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Is the IPO Market Warming up to Genomics?

By Tony Fong

NEW YORK (GenomeWeb News) – After years of being non-existent, recent activity suggests that the IPO market may be opening up to the sequencing space. But whether that will extend to the broader 'omics market is debatable.

In the last month, Complete Genomics and Pacific Biosciences filed S-1 preliminary prospectuses with the US Securities and Exchange Commission, hoping to raise up to $86.3 million, and $200 million, respectively.

Meanwhile, molecular diagnostic developer GenMark completed its IPO in the US in the late spring, while AutoGenomics, another molecular diagnostic firm, recently filed amendments to an S-1 that it originally filed in July 2008 — an indication, perhaps, that it may moving ahead soon with its IPO.

The activity represents a virtual avalanche of IPO activity in a space where public offerings are about as easy to score as a rent-controlled apartment in New York. But whether the sudden flurry of IPO-related news represents any significant change in the way investors view companies in the life science space — in particular those developing -omics technology — is questionable, as valuations for such businesses remain low and high risks associated with taking them public continue to run high.

The overall IPO market is loosening. Through Aug. 24 there were 86 completed IPOs this year, compared to 63 for all of 2009, according to IPO research and investment company Renaissance Capital. Yet only one firm operating in the 'omics arena has completed its IPO this year — GenMark, which switched from the London Stock Exchange to the Nasdaq as part of its complete identity overhaul. Along with landing at Nasdaq, it changed its name from Osmetech and moved its headquarter from the UK to Pasadena, Calif.

Investor Love

For the broader 'omics space, IPOs still remain elusive, and it is no coincidence that the two firms that most recently filed for IPOs are in the sequencing market, though they have different business models. Complete Genomics provides human sequencing services based on its proprietary technology, while PacBio is developing a real-time single molecule-sequencing platform.

Of all the 'omics technologies, next-gen sequencing has made the most progress scientifically in recent years and has attracted the most investor love.

Citing figures from consulting firm Scientia Advisors, PacBio in its S-1 said that the DNA sequencing market is anticipated to triple to more than $3.6 billion by 2014 from $1.2 billion last year. The market for sequencing-based molecular diagnostics is forecast to be $1.6 billion in 2014.

Even before announcing its proposed IPO, PacBio raised approximately $370 million since its founding, which especially in light of the current environment is not insignificant. That includes $107 million in a recent Series F round.

Complete Genomics, meantime, recently closed a $39 million Series E funding round that brought its total financing since inception to $130 million.

In a report issued this week on the benefits of the stimulus funding on the nation, the White House also noted the rapid decrease in the price of sequencing, and singled out PacBio's technology and research, which received funding under the American Recovery and Reinvestment Act of 2009, as a prime mover toward the $1,000 genome.

And Life Technologies last week announced it is buying Ion Torrent, which is developing a chip-based sequencing platform, for up to $725 million — another sign not only of the value that investors see in the technology but also of the potential that competitors see in each other.

"There is demand out there for potentially attractive products and services associated with genomics generally, but in particular sequencing," Jon Groberg, an analyst with Macquarie Equities Research, told GenomeWeb Daily News. "People think sequencing is going to be a very big market."

Indeed, in an analyst note last week, John Sullivan of Leerink Swann wrote that during a recent roundtable held by his firm, a panel of experts in molecular diagnostics said that there is the "assumption" that next-gen sequencing-based diagnostics are in the "not-too-distant future."

While he noted that sequencing-based diagnostics will likely be more "focused in the near term rather than being based on whole genome sequencing," whole-genome sequencing is expected to drive genomics-based medicine as costs continue to drop, "making it possible to shed light on the genetic underpinnings of all diseases."

Enthusiasm surrounding next-gen sequencing is not new. In 2007 Illumina purchased sequencing firm Solexa for $600 million largely because it believed that the technology would be a game-changer, even though up to that point, the instrument had never generated any revenues. Its gamble has paid off in spades, as Illumina is now viewed as the leader of the sequencing pack.

