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You Need Some Skin in This Game... Even If It Is RiggedBy Rob Fannon, editor Phase 1 InvestorFriday, September 18, 2009 After his presentation, Tim Morris took off without saying a word.
Dodging adoring Wall Street analysts and investment bankers waiting to congratulate him, Morris didn't even attempt to field questions. I sensed something was up. Seconds later, we all knew what...
A grumble rose from the crowd: "He just raised $100 million."
Morris' presentation was this Wednesday, the last day at the annual Newsmakers in the Biotech Industry conference, hosted at the Millennium Hotel in New York's Times Square. Afterward, I wandered into the hallway to watch for Morris and take in the scene.
Tim Morris is CFO of Vivus, one of three biotechs in a tight race to develop the next-generation weight-loss pill. Conservative estimates put the obesity-related prescription-drug market at a minimum $3 billion per year. Last week, Vivus released overwhelmingly positive Phase III results for its drug, Qnexa. Shares jumped 70%.
Like all good biotech corporate executives, Morris wasted no time taking advantage of investor optimism to raise cash – about $100 million. He asked JPMorgan to organize the offering... much to the dismay of the other investment bankers at the conference.
Vivus is just one of dozens of biotech companies capitalizing on the market's resurgence. Rigel Pharmaceuticals added another $90 million to its coffers on Wednesday, as well. The company was only looking to sell $40 million... but had to increase the amount due to voracious demand.
Seeing investors' wallets open for the first time in two years, biotechs have raised more than $2 billion through the end of the summer. And while the final numbers aren't available for the full third quarter, my guess is at least another $2 billion in follow-on financings have taken place.
Heck, investors' appetite for risk has grown so wide, we're seeing the first initial public offering (IPO) in biotech – Cumberland Pharmaceuticals – in more than two years. Hungry investment bankers are lining up more IPOs for the fourth quarter.
Even those with no real prospects have found willing backers. With assets not even in Phase I trials, companies like Geron and StemCells have had no problem raising money. Right now, any old company with a drug and a dream can raise $100 million.
So far, that hasn't been a problem for investors. Biotech microcaps (companies with less than $200 million in market cap) have returned around 50% this year. Small-cap biotechs (between $200 million and $500 million market cap) have returned about 25%. Both trounced the 20% return from the Russell 2000 over the same period.
But I'm nervous. Here's why...
In the recent spate of fundraising, large institutions were able to buy stock at a 10% discount to market prices. That's twice as big a discount as they've gotten in recent years.
Participating institutions are able to turn around the next morning and dump shares on the public for a quick overnight payoff. In a $50 million offering, for example, it's possible to pocket $5 million profit before lunch. And the deals are often sweetened with free warrants (the right to buy stock at a pre-specified price in the future).
Institutional investors are able to profit from the rise of the stock without any risk. In other words, the game is seriously rigged.
Still, you want to have some skin in the game when biotech bull markets take off. The rewards can be outrageous. The easiest and safest way to participate is through index funds.
The SPDR S&P Biotech ETF (XBI) offers the most diverse exposure to both large- and small-cap biotech names. The PowerShares Dynamic Biotech & Genome Portfolio (PBE) includes life-science equipment, service, and consumable players, as well as household biotech names. Or you can go with Biotech iShares (IBB), which tracks the Nasdaq biotech index, the "thermometer" of the industry.
I'm betting the current boom in biotech has room to run. But watch your stops... corrections come swift in this field. And unless you know what you're doing, steer clear of individual names for now.
Good investing,
Rob Fannon
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