closed up 0.9%.

Genzyme Corp. (NASDAQ: GENZ) shares closed the week down 2.6% as investors have started to ponder whether French drug giant Sanofi-Aventis S.A.’s bid to acquire the company will be consummated anytime soon. The Wall Street Journal reported that Japan’s Taneka had looked at Genzyme as a possible acquisition candidate.

Shares of Human Genome Sciences Inc. (NASDAQ: HGSI) shed 7% on the week as investors reacted to FDA comments about its drug Benlysta. A panel will meet next week to recommend to the FDA whether the drug should be approved as a treatment lupus. Ahead of the panel meeting, the agency presented a preliminary review of the drug, questioning both its effectiveness and safety.

The biggest gainer in the sector was Aastrom Biosciences Inc. (NASDAQ: ASTM) of Ann Arbor, Mich., which jumped 48%, while the sector’s biggest decliner was SurModics Inc., headquartered in Eden Prairie, Minn., which tumbled 30%.

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