Nearly four years later, while the –omics space has its fair share of technologies, outside of sequencing, "no one's found the particular applications, so to speak," Groberg said. "Some of that's on the content side, some of that's on the technology side. And those are a little harder, I think, for investors to understand, whereas on the sequencing side, there's a view that a lot of money is going to go to sequencing."

According to Scott Morrison, US Life Sciences leader for Ernst & Young, the "explosive growth in venture investing" in sequencing-related tools firms is due in part to the continued focus on personalized medicine and, more generally, data-driven healthcare.

"Being able to diagnose early and predict outcomes and being able to develop drugs that are more specific to a subset of the patient population … the tools become a real key facilitator — the sequencing platforms and the ability to analyze and accumulate patient data and scientific data," he said.

"Broadly speaking, personalized medicine and tools-related companies that support that have really piqued private company investment interest, as well as now, [as] we can see from the public market activities," interest from public investors, he said.

Though Complete Genomics and PacBio are expected to successfully complete their IPOs, there are, of course, no guarantees, and the current state of another sequencing firm that went public a few years ago may temper investor enthusiasm.

Helicos Biosciences went public in 2007 riding on the promise of its single-molecule sequencing technology. But as the only publicly traded pure-play next-generation sequencing firm, it has struggled financially and currently is in the midst of a business restructuring with a new focus on the diagnostics market.

That could weigh on potential investors' minds as Complete Genomics and PacBio look to go public.

"What happens is that banks, investors, boards look at other companies' successes and failures and use it to benchmark their own decisions," said Gil Bashe, a limited partner in private equity firm GTCR Golder Rauner and executive vice president at PR firm Makovsky &Co.

Unlike Helicos when it went public, however, Complete Genomics and PacBio are generating revenue, albeit in modest amounts, which signal to investors a market for their products and services.

Complete Genomics had sequenced more than 200 human genomes as of July 20, it said in its S-1, and counted among its customers "some of the leading global academic and government research centers and biopharmaceutical companies." In the first quarter, ended March 31, it booked $336,000 in revenues, and reported cumulative revenues of $959,000 as of the end of March.

PacBio is set to launch its platform later this year and through the first half of this year generated $1.2 million in revenue, it said in its filing.

Hope Beyond Sequencing?

The Complete Genomics and PacBio filings may cause others in the –omics space to at least consider their own prospects of an IPO, according to Bashe. If there is the perception that the capital markets are opening up, companies will reason that they should go after the money, "and get [their] stories in there," he said.

Morrison added that firms developing tools that are related to sequencing, such as those in sample prep, have been attracting the most attention from private investors, usually an indicator that a company may be poised for an IPO. In addition, companies in the array and microfluidics space could be primed to go public, he said.

However, just because a company files an S-1, it may not mean that it actually wants to go public. Instead, a firm may initially file for an IPO in order to set a baseline worth, and in a roundabout way tap into the private market or set the stage for an acquisition.

"It does attract people saying, 'We can buy it now less expensively or we can wait until [they go public] and it will be more expensive,'" Bashe said.

In fact, while filing and maintaining an IPO is expensive — about $1 million per year when fees paid to lawyers, banks, accountants and other costs are tallied — the IPO route has become a strategy to bring aboard private investors. A decade ago, Bashe said, when a company went public, the "great bulk" of its stock was purchased by company outsiders. Now, the purchasers are often insiders.

IPOs now have two separate functions. One is to have stock available on the public markets. The other is to set a valuation for the firm.

Bashe said that he has seen many companies go "through the motions of filing an S-1" to attract attention and then get acquired without ever going public, Bashe added.

But whatever their reasons, -omics firms eyeing the IPO route still face hurdles, including low valuations, Macquarie's Groberg said.

"If you look at the classic life science companies, valuation multiples have come down a lot over the last few months," he said. "I was just telling a friend [that] I wouldn't be looking at the market and be like, 'Oh, it's a great time to go public. The valuations are crazy … The valuations are as low as they've ever been historically."

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