When an unprecedented five Triangle-based biotechnology companies went public in 2013 and 2014, the mood on Wall Street was ebullient.
Investor enthusiasm for the sector enabled these companies to raise tens of millions with their initial public offerings even though they didn’t have a product on the market. Investors were betting the experimental drugs they were developing would one day win approval from regulators – a process that routinely takes years.
Recently, as many of these same companies sought to raise more cash, they have encountered a very different environment.
Many investors have turned skittish about investing in biotech stocks. Triangle companies also find themselves competing with a flock of biotech companies nationwide that went public over the last few years and also are seeking to raise cash.
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These companies “have made it now two or three years and are running out of money,” said Dick Kouri, chief evangelist at the Center for Innovation Management Studies at N.C. State and former executive director of biosciences management at the school. “So they are all coming back to the well at the same time.”
Heat Biologics, one of the five Triangle biotech companies that went public in 2013 and 2014, encountered turbulence when it filed plans in January to sell $12.5 million in newly issued stock to investors.
That goal proved to be overly optimistic; the Durham company ended up settling for a little more than half that amount. On Wednesday, Heat Biologics completed the sale of $6.8 million in stock and warrants.
“It’s a reflection of the market,” said analyst Rahul Jasuja of Noble Life Science Partners.“It has nothing to do with the fundamentals of the company itself.”
The market for biotechnology stocks is notoriously cyclical, and right now it’s definitely in a down cycle. The Nasdaq Biotechnology Index has fallen 25 percent from the beginning of the year.
Among other things, biotech stocks have been hurt by the broader market’s struggles and a backlash triggered by companies that overpriced their drugs. That has made some investors wary given that biotech stocks are considered risky because the best-laid plans for experimental drugs can be derailed by poor test results.
Although the Triangle is a major hub for biotech startups, having five biotech companies go public over a two-year span was unprecedented. Not a single Triangle biotech company went public in 2015. Those companies that went public in 2013 and 2014 are Argos Therapeutics, Chimerix, Heat Biologics, NephroGenex and Scynexis. Scynexis relocated to New Jersey last year.
Three of the four companies that remain headquartered in the Triangle have seen their stock plummet this year. Shares of Chimerix have fallen 46 percent in the wake of disappointing test results. Shares of Heat Biologics and NephroGenex have fallen 71 percent and 69 percent, respectively.
Argos has bucked the trend. Its shares, for no readily apparent reason, have more than doubled, rising 135 percent.
Although these companies raised anywhere from $25 million to $122 million with their initial public offerings before deducting underwriting fees, that wasn’t nearly enough to fund their drug-development efforts over the long haul.
Argos CEO Jeff Abbey estimates his 136-employee company has spent a couple hundred million dollars to date on developing its kidney cancer treatment, which hasn’t yet reached the finish line. It takes years to run the gauntlet of clinical trials required by regulators.
Being able to point to encouraging clinical trial results is key to being able to raise money in the current environment, said Art Pappas of Pappas Ventures, a Triangle venture capital firm.
Raising cash in a down market also impacts existing investors because companies have to sell more shares to raise the money they need. That further dilutes the stake of current shareholders.
When Heat Biologics, which has 25 employees, initially unveiled its plans to sell additional shares in January, its stock was trading at $2.14. But its shares plummeted over the next two months and the company ended up pricing each share, plus a warrant to buy three-fourths of a share, at 75 cents. Its shares closed last week at 72 cents.
The market proved to be too tough for NephroGenex.
Last month NephroGenex cited “the condition of the capital markets” and its dwindling cash balance as factors in its decision to put the clinical trial of its experimental drug Pyridorin on “pause.” The company had $11.5 million in cash as of Feb. 23 after paying off a $6.3 million loan.
The Raleigh company was developing Pyridorin as an experimental treatment for diabetic nephropathy, a chronic degenerative disease of the kidneys caused by diabetes that afflicts 6 million people.
In December, federal regulators had cleared NephroGenex to conduct clinical trials using Pyridorin to treat acute kidney injury. That was good news, but it apparently wasn’t enough.
In addition to suspending its clinical trial, NephroGenex also announced it was restructuring its operations and pursuing strategic alternatives, including a reverse merger. A reverse merger would involve selling the company to a privately owned business, which would enable the buyer to become a publicly traded company faster and cheaper than going through an initial public offering.
“That could be a way for (NephroGenex) to survive and grow down the line,” said venture capitalist Clay Thorp of Hatteras Venture Partners in Durham.
NephroGenex declined to comment for this story.
Argos circumvented the public market in its latest funding effort. Earlier this month the company raised up to $60 million by privately selling stock and warrants to a group of private investors, mostly venture capital and private equity firms, that previously had invested in the business.
“We were fortunate that a group of our current investors believed strongly in the company and the likelihood of success,” said CEO Jeff Abbey, referring to the company’s Phase 3 clinical trials for its experimental treatment for kidney cancer.
If Argos had gone to the public markets to raise the money it needed, Abbey added, given current market conditions, the company probably would have had to accept less favorable terms, such as a lower price per share.
One biotech company that hasn’t needed to raise money recently is Chimerix. After completing stock offerings in 2014 and last year, the Durham company had $342.9 million in stock and investments as of Dec. 31.
Weather the storm
Having that cash on hand is crucial in the wake of disappointing test results for its lead experimental drug, brincidofovir. Those results, which Chimerix first reported in December and then in more detail in February, led the company to halt clinical trials that aimed to demonstrate that the compound could prevent infections in high-risk patients.
“Chimerix was very smart to continue to get cash when they could,” said Abbey of Argos. “They were obviously assuming they would need the money for the upside scenario, and not this scenario. But luckily they have the cash to weather the storm now, which is great for them.”
Chimerix CEO Michelle Berrey said the company intends to continue to develop brincidofivir as a treatment for adenovoris, which causes the common cold but can be fatal for cancer patients whose immune systems have been compromised, and for smallpox. It’s also working on an intravenous version of the drug.
“Although we had a failed trial, a disappointing result ... we now understand what went wrong and are moving forward with ways to address that,” said Berrey. She stressed that there were no safety issues with brincidofivir and that its patent protection doesn’t expire until 2034.
Chimerix, which has more than 100 employees, also has drugs in earlier stages of development that it anticipates it will “bring forward into the clinic over the next 18 to 24 months,” Berrey said. And the company is looking for promising compounds that it could acquire as well.
“Thankfully, we’re in a position with our financial status where we have the capital to bring these programs forward,” Berrey said.