The IPO window: who will follow MethylGene?

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By Patricia Nicholson

The fourth quarter of 2003 and the first half of 2004 saw a surge in biotech IPOs in the United States, and led to speculation that the Canadian IPO window might be opening for the first time in several years. The biotech industry turned its eyes to MethylGene Inc. (Montreal, QC), which completed a much-anticipated initial public offering in June.

“We certainly took a leadership position to go out there,” says MethylGene president and CEO Donald Corcoran. “But I think we thought we were ready because, you know, we had done three rounds of private placements, we had hit milestones, we had been a company for seven years. Our use of funds — we were going to go to clinical trials, and that takes a lot more money than the VCs are willing to give us.” Corcoran says that despite declining markets at the time of the deal, MethylGene is pleased with the results.

“From when we filed our preliminary prospectus toward the end of April until when we finally closed, it wasn’t the best of markets,” he says. “The biotech indices had all gone down 10 to 15 per cent. They actually kind of peaked at the time we filed our preliminary. So we were happy in that we were able to complete the transaction in not a particularly good market for biotech companies.”

Another factor for MethylGene was when the next opportunity to go public might present itself.

“For us it was, well, if we don’t do it now — you don’t really time these windows; you don’t open these windows or close them,” Corcoran says. “When’s the next window going to be?”

MethylGene is no stranger to the ups and downs of the IPO market. The company had been gearing up to go public in 2000, during the flurry of Canadian biotech IPOs that included Nexia Biotechnologies Inc. (Vaudreuil-Dorion, QC), ConjuChem Inc. (Montreal, QC) and GLYCODesign Inc. (Toronto, ON).

“We elected not to, because we didn’t think the window was going to stay there for the type of deal we wanted to do, and we never filed,” Corcoran says. But the experience was valuable. “Getting ready to file then was, in retrospect, a good practice run for us because we had prepared, obviously, the prospectus. So we already were familiar with working with investment bankers, and with the underwriters, with different law firms, the securities.” In the intervening time, MethylGene has evolved in tandem with market expectations.

“We were able to continue building the company. The venture capitalists continued to support the company, with the goal of continuing to develop it, and what we were able to do is to put an additional drug into clinical trials on this timeline, to get a number of partnerships with Merck and Taiho — we already had one with MGI — and to advance the compounds forward,” Corcoran says.

Raising the Bar
“I think the hurdles for companies have been raised versus the IPO windows we’ve seen in the past. I think in the past, platforms or ‘I’m going to be filing an IND soon’ would meet the criteria. I think we’ve gone reasonably far beyond that now,” Corcoran says. “If you’re not in clinical trials, it’s going to be a tough sell. Even some people would have questioned whether we’re a little early, and we have one drug in Phase II and another one in Phase I.”

To be an IPO contender today, “companies need to be in, or close to, clinical trials,” Corcoran says. “Which may cut down the list of those that are coming behind us.”

Michael Denny, executive vice-president of Orion Securities Inc. (Toronto, ON), which led the MethylGene IPO, agrees that the list of Canadian biotechs ready to follow MethylGene into the public markets may be short. “The tougher the market is, the more mature the asset is that you’re IPOing,” Denny says. “In a really receptive market, you can take a company public which is earlier in its development cycle. In a less receptive market, you can only take public the most mature companies.” Denny says that although the U.S. enjoyed a strong IPO market from October 2003 until June 2004, the majority of the American biotechs going public were in Phase III clinical trials, had products on the market or had FDA approval.

“When you compare the American IPO market to the Canadian IPO market, and you say, ‘the Canadian IPO market sucks; it’s horrible, it’s horrible’ — well, no, not necessarily. We just don’t have the same companies in Canada that they have in the States. I assure you that if we had had three Phase III companies in Canada, we would have whistled those IPOs out so fast your head would have been spinning . . . But we don’t have those companies,” Denny says.

“So, not a reflection of the Canadian capital markets; more a reflection of the early stage of development that many of our companies are in,” he explains.

Be Prepared
Waiting for a window of opportunity can be time well spent. Cheryl Reicin, practice leader of the Technology and Life Sciences Group with Torys LLP’s Toronto, Ont. office, says long-term planning is crucial to a successful IPO. “People need to think about their exit strategies from the get-go, from the time they really incorporate,” Reicin says. “You can’t say, oh, this is a good time to go public, let’s go public tomorrow. So you really can’t plan with the market when the best time is. You can hold it off, but you have to start your planning a long time in advance.”

Before considering an IPO, there are many issues that require attention. Corporate structure, jurisdiction, the board of directors, and on which exchange to list are only a few of the factors that Reicin says need to be carefully assessed prior to going public.

“Selecting the underwriter that’s really going to work for a company and do a great job — that should start maybe even a year-and-a-half in advance,” Reicin says. “You’re going to spend so much time with these underwriters, you’d better get along with them,” she adds.

“They are selling the deal. They’re advising you how to structure it. They’re advising you when the right time to go out is. So that will affect the pricing,” Reicin says.

Timing does have a role to play, but aiming for a market high can have its drawbacks.

“Obviously you don’t want to do an offering at the bottom of the market. But frankly, you don’t want to do it at the top either,” Reicin says. “You want to pick a reasonable point in the market, and then you want a slow, upward movement, if possible.”

She adds that biotech companies will likely have to raise public money many times, so a slow, steady ride up the market is a wise long-term strategy.

“They want the investors to like them,” Reicin says. She adds that sky-high costs make it prudent for Canadian drug developers to set their sights on American markets.

“They’re saying on average it costs $865 million to bring a drug to market,” Reicin says. “You cannot get that money in the Canadian market.” Despite current market conditions, Reicin is positive about the likelihood of achieving those goals.

“I think this is a great time for Canadian companies because U.S. investors have finally understood that there is great value here, great science, good ways to reduce risk and great opportunities to bring companies over the border,” she says. “Whether today is the day to do a public offering — well, the markets are choppy, but you don’t look for today. You get ready, and then you wait for a time that you think is right.”