The Janney Pennsylvania Bio Index
By Stephen Hurly, Managing Director and Head of Healthcare Investment Banking at Janney Montgomery Scott LLC

Janney’s Pennsylvania Bio Index decreased by 2.1% over the past thirty days and is showing an even larger, 14.5% decrease for the year to date.  Merck’s recent recall of Vioxx has substantially dragged down the index for the year to date, with the $61 billion company seeing a decline of 40% in share price.  Excluding Merck, the index would have shown only a 7.0% decrease in the year to date, and a 0.7% increase over the last 30 days.  The Vioxx debacle has also impacted the other large pharmaceutical companies, with Glaxosmithkline and Wyeth showing year-to-date declines of 9% and 7% respectively.  This is predicated on investors’ fears that the FDA may move to recall more drugs from the marketplace, particularly Glaxosmithkline’s asthma drug, Serevent, and Wyeth’s antidepressant, Effexor. 

Despite the negative news coming from large pharmaceutical companies, more companies on the index show gains than losses over the past thirty days.  Virucon gained 25% over the past thirty days, on news that it was granted fast track FDA status for its Dalbavancin antibiotic drug, to be used for the potential treatment of skin and soft tissue infections.  Pittsburgh-area Mylan Laboratories shares rose 8% over the past thirty days mostly due to the $5.4 billion acquisition bid from shareholder Carl Icahn.  In addition, many smaller-cap companies are posting double-digit gains: Adolor (16%), Animas (12%), eResearch Technology (27%), Kensey Nash (12%), PhotoMedex (10%), and World Health Alternatives (19%).

Other recent news from the Pennsylvania biotech community includes:

• eResearch Technology, a Philadelphia-based technology and services provider to the biotech industry, expanded its previously announced stock buy-back program to 2.5 million shares, allowing the company to purchase more of its shares back from the open market. 
• Discovery Laboratories of Doylestown expanded its capital lease financing facility with GE Healthcare Financial by up to $6.5 million to approximately $9 million. Additionally, Discovery Laboratories was added to the NASDAQ Biotech index. 
• Plymouth Meeting-based Genaera closed a registered direct offering of approximately $14.4 million.

Venture capital activity for private biotech firms in Pennsylvania has been very quiet for the months of October and November as compared to September and August.  October and November to date has seen little, if any, venture financing, as compared to the cumulative $64 million raised in the two months before.  This may be a factor of the Vioxx news finally hitting the private capital markets.

The recent Genarea direct offering brings up an interesting topic, the increased interest in direct equity offerings, otherwise known as private investments in public equity (PIPEs).  PIPEs differ from other forms of equity offerings in that the shares are sold to a few accredited institutional buyers instead of put out on the public market. 

The federal rules governing PIPEs are different from a regular public offering, usually with less requirements and less time needed to complete the transaction.  In this respect, PIPEs are a less expensive and quicker alternative to a secondary offering for already public companies. 

Shares sold under a PIPE are usually issued at a discount to market price, and can come with warrants as incentives for the institutional investor to buy into a PIPE.  However, these incentives can damage the market’s short-term perception of the company, with short-term declines or a leveling-off in stock price common.

Before going into a PIPE transaction, the most important thing a company must consider is the investor base.  The key to pulling off a successful PIPE is in attracting long-term investors who will focus on the business and are willing to invest at less of a discount.  Short-term investors, such as hedge funds and other speculators, can cause great damage to the company’s share price and reputation by quickly turning over their shares for a profit. 

Many small public companies feel that they can save money by conducting a PIPE in-house, as opposed to hiring an advisor.  This is a risky proposition.  An experienced advisor can easily and quickly determine which investors are in it for the long haul from the ones who are looking to make a quick profit.  In conducting PIPEs, Janney recommends hiring an advisor to ensure long-term success.

With the pharmaceutical industry still feeling the lingering effects of the Vioxx recall and dampened by the possibility of tougher scrutiny and further recalls, Big Pharma is once again looking towards exciting new biotech startups to round out their product portfolios.  A perfect example would be Merck’s recent $7.5 million PIPE investment in Arena Pharmaceuticals, and expansion of their collaborative agreement for the development of therapies for cardiovascular diseases.  This mutually beneficial arrangement provides Arena with badly-needed capital from a committed long-term investor, while also giving Merck the immediate diversification it needs.

PIPEs are only one way in which Big Pharma can get involved.  Whether they are investing capital through a PIPE, in-licensing novel drugs for further development, or simply conducting acquisitions, Big Pharma is now, more than ever, looking to their smaller counterparts for help.  Janney is currently in a position where we are capable and willing to help smaller biotech companies meet their capital and strategic goals through finding the perfect partner.