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IPO Market Unlocking for 'Omics-related Companies, but It's 'Anything but Robust'

By Tony Fong

NEW YORK (GenomeWeb News) – For most of 2010, the IPO market froze out the life science tools and 'omics market, but by the end of the summer, there were signs that the public markets may be slowly welcoming firms operating in the space, as a handful of public offerings ended a cold snap.

The IPO market for 'omics firms has been a grim one in recent years, and even those that filed to go public often were forced to abandon their plans amid a tepid response from the investment community. Companies looking to go public still have to clear steep hurdles, and no one is saying that the public markets are flinging open their doors to companies in the space.

When it came to raising funds, the story for 2010 was an incrementally improving IPO market — even as private equity was active in raising large sums of money for the 'omics space. Whether it was due to exuberance around sequencing technology or a better economic climate, 'omics-related firms saw a rejuvenated IPO market in the past year with most of the activity taking place during the second half of 2010.

Among the companies that went public in 2010 were sequencing firms Pacific Biosciences and Complete Genomics. In addition, molecular diagnostics firm GenMark Diagnostics completed its IPO in the US in May, and Korean molecular diagnostics company Seegene did its IPO in Korea in September.

Also, Atossa Genetics and Fluidigm have filed to go public during the past three months, and BG Medicine's IPO continues to breathe, though a company officially recently told GenomeWeb Daily News recently that it had failed to price it.

Several other firms that filed before the start of 2010 to go public, including AutoGenomics and Med BioGene, continue to bide their time.

The headliners in 2010, however, were PacBio, which raised $200 million in its IPO, and Complete Genomics, which raised $54 million when it went public.

In a research note last week, Peter Lawson, an analyst at investment firm Mizuho Securities, wrote that "[r]ecent IPOs for Pacific Biosciences and Complete Genomics have helped drive IPO activity beyond pure biotechnology companies and into the life science and diagnostic space."

At the very least, those IPOs signaled that the public markets are not a pie-in-the-sky dream for companies in the life science tools and 'omics spaces, Bill Ericson, managing director at Mohr Davidow Ventures, an investor in Pacific Biosciences, told GWDN.

"When a few companies are able to go public and do so successfully, as they have [done] in 2010, slowly the public markets become more of a viable option," he said. "When the public markets are closed to startups, nobody wants to be the one who goes out and fails."

The 'omics-related field has had its problems in the public markets in recent years, and even when a company was able to gather enough investment resources to file for an IPO, many have had to eventually pull them. Among those that have had to abandon their IPO plans in recent years are XDx, BioTrove, and Perlegen, which ultimately went out of business late last year, two-and-a-half years after filing for its IPO.

Fluidigm and BG Medicine also had earlier pulled IPOs before refiling this year.

Benefitting 'omics IPOs this year was the improvement in the general IPO market. According to Renaissance Capital, an IPO research and investment company, through Dec. 28, 261 IPOs have been filed this year in the US, up 129 percent from 119 for all of last year.

There were 154 IPOs priced, a 144 percent increase from 63 a year ago. Meanwhile, total proceeds raised increased 77 percent to $38.7 billion this year, compared to $21.9 billion in 2010, according to Renaissance.

Glass Half Empty

Still, substantial challenges remain in the IPO market, in general, and specifically in the 'omics space. Steve Gullans, managing director of Excel Venture Management in Boston, said that the IPO market cannot be viewed as being completely open until companies that are years away from generating revenues are successful in going public, "and we're nowhere near that right now."

Ericson added that companies with any chance at going public still need to be "very high quality."

In addition to BG Medicine, which is now evaluating its options after failing to price its IPO, Rules-Based Medicine withdrew its IPO in November almost a year after filing its prospectus. The Austin, Texas-based multiplex molecular diagnostics outfit cited adverse market conditions for its decision.

Even Complete Genomics, though it completed its public offering, had to slice its share price to $9 when it went public from a $12 to $14 range it had originally targeted. However, the prevailing feeling is that its current share price is undervalued, and recently a handful of investment firms initiated coverage on the Mountain View, Calif., shop with "Buy" or "Outperform" ratings.

Though improvements were seen in 2010, one observer also noted that the IPO market was hardly scintillating in the healthcare sector in general. Companies need to finance and the IPO route is "the cheapest cost to capital," said Gary Kurtzman, managing director for life sciences at private equity and venture capital firm Safeguard Scientifics.

"I think it's been a year of the IPO as a renewed financing vehicle, but I'd say the IPO market is anything but robust … for life sciences," he said. "It's doable."

Not helping matters is that the number of funds that specifically invest in life sciences is shrinking. There are about 60 funds that do so, "so your universe is limited," Kurtzman said.

For 2011, he is not predicting any significant improvement in the IPO market for 'omics firms and added that scenarios similar to Complete Genomics slicing its original price target could repeat itself. "I think we've gotten into a pattern where the buyers of IPOs are looking to get value and they use the price on the cover …as guidance, and discount from there," he said.

The wariness that 'omics firms still have about the public markets can be seen in AutoGenomics, which filed its prospectus for an IPO in mid-2008 but still hasn't completed it. A few months ago, its CEO told GWDN that its underwriters are still not confident that the timing is right. Looking at companies that have gone public during the past two years, the company has determined that they "have not done very well," Fareed Kureshy, said.

The companies with the best shots at being taken public in the coming years are those in the next-generation sequencing space, experts said. Aside from the general buzz surrounding the technology, investors have put a lot of money into such firms and may be seeking a return on their investments. Before it went public, for instance, PacBio disclosed that it had raised about $370 million in private funding.

Next-gen sequencing "is the area of tools where I see the greatest impact over the last year," Ericson said, "and specifically, you're beginning to see the use of sequencing in clinical settings, including diagnostics, as more than a very niche technology."

Private Equity Option

In addition to the public markets, a few companies were successful in raising significant amounts through private equity in 2010. Among the larger rounds in 2010 was a $41 million Series B by Swiss molecular diagnostics firm Biocartis. Cellular Dynamics also received a $41 million Series B infusion in April, and Foundation Medicine raised $25 million in a Series A round the same month.

Despite the handful of large private financings, though, the consensus is that private equity remains tough. In June, Joshua Phillips, managing general partner for Catalyst Health Ventures, told GWDN, "We're actually probably seeing the worst environment there is in venture capital."

Little has changed since then. While investments into sequencing firms continue, interest in investing in the life science tools space is minimal. Customers for such tools tend to be pharma and researchers, and aside from the federal government, spending in research has not increased, said Kurtzman.

Gullans said, though, that with the public equity markets rising, "hopefully there should be significant money moving in" to the private equity markets. He added that as a result there could be more funds allocated to Series A rounds.

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