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12:00 AM
 | 
Jan 03, 2005
 |  BioCentury  |  Finance

Ebb & Flow

It's only rational that investors in a private company want a stepup when the company goes public. Indeed, anti-dilution provisions typically are attached to the preferred shares that are issued in venture rounds. But most of the time, these provisions are addressed before a company files its S-1, as the company and investors agree on a fixed ratio at which preferred shares convert into common stock. This makes it easy to figure out both how a company will be valued at its IPO and how investors will be diluted, because the only unknown variable is the price.

Things are not so simple with Sunesis' IPO, because there are two unknowns: the price and the number of shares that will be outstanding, which will vary depending on the price. Currently, the company has 40 million shares outstanding, but it plans to undertake a reverse split before the IPO, although the split ratio won't be determined until the IPO price is set.

According to the S-1, if Sunesis goes out with a pre-money valuation of at least $237 million, its series B, C, C-1 and C2 shares will convert into common on a one-to-one basis. A pre-money valuation from $160-$237 million will yield "additional" common shares for each series C, C-1 and C-2 share held, while a valuation below $160 million will trigger the issuance of "additional" common shares to all the C and B holders.

"Additional" is not defined in the S-1. Right now, it's anybody's guess as to the valuation. Sunesis' filing says the company has "not yet completed the process of valuing" itself.

Investors in Sunesis' July 2000 C round included CSFB Private Equity; International Biotechnology Trust; Lombard Odier; Warburg Pincus; Mayfield Fund; Venrock; and Abingworth. B round investors were Warburg Pincus; International Biomedicine; New Medical Technologies; Mayfield; Venrock; Abingworth; and Skyline.

If the experience of companies in this IPO window is any guide - and if the deal gets done - it's likely that the holders of B and C shares will be getting extra common stock.

Principal shareholders include Warburg Pincus (16.5% prior to the IPO); Credit Suisse (15.9%); Mayfield (12%); Biogen Idec (BIIB, 10.2%); Venrock (9.8%); and Abingworth (8.1%). The underwriters are Lehman; SG Cowen; and Needham.

Sunesis' lead compound, SNS-595, is in Phase I testing for cancer, with Phase II studies expected to begin in the second half. Thus far in this window, only one other Phase I company has gone out. Memory Pharmaceuticals (MEMY) raised $35 million and had a pre-money valuation of $101.5 million.

The average pre-money valuation for the 11 companies in Phase II and earlier is $193.4 million. But that figure is inflated by the $719.2 million pre-money valuation of Theravance (THRX), which has multiple Phase II compounds. Backing out THRX yields of average of $140.9 million.

Although Sunesis only has one clinical compound, the company does have a host of partnerships with big biotech and pharma. Sunesis has deals for its Tethering fragment-based drug discovery technology with BIIB; Johnson & Johnson (JNJ); and Merck (MRK).

As of Sept. 30, 2004, Sunesis had $41.5 million in cash and a nine-month operating loss of $16.6 million.

Indebted to Sensipar

When NPS (NPSP) partnered its Sensipar hyperparathyroidism compound and calcium receptor technology with Amgen (AMGN) in 1996, the deal was valued at $43.5 million, excluding potential royalties. At the time, the royalties were far in the future, as Sensipar was only in Phase I/II testing. Now, it's all about the royalties, as Sensipar was approved last March.

NPSP last week raised $175 million in a private placement of notes that are secured by the Sensipar royalties. The notes...

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