Red Rover, Red Rover, Let Financings of the Fortnight Cross Over

The Pacific Ocean has the Marianas Trench, the deepest place on Earth, more than six miles down. But Financings of the Fortnight has Crossover Canyon. And this fortnight, it went from zero to 210 million.

The zero was the number of dollars Radius Health raised trying to go public, and 210 million was the blockbuster financing for Intarcia Therapeutics. How fortuitous. As we noted in our previous column, our colleague Stacy Lawrence is working on a Start-Up feature about the return of crossover investors to biotech, and as if to punctuate her weeks of reporting that you’ll be able to enjoy just after Thanksgiving, Intarcia announced Nov. 15 a $210 million Series C, one of the industry's biggest rounds of private financing in memory, and it did so mainly by tapping crossover investors: the hedge fund Baupost Group, the diversified fund Farallon Capital Management, the multinational giant Fidelity Investments, and two other unnamed institutional investors. Existing venture backers New Enterprise Associates, New Leaf Venture Partners and Venrock also joined. The funding consists of $160 million in equity and $50 million in debt, and it’s all in one shot, Intarcia CEO Kurt Graves told our "Pink Sheet" DAILY colleagues. In other words, they don’t need no stinkin’ tranches.

The money will help push Intarcia’s lead product ITCA-650 in a set of Phase III trials. Intarcia has developed a formulation of the diabetes drug exenatide that can be implanted under the skin up to a year in a matchstick-sized delivery device. Exenatide, an analog of glucagon-like peptide-1, is marketed by Bristol-Myers Squibb and partner AstraZeneca as both Byetta and Bydureon, in twice-daily and once-weekly formulations respectively. The partners paid $7 billion to acquire Amylin, which previously owned the drugs, in June.

Meanwhile, Intarcia was once a whisker away from partnering ITCA-650 but backed off to keep full control. That helps explain the enthusiasm of the crossover investors, who have piled into to some of the year’s largest venture rounds, though none of course as large as the Intarcia deal. Crossovers want to take companies public; M&A is not their preferred exit. In fact, one factor in their resurgence is frustration as they’ve watched strategic buyers pick off the best biotechs before they, the public investors, can get a piece of the action. It’s worth mentioning that these days, those buyouts often happen in wildly favorable circumstances for the buyers – in structured deals with earnouts that only pay shareholders if the acquired company’s products hit milestones, as we explained in the March issue of Start-Up.

So when you see hedge and mutual funds featured in a biotech venture round, it’s a good bet that company will do its damndest to go public. With all that cash riding into Phase III, and a product that could address one of the world’s most burdensome diseases, don’t expect Intarcia and its new shareholders to jump quickly into a buyer’s arms.

The crossover road can be rough, too. Radius Health, with crossovers BB Biotech AG and Brookside Capital in the mix, raised $91 million in 2011 – also with a debt component – merged with a public shell, and pointed itself toward the public markets through a process known as Form 10, which lets a company list over the counter without the hullaballoo of a big IPO. It then opted to try for a big IPO, after all, and filed an S-1 in February. Those dreams were put on hold this week; the company said it would withdraw its S-1 because of general market conditions, and the stock is still not trading anywhere, even on the low-profile, low-volume exchanges.

Somewhere in between Intarcia’s $210 million and Radius’s zero is Ziarco, a new company that said Nov. 5 it received the first $6 million tranche of a potential $27 million Series A round. Consider it a small bite of Pfizer’s old Sandwich. Ziarco licensed four drug candidates that were developed at Pfizer’s now-shuttered Sandwich, UK labs, and part of the venture cash comes from Pfizer’s venture arm. But the lead financier is a very unlikely source: the hedge fund Biotechnology Value Fund, which typically invests in small- and micro-cap biotechs like this one. The crossover move is its first in five years, and it doesn’t seem inclined to make a habit of it. BVF partner Mark Lampert called the Ziarco deal opportunistic. Ziarco has four anti-inflammatory and anti-allergy drugs, on which Pfizer spent more than $100 million on R&D, said BVF’s Lampert. The most advanced is a histamine H4 receptor antagonist that has completed Phase I. CEO Mike Yeadon, who was VP and CSO of the allergy and respiration research team in Sandwich, told our “Pink Sheet” DAILY colleagues it could be a once daily low dose oral treatment for asthma, allergic rhinitis, pain, and inflammatory skin conditions. Pfizer Ventures’ stake is undisclosed, and it will receive milestone payments and royalties as the drugs progress.

