A backdoor hope for life science ventures

Despite the sector making solid gains, the IPO market for biotech is struggling.

By Tony Featherstone

Capital-seeking life science companies might find more life through so-called backdoor listings in 2013, as a weak float market stifles emerging ventures.

There was only successful life science initial public offering (IPOs) in 2012 (Osprey Medical) and no such IPOs are on the immediate horizon, despite the sector outperforming the sharemarket and the broader equity market rallying.

Only two life science companies managed to list in the US in the fourth quarter, raising $144 million, according to the latest PwC Bioforum report. Venture capital funding for US life science companies dropped 9 per cent in the June quarter, according to PwC, and went against the trend of rising venture capital funding for other US industries.

Led by CSL and Resmed, the PwC Australian Life Sciences index gained 13.5 per cent in the first quarter of 2012-13, compared to a 6.9 per cent gain in the ASX All Ordinaries index. After excluding the big life science companies, the PwC Life Science index performed in line with the All Ords.

“Australia’s biotech sector performed reasonably well last year, but conditions for life science IPOs are tough,” says Inteq managing director, Kim Jacobs. “Raising the minimum subscription and getting a sufficient spread of investors to meet ASX Listing Rules is proving difficult for most IPOs in this market, not only life science companies. I expect to see more backdoor listings on ASX for life science companies in 2013 and higher mergers and acquisitions activity across most sectors.”

Inteq was lead manager on the Reva Medical and GI Dynamics IPOs, two of the largest IPOs in recent years. Inteq raised a combined $165 million for Reva and GI, a stellar effort given market conditions then, and enough capital to get both companies through to commercialisation. “Inteq was also the lead manager for the 2005 IPO of HeartWare Inc which is now back on the Nasdaq exchange and capitalised at more than $1 billion.

More US medical device companies were expected to follow Reva Medical, GI Dynamics and Osprey Medical with IPOs last year. Difficult capital-raising conditions for pre-revenue life science companies on NASDAQ, and Australian investor interest in medical device companies, would encourage more of them to seek ASX listings through IPOs.

But the $40-milion offer for US-based Ventus Medical, which would have valued it at $150 million, was shelved last June because of a shaky sharemarket. Another US medical devices company, Vibrant, cancelled its $120-million offer in July after citing volatile sharemarket conditions.

Hawaii-based sleep therapy company, Kai Medical, sounded out investors last April for a possible $100-million-plus float, but there was not enough interest. Kai then attempted a backdoor listing through Novogen, which terminated the merger agreement in September.

It is hard to see greater interest in life science IPOs anytime soon. The IPO market had its worst year in a decade (by capital raised) 2012 as a risk-averse market shunned new offers. Most companies have struggled to close their IPOs last year and many abandoned or delayed them.

The majority of floats in the past five years are trading below their issue price and a small group of life science companies that have closed their IPOs have mostly disappointed investors so far.

GI Dymamics raised $80.3 million to develop its weight-loss device and listed on ASX in September 2011. Its $1.10 issued securities are 80 cents. Reva Medical raised $85 million in 2010 to develop its bioresorbable coronary stent to restore arterial blood flow to the heart. Its $1.10 issued securities have slumped to 53 cents.

Both companies have strong long-term prospects and look like takeover targets as their research progresses, but maintaining investor interest in companies that can take years to develop their products is a challenge in an impatient, volatile sharemarket.

Canadian-based Bioniche Life Sciences has also tumbled, after raising $12.5 million in 2011 through an IPO. Its $1.45 issued securities are 25 cents.

Osprey Medical has performed much better. It raised $20 million to develop a promising device that treats contrast-induced nephropathy, a form of kidney injury caused by X-ray visible dye that cardiologists inject during heart procedures, such as angioplasty and stenting. Osprey’s Cincor System captures a large amount of dye before it circulates to the kidneys. Its 40-cent issued securities are 60 cents.

Bluechiip raised $3 million in 2011 to develop a platform wireless-tracking technology. Its first application will make it safer and more efficient for laboratories to store frozen biospecimens. Bluechiip’s 25-cent issued shares are 23 cents despite decent operational progress.

Other small life science floats have struggled. A 2008 IPO, Genera Biosystems, is trading at 10 cents after strong early gains. Another medical-device float from 2008, Austofix Group, has delisted, and the Fluorotechnics float that year tanked. A mining company, Lamboo Resources, backdoor listed on ASX last year through the Fluorotechnics shell.

Investors have less incentive to buy stock in life science floats when most have traded at a deep discount to their issue price within a year or two of listing. Lack of aftermarket support has made it even more important for life science companies to choose advisers and lead managers that can research and promote the company, and drive secondary capital raisings when needed.

Backdoor listings may provide more hope for emerging life science ventures in 2013. There has been a resurgence in mergers and reverse takeovers as more companies acquire the shells of failed ASX-listed companies. Backdoor listings are typically cheaper and faster than IPOs, although that is not always the case. Finding “clean” shells with sufficient cash, at the right price, is challenging.

Most backdoor listings in 2011 and 2012 were for resource companies, but the lifescience sector has a history of back-door listings in this market. There were several life science backdoor listings between 2002 and 2004 as failed dot.com companies provided corporate shells for biotech companies.

The same trend might emerge again as failed mining exploration companies become fodder for the next wave of backdoor listings, some for the life science sector.

Hunter Immunology made a successful reverse takeover for Probiomics last April and changed its name to Bioxyne. It wants to commercialise a therapy aimed at the global market for chronic obstructive pulmonary diseases, such as emphysema and bronchitis.

Other backdoor listings could follow in 2013 as the weak IPO market forces emerging life science companies to seek more private funding and pursue alternative listings mechanisms.

–          Tony Featherstone is a former managing editor of BRW and Shares magazines, and a Wholesale Investor contributor. All prices and analysis at February 11, 2013.