13 Biotech IPOs To Watch For
By David Stipp

(FORTUNE Magazine) – Initial public offerings are busting out in the biotechnology industry like desert flowers after rain. "We'll see as many as 50 biotech IPOs over the next several months," estimates Steven Burrill, chief executive of Burrill & Co., a San Francisco merchant bank focused on life sciences. Last year there were 11.

The burst was triggered late last year by investor lust for newly issued shares of four companies: Tularik, Maxygen, Caliper Technologies, and Symyx. Tularik, the first to have a dot-com-like experience, spent almost a decade gearing up for its public debut. A few days after the South San Francisco company's IPO on Dec. 10, in which it raised $97 million, its share price doubled to nearly $40, then more than doubled again. Recently, biotech shares dropped steeply, trimming Tularik's price to $56 as this story went to press. But the rush to market is likely to continue. Tularik, which is developing drugs to fight cancer and other disorders, is readying a secondary offering of five million shares. "The deal flow is the highest I've ever seen," says Michael Brinkman, a biotech specialist at investment bank CIBC World Markets in New York. "A 16-hour day is a short day for me right now."

As an investment strategy, buying IPOs of hot startups falls somewhere between racetrack betting and taking part in a Ponzi scheme. If you're devoted to thoughtful, patient investing, you should stop reading this article right now. (Warren Buffett, this means you.)

Okay, everybody else, let's cut to the chase: Of the dozens of biotech IPOs coming at us, which seem likely to combine the magic ingredient of buzz with true promise?

One set of potential highfliers are key players in "functional genomics"--developers of technologies that offer an edge in sorting out what newly discovered genes do. Such knowledge is crucial for identifying genes that underlie diseases, which, in turn, is needed to win patents and guide drug researchers to the molecular sources of sickness.

Lexicon Genetics, an IPO-bound company in The Woodlands, Texas, has developed a clever way to elucidate gene function: an assembly line-like technology to generate "mouse knockouts." Specific genes are disabled in laboratory mice, whose abnormalities then give clues about what the missing genes do--and by extension, what similar genes do in us. (Like E.B. White, geneticists find it easy to see mice as small, eccentric people.) Lexicon has created a living library of more than 60,000 mouse "embryonic stem-cell" clones stored in liquid-nitrogen freezers--each of which can be grown into a mouse with a specific disabled gene. Several major drug developers have signed up for access to Lexicon's knockout bank, including genomics leader Millennium Pharmaceuticals.

Another functional-genomics player headed for an IPO is Exelixis Pharmaceuticals in South San Francisco. It is focusing on geneticists' favorite study subjects, including fruit flies and nematodes. Volumes of genetic information already exist on such creatures, giving Exelixis a head start in unraveling how their genes work. The hope is to elucidate analogous human genes; at the level of basic cellular functions, such as energy metabolism, we're remarkably similar to worms and flies. Exelixis has lined up more than $180 million in research contracts with drug companies.

In the plant realm, Paradigm Genetics in Research Triangle Park, N.C., is the genomics IPO to watch. Like Lexicon, it's developing fast technology to tweak selected genes--in this case in crop plants--to shed light on what they do. Paradigm plans to use its findings to guide the development of everything from improved herbicides to more nutritious food crops. Headed by John Ryals, who formerly directed genomics research at Novartis' crop-protection unit, Paradigm has research contracts valued at up to $190 million with Bayer and Monsanto.

Since the 1980s, scientists have identified scores of disease- related genes by analyzing the DNA of people with inherited illnesses. DeCODE Genetics, formed by former Harvard professor Kari Stefansson in Reykjavik, Iceland, is gearing up to conduct such gene-mapping studies using data from the island nation's entire populace. DeCODE's strategy is based on the fact that centuries of inbreeding have left Iceland's 270,000 inhabitants relatively homogeneous genetically, making their gene glitches easier to pinpoint than those of more diverse populations.