Speaking of progress, we're almost to the blurbs. A quick programming note: This week we've added a new twist to FOTF. After the four blurbs, you'll find a lightning-round paragraph that takes you through the rest of the fortnight's financings. We hope you find it useful. Now on the count of three, let's all get a running start and jump headlong into...

Visterra: If the Cambridge, Mass. biotech has its way, Tamiflu will have competition. Visterra said Nov. 9 it closed a $26 million Series A round with $13 million from the Bill & Melinda Gates Foundation, Omega Funds, and its existing investors. The cash will help Visterra push its monoclonal antibody VIS410 into the clinic for seasonal and pandemic influenza. It’s a therapeutic, much like Tamiflu (oseltamivir), which is famously stockpiled whenever a new flu strain emerges amid whispers of “pandemic.” Visterra also sees it used as a prophylactic for first responders and others at near-term risk of flu infection. The infusion of cash from the Gates Foundation was undisclosed, but it’s significant nonetheless. Visterra is the third biotech in roughly a month, and fourth since March 2011, to sell equity to the Gates Foundation. In our previous edition we discussed the Gates investment in vaccine firm Genocea Biosciences. New head of global health Trevor Mundel said this summer the foundation would be more aggressive with its new investment strategy, and so far he’s right. (The upcoming issue of Start-Up takes a deeper look at the Gates biotech investment initiative.) So far, the foundation is targeting platforms, such as Visterra’s antibody discovery technology, so it can help point applications of the technology in directions beneficial to global human health. For example, roughly half of Gates’s Visterra investment is earmarked for a program in infectious disease (but not the flu). The other lead investor in the $13 million tranche, Omega Funds, usually buys shares of venture firms no longer able to hold positions in portfolio companies. But the Visterra investment is primary, not secondary, said Visterra CEO Steve Brugger. – Alex Lash

Abbvie: With a split from its parent company Abbott Laboratories imminent, the pharmaceutical unit AbbVie issued $14.7 billion in debt securities that will help it pay back cash to Abbott, as well as fund dividend payments to future shareholders. The debt issuance -- which included three-year fixed-rate, three-year floating-rate, five-year, six-year, 10-year and 30-year notes – was the largest dollar-denominated offering by a company in more than three years, and a sign that throughout market turmoil, health care reform, and other disturbances, Big Pharma has no problem convincing bond buyers of its seaworthiness. However, AbbVie did receive a slightly lower rating, Baa1, from Moody’s because of its untested independence and its overreliance on sales of rheumatoid arthritis drug Humira (adalimumab). Before AbbVie, the largest dollar-denominated debt offering was from Roche in February 2009 to help pay for its acquisition of Genentech. The company issued $13.5 billion in long-term debt, as well as $3 billion in commercial paper, a form of short-term debt. That same year Pfizer issued $13.5 billion in debt in conjunction with its acquisition of Wyeth. Amgen has also issued more than $10 billion in debt over several years to fund share repurchases. AbbVie issued $3.5 billion of 1.20% senior notes due 2015, $4 billion of 1.75% senior notes due 2017, $1 billion of 2.00% senior notes due 2018, $3.1 billion of 2.90% senior notes due 2022, $2.6 billion of 4.40% senior notes due 2042, and $500 million of floating rate senior notes due 2015. – Lisa LaMotta

Pearl Therapeutics: The Redwood City, Calif. company said Nov. 13 it has closed a $65 million Series D round to help move its combination chronic obstructive pulmonary disease drug, PT003, into Phase III testing by mid-2013. With four years of Phase II testing under its belt, Pearl Therapeutics wants to move into two pivotal trials and, it hopes, attract a partner for PT003. The Series D included the company’s four existing investors: 5AM Ventures, Clarus Ventures, New Leaf Venture Partners, and round leader Vatera Healthcare Partners. The company has raised a total of $167.5 million since 2007, including its $69 million Series C in 2010, which included the same four investors. Pearl expects to file for approval of its combo product, as well as each of the components in three separate New Drug Applications, by the first half of 2015. PT003 is a fixed-dose combination of glycopyrrolate, a long-acting muscarinic antagonist (LAMA), and formoterol, a long-acting beta-2-agonist (LABA). It uses a meter-dose inhaler (MDI) as a delivery device, and since MDI technology is already used with other medications, the company will not have to seek regulatory approval for the device, nor will it have to spend resources educating doctors and patients about the use of the device. – L.L.
 
