After a lull for 12-18 months, there has been buoyancy in the biotech market—globally as well as locally. Strong fundamentals, global uptrend, and the booming Indian stock markets give the right platform for the launch of biotech Initial Public Offerings (IPOs). A report on the Indian and global biotech IPO pipeline.

Globally, there has been a sudden surge in biotech filings. For instance, towards September-end five Massachusetts firms, Aderis Pharmaceuticals Inc., First Marblehead Corp., Nitromed Inc., TolerRx Inc. and Vaso Active Pharmaceuticals planned IPOs. The combined worth was $400 million. Watertown biotech Acusphere set the tone with $52.5 million debut. The mood was not restricted to the Bay State alone.

The same sentiment was reflected across the US. Genitope Inc. went public offering 3,700,000 shares of its common stock at $9 per share on the Nasdaq to raise close to $33 million. CancerVax Corp., a biopharma company focused on cancer therapies, ended up raising $72 million after pricing six million shares at $12 per share. Myogen Inc. raised about $70 million. Adolor Corp.’s offering was approximately $119 million. This is a partial list of IPOs since September.

There are about 20 odd biotech companies waiting to go public now and raise close to $1 billion according to some analysts. There have hardly been any IPOs in Europe, but in mid-2004 Europe too is expected to open out.

India follows global footsteps

The conditions in India are similar or even better than that globally. In fact the trend in the past six months suggest increasing investor confidence and a great IPO bazaar ahead. According to a Business Standard report, IPOs worth Rs 22,000 crore are expected to come out in the next 12 months. In the first six months of this financial year, Rs 1,868 crore was raised through public issues, both debt and equity. The six equity IPOs in the market this year are now commanding a combined market capitalization of Rs 12,839 crore, creating shareholder wealth of Rs 7,795 crore according to the report. Besides, there has been over subscription to almost all the IPOs that have come after September. And experts believe that there would be oversubscription in most cases in future.

Biotech may not lead the IPO revolution. But it definitely has a strong case to gain in 2004. With the Securities and Exchange Board of India (SEBI) mandating a wide range of disclosures in the prospectus for public offers, the current list of IPOs that are coming are of quality and with strong fundamentals. This paves the way for companies in biotech too to exploit the markets as during the year, biotech companies have made significant progress on all counts—the ability to attract investments, talent new products and make money too.

According to BioSpectrum-ABLE Survey, the biotech industry in FY 2002-03 was Rs 1830 crore. The industry has invested heavily. The total investment in the industry in 2002-03 was Rs 635 crore. The R&D manpower grew over 74 percent. The biotech industry is expected to grow by about 26 percent this year and hopes to invest close to Rs 1,000 crore in the next couple of years.

Several biotech companies plan to go public. Biocon, Shantha Biotechnics, Amreshwara Agri Bio, Bharat Biotech, etc. are looking to go IPO. In fact Bangalore-based bio-pharma major Biocon India could be the one to take lead. It is planning a March 2004 launch of its IPO. It intends an equity capital expansion through a restructuring of its paid-up capital and reserves before that. It has also entered a tie-up with the HSBC-ABN Amro Bank consortium for a Rs 150-crore debt financing for part-funding of its Rs 500-crore expansion programme. The public offer will be done entirely through the book-building route and it has appointed DSP Merrill Lynch and Kotak Mahindra Capital as the book running lead managers. HSBC Securities & Capital Markets will be the co-book running lead manager. Biocon has indicated that the company proposes to offer 10 percent of its equity in the IPO, but the size of the issue will decide the company’s new equity capital after the proposed equity restructuring plans.

The success of Biocon’s IPO would set the benchmark for future IPOs in the sector. For it is the No.1 biotech company in the country and has strong fundamentals. CRISIL, India’s leading credit rating agency, has maintained its P1+ rating for the Rs 20 crore short-term debt programme. According to CRISIL, "The rating continues to reflect Biocon’s strong presence in the statins business and its leading position in industrial enzymes. Its R&D skills in fermentation technologies and its US FDA-approved facility for manufacturing Lovastatin also support the rating. These business strengths are complemented by Biocon’s favorable financial profile, which is characterized by robust sales growth (compound annual growth rate of 50 percent since FY 98-99), healthy profit margins (24.9 percent at the operating level and 14 percent at the profit after tax in FY 02-03), comfortable gearing (0.56 times as on 31 March 2003) and healthy debt-servicing ratios. The rating strengths are, however, tempered to some extent by the large ongoing capital expenditure programme, the market-related risks on some of its new product launches in the biologicals segment and the flattening growth in the industrial enzymes sector."

Be it the biopharma, agribiotech, or informatics segment, the chances for IPO successes look bright. But everyone is adopting a wait and watch policy till Biocon IPO takes off. Bharat Biotech, Biological E, Shantha Biotechnics, all need money to expand and grow. They have strong fundamentals, quality products, relationships, and vision. Some experts believe that the biotech IPO has the potential to attract collectively Rs 500 crore in 2004.

Sentiments the key

Why is the market for initial public offerings coming to life? In the US, the stock market sustained a rally since March. The Dow Jones Industrial Average went up by 16-17 percent and the Nasdaq Composite Index by 45 percent. That sentiment is believed to be one of the reasons for companies, who had put off their IPOs, to go public.

The traditional financial measures like revenue, income, and sales may be important, but what pushes the case of a biotech company is the FDA approval. The companies, which are focused on new therapeutics, have found favor. For instance, Genitope is focused on the research and development of novel immunotherapies for the treatment of cancer. Its lead product candidate, MyVax, is personalized immunotherapy. CancerVax Corp. is focused on cancer therapies too. It is focused on obtaining approval of the Canvaxin therapeutic vaccine for the treatment of melanoma and colon cancer. Myogen Inc. is focused on the discovery, development and commercialization of small molecule therapeutics for the treatment of cardiovascular disease. Adolor is specializing in prescription pain management products. Its lead product Entereg (alvimopan) is being developed to manage postoperative ileus and its next product candidate is a sterile lidocaine patch in clinical development for treating postoperative incisional pain. It is not that their IPOs were oversubscribed. Nonetheless the ball has been set rolling.

Positive Vibes

Altogether, the biotech sector has positive vibes. According to the PricewaterhouseCoopers, Thomson Venture Economics, and National Venture Capital Association MoneyTree Survey, for the first time in seven years, biotech was the number one industry and attracted $873 million in VC money. About 17 drugs got the nod from the US FDA by July, against 20 in total last year. All these conditions only indicate that 2004 may be a good year for biotech IPOs

Ch. Srinivas Rao

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