IPOs of Biotech Issues Regenerating Interest Despite Volatility Risks

It’s the newest new thing on Wall Street, but it could mean the same old heartache for overly eager investors.

Biotechnology-related stocks are a hot sector again in the initial public offering arena. This week alone, biotech companies make up nearly one-third of all companies slated to go public.

With news this spring of scientists’ success in mapping the human genome--the blueprint for human life--young biotech firms have been scrambling to capitalize on investor interest by selling shares to the public.

Already this year, there have been 44 biotech initial public offerings, compared with 13 for all of last year, according to Thomson Financial Securities Data, a data service in New Jersey.

At least 20 more biotech IPOs are in the pipeline, analysts estimate.

Like last year’s hot IPO sector--Internet-related firms--young biotech companies are extremely speculative investments. However, while Net-related companies can at least quickly show whether they’re attracting customers, it can take years for a biotech company to demonstrate that it has a marketable drug.

What’s more, there is never any certainty of success, and every biotech company’s drugs are subject to government approval and regulation.

In the meantime, most of the companies are generating enormous losses as they spend on drug research and development.

A prime example is DeltaGen, a Menlo Park, Calif., firm expected to raise $98 million through lead underwriter Salomon Smith Barney this week. The company plans to trade under the symbol DGEN on Nasdaq.

DeltaGen reported losses of $29.8 million for the first quarter of this year on revenue of $286,000, compared with a loss of about $2 million during the same time last year on revenue of $221,000. In 1999, the company reported a loss of $13.8 million on revenue of $1.2 million.

Michael Falbo, analyst with IpoPros.com, a data service in Boulder, Colo., thinks DeltaGen has better prospects than most in this sector because it has created a genome-related proprietary database aimed at assisting the drug discovery process.

That database could prove to be a solid revenue producer at some point. But for now, “The losses here are tremendous,” Falbo said.

But the risks in the biotech field haven’t stopped investors from piling in. As a group, biotech companies have raised $5.5 billion this year, compared with $2.15 billion during the same time last year, according to CommScan, a New York data service.

This year’s biotech-related IPOs so far are up 73% from the offering price, on average. Only three deals are trading below their offering price, according to Thomson.

Last year’s biotech-related IPOs are now up 166% from the offering price, on average.

Given the appetite for the stocks, even many investors who have purchased the stocks on their first day of trading--as they’ve soared--have been rewarded as their prices have continued to rise thereafter.

Performance has been especially strong in recent weeks. IPOs priced last week by Mountain View-based Rita Medical Systems Inc. (ticker symbol: RITA) and San Diego-based Applied Molecular Evolution Inc. (AMEV), for example, each raised more than originally planned, and both companies saw their shares surge on the first trading day.

Rita, which develops radio wave technology to treat tumors and cancers, rose 20% and Applied, a biotech research firm, was up 60%.

Last Friday, San Diego-based Arena Pharmaceuticals (ARNA), whose technology is supposed to offer a better way to identify drug candidates for diseases, saw its shares rise from $18 to $25 in their debut, up 39%.

Biotech offerings also are getting a boost from investors’ renewed interest in IPOs in general, after a freeze in April and May when the Nasdaq market was rocked.

Another deal expected this week is from Fremont, Calif.-based Versicor, which expects to raise $63 million through underwriter UBS Warburg and trade under the symbol VERS on Nasdaq. The company is developing drugs for the treatment of bacteria and fungal infections.

How long can this biotech boom last? The last great mania for the stocks lasted from 1989 until January 1992. An American Stock Exchange index of major biotech stocks rocketed 367% between year-end 1989 and its January 1992 peak.

But the sector then crashed amid rising investor disappointment about the pace of drug discoveries. The Amex biotech index dived about 66% from the 1992 peak to mid-1994.

This time around, the Amex biotech index has gained 228% since year-end 1998.

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Despite stock market volatility, venture capital continues to roll into Los Angeles-area companies, even the “dot-coms.” Need2Buy, a Westlake Village-based business-to-business marketplace for the electronics components industry, said it has raised $43 million in a second financing round. Investors include Baker Capital, a New York-based private equity firm, and Mitsubishi Corp.

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Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at [email protected] or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.