Auspex Pharmaceuticals: Amid all our talk about public investors crossing over into the mezzanine rounds of private companies, we noticed that Auspex is having a different conversation. The San Diego-area company that makes deuterium-modified compounds has raised a $25 million Series D round that it hopes will fund its lead drug, an analogue of tetrabenazine, a treatment for chorea (involuntary spastic movements) associated with Huntington’s disease (HD). The original version, Xenazine, is marketed by Valeant Pharmaceuticals International through Lundbeck in the U.S. for the same indication. New investor Panorama Capital led the Series D round, with participation from existing investors Thomas, McNerney & Partners, CMEA Capital, and Sloan Biotech Fund. Gaurav Aggarwal of Panorama joins the board with the financing. Auspex has raised a total of $60 million since its 2007 inception. “We like the near-term nature of the product and the uniqueness of it,” Aggarwal told our friends at "The Pink Sheet". He was confident that Auspex could go public even if the syndicate can’t sell the company. Another deuterium modification company, Concert Pharmaceuticals, has advanced its lead candidate for diabetic neuropathy nephropathy into Phase II. Deuterium is an isotope of hydrogen, and substituting it for hydrogen bonds makes a molecule more able to withstand enzymatic breakdown and thus stay in the body longer. It also creates new chemical entities, their developers say. The patent office agrees: on Nov. 15 it granted a composition-of-matter patent to Auspex for its deuterium-substitute version of Pfizer’s JAK kinase inhibitor tofacitinib, which the FDA approved on Nov. 6. – A.L. 

The Best of the Rest: Shanghai Jingfeng Pharma’s venture round brought in $30 million led by Vivo Ventures…an OrbiMed-led Series B for Cardioxyl Pharma totaled $28 million…Roche Ventures and MedImmune Ventures participated in Ambit Biosciences’ $25 million Series E supporting quizartinib clinical trials… fellow diagnostics companies Metamark Genetics, Epic Biosciences, and Advanced Cell Diagnostics each raised Series B financings…STAR antibody platform play Alethia Biotherapeutics closed a $4.7 million Series B…Avexxin raised an undisclosed amount in Series B financing for chronic inflammatory disease development…Vivo Ventures and New Leaf Partners joined as new shareholders through MEI Pharma’s $27.5 million PIPE…Tavistock Life Sciences led a $Cdn26.1mm private placement for MethylGene…vaccine adjuvants developer Isconova raised SEK50mm through a rights issue…Idera Pharma completed a $7mm converted preferred stock and warrants sale…small-molecule cancer drug developer Array BioPharma’s FOPO grossed $65.7 million…in the only completed IPO of the fortnight, breast cancer testing company Atossa Genetics raised $6.5mm without taking a haircut…Enanta filed to go public, hoping to advance its anti-infectives…Cardiovascular diagnostics company Singulex postponed its IPO … AstraZeneca completed a $2 billion two-tranche bond issue… insurance provider Aetna raised $2 billion from the sale of senior notes to fund its acquisition of Coventry Health Care.

Photo courtesy of flickr user bumeister1 via a Creative Commons license.

(Final) Deals of the Year Nominee: Lilly/TPG-Axon/NovaQuest

Ah, awards season. Why should film critics have all the fun? And voting! It's not just for presidential elections. This year your IN VIVO Blog team is nominating a handful of alliances, acquisitions, financings, regulatory negotiations and legislative compromises in our First Annual DOTY competition. And then you, dear readers, will vote (early and often, we hope) for the winner. Imaginary federal and international biopharmaceutical statutes prohibit us from awarding a monetary prize. But our winners, when they die, on their deathbeds, they will receive total consciousness. So they've got that going for them, which is nice.

Aaand, last but not least: It's not just cash-poor biotech firms that need the occasional helping hand to finance their drug development efforts. Even for the likes of Eli Lilly (and, say, Bristol-Myers, which has blazed this particular trail among larger companies), hedging pre-market risk is part of the game plan when cash is becoming more expensive and clinical development and regulatory affairs more uncertain.

