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 approval in Europe, but the path to U.S. approval would take longer, according to Zohar.

I asked Zohar what market conditions would prompt Gelesis to try for an IPO again. He declined to answer, but said that “there [had been] enough demand to price” the previous attempt. “For strategic reasons we decided to wait.”

Kolltan Pharmaceuticals. Kolltan of New Haven, CT, seemed like an IPO shoo-in. One of its founders, Joseph “Yossi” Schlessinger, is chair of pharmacology at Yale University, and his decades of work have helped build a major field of cancer drug development: inhibition of kinases, which are a family of enzymes with diverse roles in driving cancer and other diseases. The dozens of kinase inhibitors already approved include ones that previous companies backed by Schlessinger helped bring to market.

Schlessinger co-founded Sugen—the source of two approved drugs now at Pfizer, which acquired it during industry consolidation in the early 2000s—and Plexxikon, creator of a mutation-specific therapy for melanoma, vemurafenib (Velboraf). (Daiichi Sankyo bought Plexxikon for $805 million upfront in 2011 and shares vemurafenib rights with Roche.)

Kolltan aims to build a pipeline of monoclonal antibodies that inhibit a subset of kinases called receptor tyrosine kinases. There are antibody drugs that go after cancer by shutting down kinase activity, perhaps most famously Genentech’s trastuzumab (Herceptin) and bevacizumab (Avastin), but a company dedicated to the specialty is unusual.

We don’t know what made the company withdraw its IPO try in January 2015. The official notice didn’t give a reason, and the company declined to comment when contacted for this story.

Could it have been too early? When Kolltan declared its intentions to go public, in September 2014, it was just barely clinical stage, still in Phase 1 with KTN3379, a compound it licensed from AstraZeneca’s MedImmune division. But being early   hasn’t prevented biotechs from going public during this boom. (And in May, the company said the Phase 1 data were strong enough to move the drug into multiple Phase 2 trials.)

The company has seen major losses—$92 million in three years—but hey, it’s biotech.

There’s also a notable amount of founder ownership. When last reported, Schlessinger, Altschul, and CEO Gerald McMahon together owned more than 12 percent of the company, nearly as much as the top institutional shareholder, Fidelity (14 percent). (There’s the crossover.)

But with the founders’ track record, those oddities seem mild. Often companies will “dual-track”—plan an IPO while talking to potential acquirers—and it’s possible Kolltan, thinking a buyout was imminent in January, pulled its IPO. But six months later, there’s no deal.

As of September 30, it had $53 million in the bank. It has not disclosed any new financing plans since January’s IPO withdrawal.

Dance Biopharm. Inhaled insulin is a product that could change the lives of millions of diabetics. It’s also the arena for some of biopharma’s most spectacular flubs. Pfizer got the flub-train rolling nearly a decade ago with Exubera, the inhaler that was approved in 2006. It had no safety problems, but $12 million in sales and one year later Pfizer voluntarily pulled it from the market. (Here’s a great article about the disaster, accompanied by a picture worth a thousand words. No one wanted an inhaler that looked like it was left behind by Cheech and Chong.)

In the wake of Exubera, Novo Nordisk and Eli Lilly (NYSE: LLY), two diabetes powerhouses, pulled the plug on their inhaled insulin programs. Next up was Mannkind (NASDAQ: MNKD), a Los Angeles-area company that first asked FDA to approve its Afrezza product in 2009. Approval finally came in June 2014, and Mannkind’s partner Sanofi (NYSE: SNY) began selling it earlier this year (with, it should be noted, a much smaller inhaler than Exubera). So far, sales are dismal. Updated numbers should come when Sanofi reports second quarter earnings on July 30.

Along comes Dance, of Brisbane, CA, headed by John Patton, a founder of Nektar, which was behind the inhalation technology of Pfizer’s Exubera. (Nektar was originally known as Inhale Therapeutic Systems.)

Dance has been working on turning inhalable insulin into a mist, rather than a dry powder, which Afrezza uses and Exubera used. (Dry powder can cause throat irritation and cough, which Dance’s product aims to avoid.)

Dance filed to go public in April 2014, then withdrew its effort in October with no explanation. At the time of the most recent public filing, CEO Patton owned 43 percent of the company. (It has since raised more private capital.)

The company did not respond to requests for comment. So what could have made its IPO try go awry? In its first public filing April 2014, the company said it planned to start a worldwide Phase 3 trial for type-2 diabetes in mid-2015. To date, nothing has begun—or at least been publicly announced.

Between Dance’s first public IPO notice in April and its withdrawal in October, Mannkind received FDA approval for Afrezza. Could that have complicated Dance’s IPO chances? Dance itself had been of two minds about the potential effect of an Afrezza approval, as noted in its prospectus: “If Afrezza is approved, MannKind will have a first-to-market advantage over us, which will impair our ability to compete. If the FDA does not approve Afrezza, our ability to raise capital and our business prospects could be impaired.”

