In Biotech, Everyone’s Going Public. What’s Your Excuse?

Xconomy National — 

Biotechs everywhere are going public these days. You might have heard.

Approaching the traditional market lull in August, we’re up to nearly 40 life science IPOs in 2015, by my own count, with plenty more lined up. That’s more than half way to last year’s mark and already past the 2013 total. I weighed in on the bubble talk in April, so I won’t rehash that parlor game here.

But it’s fair to say, like in any hot market, companies of all stripes—and of all levels of quality—are leaping through the IPO window. So what does that say about companies that have tried and failed to go public? Yes, they exist, too.

Once in a while, the change of plans is revealed along with a merger or big licensing deal. Sometimes a company instead opts for more private money, as we’ll see below. The companies I’m highlighting here—a small sample from the past couple boom years—decided at some point that the tradeoff of public scrutiny for access to public cash was worth it. They ended up with the scrutiny by opening a window onto their finances and strategy, but not with the cash.

For companies ambivalent about that tradeoff—and there are other reasons not to go public, too, such as keeping tighter control—current U.S. regulations are supposed to minimize the need to reveal too much. It’s now permissible to speak more freely with potential investors, to “test the waters,” as the provision is known, before making the commitment to bare secrets in public documents.

But biotech investor Peter Kolchinsky of RA Capital Management in Boston says talk is cheap when it comes to private conversations. “Some companies that rely on just ‘testing the waters’ before an IPO may misread everyone’s politeness as representative of their genuine desire to invest at a particular valuation, which can lead to disappointment once the IPO process flips to its public phase and those investors are asked to formally commit,” Kolchinsky says.

Kolchinsky’s public-oriented fund often takes stakes in private biotechs for prime position in an upcoming IPO. These so-called crossover investments are a hallmark of this boom, with hedge and mutual funds like Deerfield Management, Adage Capital Partners, Fidelity, T. Rowe Price, and many others showing up in private financings all the time.

Crossover investors in a biotech’s late private round are supposed to solidify future IPO demand and help avoid sudden U-turns. (RA Capital began its crossover strategy in 2012. Since then, Kolchinsky says no company that has taken one of its crossover investments has backed out of an IPO try.)

As we’ll see, the presence of a crossover investor doesn’t guarantee IPO success. And the lack of crossovers isn’t necessarily a recipe for flip-flopping. But for companies that postpone or withdraw IPO attempts, there is some kind of disconnect. Perhaps it’s a misjudgment of investor sentiment, or a re-evaluation of the need for privacy. Some companies, while backing off, say the IPO was something they only wanted if terms were ideal.

The following five companies are a small, diverse collection of stories that show how, even in this day and age, an IPO is no guarantee.

Gelesis: Let’s start with a company that said going public wasn’t a top priority. As my colleague Ben Fidler reported in May, Boston-based Gelesis, working on an unusual weight-loss product, pulled back from its IPO attempt, citing market turbulence.

It’s true that the biotech indices had spent about a month and a half, from mid-March to May, rolling and tumbling. Back in May, CEO Yishai Zohar—whose wife Daphne runs PureTech, Gelesis’s creator nine years ago and still its top investor, as of earlier this year—downplayed the import of backing away: “Given our strong cash position and clinical studies underway, our board has been weighing the relative benefits of being a public company at this time.”

What Zohar called a strong cash position—a phrase he repeated when I contacted him this week—was a $22 million financing round that arrived in April, and perhaps in the nick of time. In its S-1, filed on the same day it announced the financing, Gelesis said it had $2.6 million in cash at the end of 2014. (Zohar this week declined to discuss the company’s cash position beyond the figures in the S-1.)

One question public investors might have concerns regulation. Gelesis says its weight-loss pills will be considered medical devices, which face different approval standards than drugs. The pills contain a material made from cellulose and citric acid that expands in the stomach to give people a full feeling.

At the time of the IPO postponement, the company was digesting a 128-person, three-month study with middling weight-loss results, and it was in the midst of a 168-person, six-month trial that won’t reveal its data until the first half of 2016. (That timeline remains in place, says Zohar.) The Gelesis prospectus said that FDA would want to see better results from the six-month trial: the pills would have to result in at least three percent more weight loss than placebo overall, with at least 35 percent of patients losing at least five percent of their body weight. In Europe regulators might require a five percent loss over placebo.

The six-month trial, dubbed GLOW, could serve as a final test before … Next Page »

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