Capital Markets

Biotech IPO Bucks an Adverse Tide

Although firms in the sector have struggled in going to market, one has managed to launch at its expected price.
Helen ShawAugust 16, 2006

In the midst of an overall flagging of the IPO markets, initial public offerings in the biotech industry have been among the most sluggish. With many biotechs in dire need of current funding, many can’t market new products or drugs until years into the future.

Indeed, the Burrill Small-Cap Biotech Index dropped over 15 percent in July. Even established companies with strong drug pipelines have slashed their IPO prices and struggled in this bear market for biotech stocks, notes Peter McDonald, a research analyst at American Technology Research.

A major reason for the tepid environment for biotech stocks is the length and steadily rising costs of compliance as a drug moves through three trial phases before it gets final approval from the U.S. Food and Drug Administration. “The sector runs on clinical trial data; it is a lot of what drives valuation,” McDonald said.

For some time now, many biotechs have been running into difficulties in the costliest third phase of clinical trials. The FDA has raised the hurdle somewhat by asking for a lot more data from companies, McDonald explained. The litigation surrounding Vioxx, the heart medicine, has also made investors wary of the entire drug-development sector.

The abundance of such difficulties has made the emergence of a successful biotech IPO good news indeed. That’s certainly been true in the case of the recent offering of Osiris Therapeutics. By launching within its initial price range, the IPO achieved a feat that only two other biotech IPOs have managed in the last two years.

On August 4, its first day of trading, the Baltimore-based company opened on Nasdaq at $11 per share, the bottom of the initial $11 to $13 price range, and closed at the same price. The stock launch, with 3.5 million shares, raised $38.5 million for the company, which uses adult stem cells from bone marrow to develop products to treat cardiovascular, orthopedic, and other medical conditions. Only Altus Pharmaceuticals and Coley Pharmaceuticals have debuted within their expected IPO ranges, in 2006 and 2005, respectively.

For the Osiris offering, Jefferies and Company served as the lead underwriter with Lazard Capital Markets and Leernik Swann and Company as the co-lead and co-manager, respectively.

Going forward, a significant factor for the stock’s success will be the FDA’s response to Osiris drugs that are currently under evaluation, says David Menlow, president of IPO Financial Network, a new-issue research service. The company has a few drugs in clinical trials. It’s already produced Prochymal, the only stem cell therapeutic designated by the FDA as both an “orphan drug” and a fast-track product, according to the researcher. An orphan-drug status gives the manufacturer the right to exclusively market an unpatentable drug for seven years.

Part of the reason for Osiris’ relative success compared to other biotech companies may be that its field of research has been much in the news of late. “I’d imagine the real lighting rod for this offering was stem cell research,” suggests Menlow.