Ouch for Arch: VC Bob Nelsen Says Ikaria Will March On After Withdrawing Big IPO

Xconomy Seattle — 

If Bob Nelsen ever wanted to hide, yesterday would’ve been the time. Ikaria, the futuristic “hibernation-on-demand” company he bankrolled five years ago, was on the cusp of going public this week at a valuation of more than $700 million. It was a moment he had been eagerly awaiting a long time. Two years ago, Nelsen told Xconomy that Ikaria “will probably be the biggest biotech IPO ever when it decides to go public.”

This week, when Ikaria tested the IPO waters, it actually found nowhere near that kind of demand from investors. The offering was withdrawn at the 11th hour Wednesday night.

One of those rare moments in venture capital—the moment an illiquid investment becomes liquid—had slipped away. Arch had missed an opportunity to have its Ikaria stake valued at more than $56 million. It was also bad news for the Fred Hutchinson Cancer Research Center, and founding scientist Mark Roth, who both have substantial holdings in the company.

But Nelsen came to work anyway today, and did his best to explain why Ikaria withdrew its IPO, and why he thinks the company still has good growth prospects. He pointed out that unlike most biotech companies, which burn cash for many years in anticipation of developing a profitable drug, Ikaria is already profitable and doesn’t really need the IPO proceeds to stay in business. Regulatory filings do show that Ikaria had generated $274 million in revenue, and a $13 million profit in 2009. Here’s what he had to say in an e-mail message yesterday, and his response to a few follow-up questions.

Bob Nelsen: We pulled the IPO due to market conditions. While there was significant interest in the offering and in the company, Ikaria is one of only a few profitable biotech companies, and had the option to withdraw at this time. In other words, we didn’t need the money to survive as most biotechs would.

Ikaria generates large positive cash flows and has a solid pipeline of critical care drugs. (I think our positive net cash flows exceed all the biotechs in Seattle together)

Our next steps will be to continue to develop the pipeline, and to continue to acquire additional critical care assets.

Xconomy: Are you disappointed?

BN: Yes, it is never fun to go through the effort and decide not to go. It is nice in this case to be playing from a position of strength and to have the cash to be able to walk away, though.

X: Without doing an IPO, how are you going to get liquidity from your investment in Ikaria?

BN: Even if they went out, they would not expect immediate liquidity, especially in a weak market. Ikaria is the only company I have ever seen in biotech which literally can execute an aggressive pipeline internally on several great later stage clinical products, have an active development effort looking for additional products, and do it with our own cash. We are already back focused on growing the business and hitting internal milestones. We will watch the markets and re-evaluate over time, but we are not in a hurry. There is huge value here and we will be patient.

X: Will this affect the timing and your ability to raise a new fund at ARCH?

BN: We have not yet decided when to raise a fund and do not expect this to impact the timing of our fund raise. We have strong LP (limited partner) demand already to raise a new fund, but we have dry powder until well into the end of 2012/2013 and are investing Fund 7 actively now. We have done two new startups in the last two weeks.

Our portfolio performance has been incredibly strong in the last two years since the crash, with only one “involuntary” wash-out in the whole portfolio of close to 50 companies, and many flat and a large number of up rounds. Companies like Ikaria, Sapphire Energy, VentiRx Pharmaceuticals, Xtera Communications, Impinj, Kythera Biopharmaceuticals, Nanosys, Agios Pharmaceuticals, Semprius, Achaogen, Quanterix, VLST, Allozyne, Theraclone Sciences, Variation Biotechnologies, and many others are on deck.

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