Iceland's government has granted DeCODE an exclusive license to create and use a national database of medical records for gene studies. DeCODE plans to cross-reference the data with genealogical information dating back to the ninth century--Icelanders have long been famed for their family sagas. If all goes as planned, DeCODE will take gene mapping to a new level, ferreting out predisposing genes for cancer and other major killers. The plan is controversial--critics fret about patient privacy and other issues. Yet it promises major advances in the quest for better diagnostics and treatments--and a monster IPO. In early March, DeCODE announced plans to go public.

Genomic Solutions in Ann Arbor, Mich., hopes to launch a splashy IPO based on another technology for finding disease-related genes: biochips that scan the activity levels of thousands of genes in cells. Pioneered by Affymetrix and other companies, such chips enable researchers to spot genes that are abnormally revved up or damped down in diseased cells.

Genomic Solutions' competitive edge involves a one-stop-shopping idea: It has integrated a biochip-making system with complementary "proteomics" technology, which measures protein levels in cells. The combined technologies can shed more light on disease processes than either can alone. (Genes, by the way, are blueprints for proteins, the main molecules constituting our cells.) In December the company got a vote of confidence from PerkinElmer, formerly EG&G, which licensed rights to sell Genomic's systems outside the U.S., the U.K., and Japan.

Once a gene underlying a disease is identified, drug researchers typically try to find molecules that selectively bind to and disable its associated protein. If they're lucky, that will brake a metabolic process gone wrong. Automation has greatly accelerated such research; the drug industry is rife with robots that tirelessly squirt dabs of potential medicines onto protein targets in "microwell plates," which resemble miniaturized muffin tins. The systems enable thousands of compounds a day to be tested for their stick-to-it-iveness to a target protein. But now several companies are developing revolutionary lab-on-a-chip devices that may jeopardize many of the robots' careers.

Caliper Technologies in Mountain View, Calif., introduced one of the first lab-on-a-chip systems last year in collaboration with Hewlett-Packard. Caliper's chips, made of quartz, glass, or plastic, are laced with fluid channels the width of a hair. Precise, minuscule amounts of chemical solutions can be rapidly moved and mingled in the channels by computer-controlled pressure and electrical fields--picture an oil refinery shrunk to the size of a floppy disk. The company boasts that its chips can speed up complex chemical analyses by a factor of ten or more.

Caliper's soaring shares--its price nearly quintupled after its Dec. 15 IPO, and recently traded at $99--suggest that the imminent IPO of its chief rival, Aclara BioSciences, also in Mountain View, will have wings too. Aclara, allied with PE Corp.'s PE Biosystems Group, is developing plastic microfluidic chips for a remarkably broad array of applications, from decoding DNA to analyzing gene activity. Aclara plans to introduce its first chip late this year.

Lab-on-a-chip devices are among the most versatile tools emerging in biotech--they promise to do for biochemistry what integrated circuits did for electronics. But before investing in Aclara or Caliper, you'd better bone up on who owns what; the two are engaged in a high-stakes patent fight, and each alleges the other has infringed on its patents.

One of biotech's hot topics lately is SNPs, or single-nucleotide polymorphisms. SNPs (pronounced "snips") are bits of DNA that vary from person to person, giving rise to genetic variation underlying many of our idiosyncrasies--from eye color to responsiveness, or lack of it, to a given medicine. Pharmaceutical companies are investing heavily in programs aimed at correlating particular SNPs with drug efficacy and side effects. That will enable the companies to improve their success rates in clinical trials by excluding patients whose SNPs are shown in preliminary tests to make them unlikely to benefit.

A bevy of startup companies are racing to develop SNP-testing technologies and services, including several likely to be among the year's most robust biotech IPOs. One is Orchid BioSciences in Princeton, N.J., which is developing a fast, cheap SNP-testing technology. Underscoring the technology's potential, biochip leader Affymetrix has agreed to help Orchid develop a version of it. Last year Orchid garnered headlines by announcing plans to offer SNP testing directly to consumers.

