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Living creatively

BioCentury 2012 biotech stock market preview

For small, early stage biotech companies, 2012 could be the year of living creatively.

Although public biotechs raised more funds last year than ever before, the vast majority of the money was debt financing by established companies with marketed products. Thus while the overall numbers look good and are likely to continue to do so, precommercial companies will have to get creative with their financings.

Many of these companies avoided raising money in 2011 because they didn't like the valuations, but Wall Streeters say they are now running out of cash. As a result, they will have to use the tricks at hand - underwritten offerings via an empty S-1 filing, at-the-market offerings, and going public via Form 10 - to raise money at whatever valuations they can get.

At the same time, investors who sat on their hands in 2H11 to protect their returns may feel freer to pick up bargains early in the year since they won't be judged on their performance again until late in 2012.

Companies that can't tap the public markets - or have given up - will be hoping for another year of robust M&A, as the deals that closed in 2011 reached an all-time high both in number and transaction value.

Setting the stage

Development stage biotechs are getting a shrinking share of an expanding pie. And in absolute terms, their money raised has remained static. The trend is likely to continue as long as the sector remains out of favor among generalist investors and debt is a cheap and viable alternative for large and mid-cap companies (see "The 1% Effect").

In 2011, public biotechs raised $43 billion, easily eclipsing the record $33.1 billion in 2000. But debt accounted for 82% of the total dollars raised, compared to only 19% in 2000 (see "Debt Dominance," A3).

Excluding debt, 2011 was lackluster at best. Development stage companies without products in registration or on the market received only 10% of the total funds raised, down from 13% in 2010. In dollar terms, the number was up slightly from $4.1 billion to $4.4 billion (see "Funding by Stage," A4).

During the last biotech financing boom in 2007, development stage companies accounted for more than one-third of the sector's public financing activity.

Last year, Phase II companies raised $1.8 billion, which was only 4% of total public biotech fundraising. Indeed, the amount raised by public Phase II companies actually was down from $1.9 billion in 2010.

Private Phase II companies raised $1.4 billion. Indeed, VCs played a role in both types of offerings and are increasingly being called upon to foot the bill for both public and private Phase II players.

"It's a very tough environment, one of the tougher situations for early stage money raising in my 25-year experience," noted Viren Mehta of Mehta Partners. "Many companies don't have any option but to raise at lower valuations."

He added: "Many companies are not able to defer any longer. The moment comes for many companies when they have to swallow hard and accept painful dilution."

Cash on hand

Market volatility and macroeconomic risk had most buysiders sitting on the sidelines through the back half of 2011. Bankers are hopeful that this year will be more stable, in which case investors might be willing

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