As IPO market wanes, biotechs turn to reverse mergers

Print 15 May 2015
Brian Orelli / BioWorld

Through the first four months of the year, BioWorld Snapshots tracked 24 IPOs by drug companies on U.S. and international exchanges compared to 36 in the same time period last year.

"We're pretty late in the IPO cycle, and that means investors should be getting more picky about what they will invest in via an IPO," Rajesh Patel, chief investment officer at Red Acre Investments, told BioWorld Insight.

Biotechs have always had an alternative way to get on the public markets by performing a reverse merger into a public company with cash on hand. The "reverse" part comes from the mechanism of the deal where the public company buys the private company and subsequently changes its name and ticker to match the formerly private company.

Last week, Tobira Therapeutics Inc., of South San Francisco, began trading on Nasdaq thanks to its reverse merger with Regado Biosciences Inc. After the merger, the company changed its name and ticker to Tobira Therapeutics (TBRA). As part of the deal, Tobira raised $40 million by selling common stock and debt conversion to add to the $33 million that Regado still had in its coffers.

Regado, of Basking Ridge, N.J., evaluated "over 100 companies" before settling on Tobira as the company for which it traded its cash for an equity stake, according to Tobira CEO Laurent Fisher.

In March, Pulmatrix Inc., of Lexington, Mass., chose a reverse merger strategy with Santa Rosa, Calif.-based Ruthigen Inc. After the deal closes, Pulmatrix's shareholders will own 81 percent of the combined company. Pulmatrix also announced it had secured agreements from some existing investors to raise $10 million in conjunction with the reverse merger. (See BioWorld Today, March 17, 2015.)

"The upshot was, when this reverse merger opportunity was presented to us, the primary appeal was the amount of capital it came with, the full Nasdaq listing and the speed that we could go, in terms of getting this completed," Pulmatrix CEO Robert Clarke told BioWorld Insight at the time.

Also in March, South San Francisco-based Catalyst Biosciences Inc. announced plans for a reverse merger with Targacept Inc., of Winston-Salem, N.C. As part of the complex deal, before the merger closes, some of Targacept's cash will be returned to shareholders through a $20 million special cash dividend and the issuance of redeemable convertible notes valued at $37 million. Upon closing, the combined company will have approximately $40 million to advance Catalyst's hemophilia pipeline.

"I think we have money – it could be safely said – for the next several years, and at least to get through two meaningful clinical endpoints," Nassim Usman, CEO of Catalyst Biosciences, said on the conference call announcing the reverse merger.

CERTAINTY

Some firms that believe they could have gotten out via a traditional IPO are choosing the reverse merger route because of the certainty it provides.

"Even if a company has great fundamentals, it is subject to the vagrancies of the market," Dennis Podlesak, partner at Domain Associates LLC, told BioWorld Insight. "Even if you look back at 2014, which was a record year, there were still windows during that year when investors weren't deploying capital."

Twenty of Domain's portfolio companies, including Tobira, have gone public since the IPO window opened. "We've seen a whole range of outcomes," Podlesak said.

By taking a reverse merger approach, companies guarantee themselves the cash in the shell and the stock exchange listing and can raise additional capital when there's a better window in the public markets.

That won't be necessary for Tobira. The $40 million that the company raised in conjunction with its reverse merger was oversubscribed. With $70 million in cash, including what Regado had left, the deal "looked like an IPO from our standpoint," said Chris Peetz, chief financial officer at Tobira. Of the 24 IPOs through the first four months of the year, 15 raised less than $70 million.

That cash will last into the second half of 2017, funding trials testing Tobira's CCR2/CCR5 inhibitor cenicriviroc to treat inflammation and fibrosis in diseases such as non-alcoholic steatohepatitis (NASH).

Tobira expects to have data from its phase IIb NASH trial in the middle of next year, giving it a year to raise additional funds or find a partner for the late-stage trials.

STIGMA

While private companies and their investors are willing to skirt the IPO market to get a public listing, it doesn't come without consequences.

"I do feel that there is a perception of stigma with reverse mergers," Patel said, adding that "questionable Chinese companies" using the vehicle to go public added to the bad reputation.

There are certainly many legitimate biotechs that go through reverse mergers, but the bad apples may be spoiling the barrel.

"You only have so much time for due diligence. As a biotech investor, I would rather spend that time understanding the science and whether or not the company has a truly groundbreaking approach rather than sifting through the minutiae of the prior entities and capital structure that led to the reverse merger."

The other problem for companies undergoing reverse mergers is that the shell companies often have low trading volumes, creating liquidity problems for investors.

"Liquidity is only solved by having the stock in enough people's hands that it gets actively traded. I think that starts with communicating with the buy side about the story and the upcoming milestones," Patel said.

SHOW ME THE MONEY

While there may be a negative stigma for biotech companies that have undergone a reverse merger, it's certainly possible for investors to get over it, allowing the biotech to raise additional capital and even get acquired.

"If a company gets to a pivotal data event that proves out their technology that warrants taking a further look and dealing with the cap structure and history," Patel said.

In October, Boston-based Paratek Pharmaceuticals Inc. completed its reverse merger with Point Richmond, Calif.-based Transcept Pharmaceuticals Inc., grossing $93 million in new investment from a combination of some current and new investors. Earlier this month – a little over six months after the reverse merger – Paratek was able to raise an additional $71.1 million through a secondary offering.

Last week, Cheshire, Conn.-based Alexion Pharmaceutical Inc. announced plans to acquire Synageva Biopharma Corp. in an $8.4 billion cash-and-stock buyout that more than doubled the value of Lexington, Mass.-based Synageva. (See BioWorld Today, May 6, 2015.)

Few people probably remembered that Synageva went public through a reverse merger with Nasdaq-listed Trimeris Inc. (See BioWorld Today, June 14, 2011, and June 24, 2011.)

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