A less-well-known SNP play is Illumina, a San Diego startup planning an IPO. Illumina is developing ingenious biochemical analyzers based on fiber optics. The technology employs bundles of thousands of light-conducting fibers, each of which has a tiny "well" at the end that serves as a chamber for chemical reactions. When a solution containing molecules from a patient's cells is poured over the bundle, each well acts as a detector for a particular molecule--chemicals within the well are set to light up when that molecule is present. Illumina says 250,000 such sensors could fit on the head of a pin.

Illumina's technology appears highly versatile--besides SNP testing, the company hopes to develop "optical noses" to sniff out everything from land mines to tainted raw ingredients used to make processed foods. Though still at an early stage, the technology has attracted a prestigious backer: PE Biosystems is helping to fund development of Illumina's systems for DNA analysis.

While Orchid and Illumina are focused on developing SNP detectors, Variagenics in Cambridge, Mass., and Genaissance Pharmaceuticals in New Haven, Conn., specialize in correlating patients' gene variants with their susceptibility to disease and responses to drugs. Both are planning IPOs that should go over well.

Variagenics has filed patents on more than 600 targets for drug discovery, patented a strategy for discovering anticancer drugs, and lined up Quintiles Transnational and Covance, leading providers of drug-testing services, as partners in applying SNP-based discoveries to pharmaceutical development. Genaissance has said it plans to analyze genetic variation in some 2,000 key drug-related genes by year-end and is negotiating deals with big pharmaceuticals companies to put the data to use.

The data generated by genomics companies have grown even faster than the companies' market caps, giving drug researchers bad cases of information anxiety. DoubleTwist in Oakland is making a name for itself by treating this ailment: It has created a Website featuring a broad array of both free and subscription tools to turn mind-numbing reams of genetic data into clues for developing drugs. The site offers everything from software "agents" to help decode DNA to a patent database. Expected to go public soon, DoubleTwist has the pedigree of a hot dot-com: It's headed by former Apple Computer executive John Couch and backed by a blue-chip venture group that includes Kleiner Perkins Caufield & Byers.

While genomics companies have been all the rage with investors, Tularik's soaring IPO showed that good old-fashioned biotech firms--drug developers in the mold of companies like Genentech--can still get investors excited. Praecis Pharmaceuticals in Cambridge, Mass., is heading for an IPO with an impressive set of experimental drugs and partners. Praecis' lead product, a slow-release drug that fights prostate cancer by lowering testosterone levels, is in late-stage clinical testing; the company, working with Amgen and Sanofi-Synthelabo, hopes later this year to request FDA approval for it. Praecis is also developing a similar estrogen-lowering drug to treat endometriosis, an abnormal growth of the uterine lining, and a drug to arrest the neuronal damage of Alzheimer's disease. To further fill its pipeline, it has formed an R&D partnership with genetics powerhouse Human Genome Sciences. The kicker: Praecis' partnerships have proved so lucrative that the business has been profitable for the past three years.

Adolor in Malvern, Pa., is another drug developer whose upcoming IPO may have legs. Adolor's specialty is pain: It is developing morphine-like drugs with fewer side effects than traditional painkillers. Unlike morphine and its cousins, Adolor's drugs stimulate molecular pain-relief switches, called "opioid receptors," outside the brain, hence promising to relieve pain and itching without causing heavy sedation or depressing lung function.

With so many offerings on the way, investors are likely to be glutted with new biotech shares before long. The genomics bubble may further deflate, dragging down the whole sector.

But the retreats won't necessarily become routs. Many of the biotech companies now going public have far more versatile technologies and deeper pipelines than their predecessors did. Nearly 250 biotech drugs are now in final Phase III clinical trials, according to BioWorld, an Atlanta publisher of biotech newsletters. At least some will pan out, giving repeated boosts to the sector's momentum. And the vast sums pouring into biotech offerings are equipping many players with war chests that will enable them to speed up drug development and survive setbacks. Who knows? By the time buy-and-hold investing comes back, many of these companies may be viewed as blue chips. Hey, Mr. B., maybe you should read this after all.