Perhaps the concern about competition resonated too well with public investors. Or, if Afrezza ultimately falters, Dance will convince enough people that there’s still the need for an inhaled insulin solution.

MultiVir. The boom has been good to the developers of all kinds of cutting-edge therapies, not least of which is gene therapy. UniQure (NASDAQ: QURE), Bluebird Bio (NASDAQ: BLUE), and Spark Therapeutics (NASDAQ: ONCE) have all gone public.

But MultiVir, of Houston, did not. It filed its first public notice this March. On May 27, it sent the SEC its withdrawal notice. MultiVir CEO Robert Sobol told me that the week MultiVir had its road show, San Diego gene therapy firm Celladon (NASDAQ: CLDN) reported a Phase 3 failure for its heart-failure treatment. (That was on April 27.)

Instead of a postponement, MultiVir reacted to what Sobol called “a challenging market” by withdrawing its S-1. He says an IPO isn’t off the table completely. In nine to 12 months, he expects MultiVir’s two lead programs to produce Phase 1 data, which “could be useful” in making another fundraising pitch.

MultiVir has a long history. It was once, essentially, the Austin, TX-based Introgen Therapeutics, which filed for bankruptcy in 2008 after FDA refused to review its lead product. Now, several of the same executives (Sobol was Introgen’s SVP of medical and scientific affairs) and clinical products are back.

Licensed from Introgen, MultiVir’s lead product candidates are in Phase 1—well behind the more advanced lead programs at UniQure  and Spark at the time of their IPOs. Introgen’s lead candidates, one to treat liver metastases from colon cancer, the other to treat squamous cell carcinoma of the head and neck, use adenoviral vectors to deliver their genes. It’s a delivery technology not seen often these days, but it was the basis for the first gene therapy ever approved. (It was in China.)

I asked what changes MultiVir has made to those products since buying them out of Introgen’s bankruptcy proceedings. Sobol said the agents are now being considered in combination with checkpoint inhibitors, a class of drug that blocks a tumor’s ability to hide from the immune system.

Multivir is—or was, at the time of its most recent filing—nearly wholly owned by one entity, Pope Investments of Memphis, TN, which bills itself as an investment manager for high-net-worth investors.

Compare that to the gene therapy developers that have gone public, plus others—Voyager Therapeutics, Audentes, GeneSight Biologics, RegenXbio, and Dimension Therapeutics, for example—which have all attracted high profile VCs, crossovers, and sometimes both.

MultiVir is looking to cancer immunotherapy to put Introgen’s technology, products, and people in a new light. So far, that light has only attracted a single investor.

CardioDx. Diagnostics companies haven’t enjoyed the IPO boom as much as drug companies, but now and then a diagnostics firm has notched a public listing. CardioDx isn’t one of them, but not for lack of trying.

It first filed its intentions in 2013, but by the end of that year, it had pulled back. In late April 2014 it reanimated its attempt, then officially withdrew in late December.

The company has a commercial product and an all-star board of directors that includes former Boston Scientific CEO Jim Tobin, Brook Byers of Kleiner Perkins Caufield & Byers, who has helped take several diagnostics firms public, and cardiologist/entrepreneur Louis Lange.

The company’s CORUS CAD genetic test helps doctors rule out obstructive coronary artery disease when a patient comes in with chest pain. CardioDx claims 90 percent of all such patients don’t have a heart problem, and the test can help avoid a range of unnecessary procedures, including invasive cardiac catheterization.

The test received Medicare Part B coverage in mid-2012 and by the end of 2013 had generated $8 million in revenue. Two private insurers have since signed on, but more recent revenue numbers weren’t available. (The company did not respond to requests for comment.)

With more than $200 million in private capital raised, it would be safe to assume the investors were clamoring for an exit. Still, late last year, when the company withdrew its IPO try, it played down the importance of the would-be offering: “The terms currently obtainable in the public marketplace are not sufficiently attractive to the Registrant to warrant proceeding with the public offering,” the notice read.

It added that the IPO would have been strictly a “discretionary” financing—a comment meant to signal the company was by no means desperate for the cash.

At the same time, the firm announced a $35 million private round of financing. So make that at least $235 million in private funding, and counting. Those are numbers that would make most investor syndicates shudder, although Juno Therapeutics (NASDAQ: JUNO) made the big-box financing strategy (one year, two rounds, $310 million) look brilliant, and some of Juno’s backers are trying it again with Denali Therapeutics.

Other than those rare deliberate efforts to raise mountains of capital, we haven’t seen many totals like that in recent years, with so many biotechs able to convert less than nine digits of investment into a public debut. In the end, though, going public can salve a lot of wounds, or at least shift the financial risk to a new set of bettors. For a handful of biotechs, however, that day has yet to come.