Friday, May 30, 2008

Biotechs find new deals amid dearth of IPOs

By Ryan McBride

Wall Street has turned its back on private biotech companies trying to complete initial public offerings this year, and Massachusetts life sciences firms are using that poor IPO climate to forge alternative deals, including reverse mergers.

There hasn’t been a single biotech IPO in 2008, but privately held Xanthus Pharmaceuticals Inc. of Cambridge was able to find a favorable valuation, at $52.2 million, from publicly traded Antisoma PLC, a European biotech firm focused on anti-cancer drugs. Also, Avant Immunotherapeutics Inc. and Critical Therapeutics Inc., two publicly traded biotechs in the Bay State, have recently advanced reverse mergers with private companies.

Such deals may not provide equity investors with a traditional cashout, but in the case of Lexington-based Critical, the company’s valuation is expected to more than triple upon the completion of its merger with Cornerstone BioPharma Holdings Inc. of North Carolina. For its part, the deal allowed the privately held Cornerstone the opportunity to bypass the complex process of going public in a difficult fundraising environment.

Observers say reverse mergers and other fallback deal options are likely to remain the go-to strategies as long as the IPO window remains nailed shut.

“The public markets for biotech companies have deteriorated such that no biotech companies have completed a successful IPO this year,” said Michael Lytton, a general partner of Boston VC firm Oxford Bioscience Partners, who manages the firm’s investment in Xanthus.

Xanthus, a developer of drugs to treat cancer, had looked to go public but found stronger valuation estimates from London-based Antisoma, Lytton said. Antisoma agreed to issue shares of its stock to Xanthus shareholders such as Oxford and HealthCare Ventures of Cambridge, giving them a 22 percent ownership stake in the combined company.

Though reverse mergers may be a viable option for some private life sciences companies, there are drawbacks, said David Anderson, a vice president who specializes in health-care mergers and acquisitions at Covington Associates LLC, an investment banking firm in Boston.

Anderson said that the reverse mergers don’t provide venture backers of private biotech firms the huge returns they seek from their investments. Also, once the reverse mergers are completed, the companies may fall into a “death spiral” during which the value of their stock is diluted every time they raise money from the public markets.

“I think it’s becoming more of an option,” Anderson said, “(but) I don’t know if it’s a viable option.”

Small public biotech companies such as Avant and Critical have sought private drug development firms to improve value for shareholders.

Avant completed its $129.3 million all-stock merger with Celldex in March, combining two firms focused on developing vaccines and other immunological treatments into one public company. “I think the deal has gone very well,” said Anthony Marucci, interim CEO of Avant, who came to the company from Celldex. “We’ve integrated the staffs and I think everyone is excited about the programs we have brought on.”

Marucci, who had served as interim CEO and CFO of Celldex prior to the merger, said the Garden State biotech firm had filed papers for an IPO with the U.S. Securities and Exchange Commission in 2005. The company sought alternatives to the public offering due to market conditions, resulting in the merger with Avant.

Celldex shareholders now control about 58 percent of the stock in Avant, which is still headquartered in Massachusetts even though Celldex shareholders gained a majority stake in the combined company in the merger. Also, Marucci said, Avant’s manufacturing facility in Fall River was a key asset that lured Celldex to the deal, and he plans to keep the plant in operation.

At Lexington-based Critical, the reverse merger with Cornerstone is expected to result in a company worth more than three times the current value of Critical, which had a market capitalization of around $12.8 million on May 28 while its stock traded for about 30 cents per share. Critical declined requests for its executives to be interviewed about the pending deal for this story.