In July, Lilly announced an agreement with TPG-Axon Capital and Quintiles Transnational Corp.'s NovaQuest partnering group under which Lilly's partners will pay up to $325 million in development funding for its two lead Alzheimer's disease compounds, a gamma secretase inhibitor and an A-beta antibody, each ready to begin Phase III testing.

In exchange, TPG (which provides the bulk of the capital) and NovaQuest (10% of the funding and strategic development advice) will receive success-based milestone payments and mid-to-high-single-digit royalties on future sales of the two compounds. Quintiles CRO arm will act under a traditional fee-for-service contract. Finally, to sweeten the deal and hedge the risk shouldered by TPG and NovaQuest, those partners will also receive an additional undisclosed royalty on a third, unidentified product that Lilly has out-licensed to a third party. (See our coverage of the deal here.)

Not to show you how the sausage is made, but there was some internal dispute here at IVB over what this deal signifies within pharma, if not its overall importance.

See, on one hand, the deal is forward-thinking and increasingly necessary in a difficult R&D climate; with the cost of capital increasing even for the likes of Lilly and its Big Pharma brethren it allows Lilly the flexibility to take multiple shots on goal in Alzheimer's or other diseases. It's also the first publicly announced deal (we've heard rumors of deals signed but still private) in which a private equity player takes a big financing role in a Big Pharma's development program -- something they've done in small and mid-sized companies (e.g., Symphony Capital) but which Big Pharma has always shunned.

There will now likely be further variations on this theme: former AstraZeneca CFO, now Goldman-Sachs partner Jon Symonds says he's working on putting together a pool of PE capital for developing Phase I and II Big Pharma (and maybe other) compounds, which could be pulled together as soon as January. That structure, incidentally, addresses one of the big problems for PE players (and probably one of the big sticking points of the Lilly/TPG negotiations, which apparently took about a year and a half): how do you put together a marketbasket of enough develop-able compounds to offset the awful odds facing any single on of them. The drug company wants to put as few as possible in the basket; the PE investor wants as many as it can get.

On the other hand, there is something odd about offering deal-of-the-year honors to a Big Pharma company for creative financing to mitigate risk during the year when a lot of people who are supposed to be the experts in this kind of thing are bankrupt, unemployed--or begging the taxpayers for assistance.

And it is especially odd, given that (as we wrote here) Lilly is a model of a Big Pharma company that is focusing on innovative products--rather than diversifying into OTCs or related business like some of its peers. The logic of focusing--that investors want to diversify for themselves, rather than turn their money over to Novartis management to diversify for them--seems to apply here too. Shouldn't Lilly's investors just hedge for themselves, rather than have Lilly management do it for them?

Still, everyone agrees that the deal allows Lilly to shed risk (in return for a smaller reward) in this notoriously difficult therapeutic space in a creative transaction that could prove to be a model for private equity/pharma deals going forward. It's just that we don't agree about whether that's a GOOD THING.

So there you have it--your last IN VIVO Blog Deals of the Year! Nominee. Got it in just under the wire. Why Lilly/TPG/NovaQuest? For the new-model dealmaking, for the sexy private equity angle. For the Controversy!

We'll see you later, at the ballot box.

image by flickr user jacob.theo used under a creative commons license.

Deals of the Week: Divine Intervention

Christmas came early for the faithful this week, many of whom flocked to the nation's capital to see His Holiness Pope Benedict XVI on his first official visit to the US. Among those celebrating the Pope's crossing: Comedy Central's Stephen Colbert and NBC Today show host's Kathi Lee Gifford, who was so moved by the Pope's arrival that she actually "teared up" during her Pilates session.

Pharma executives--at least those with the word STRATEGY in their titles--might do well to say a few "Hail Mary's" of their own. The list of companies who might benefit from a miracle is growing longer every week. Take Merck and Schering Plough, which continue to suffer the ramifications of the ENHANCE conflagration. (Merck actually suffered a double whammy: Vioxx reared its ugly head again with the publication of a JAMA article claiming company-paid ghostwriters authored many research articles written about the drug.) Roche appears to be in need of help too: the company reported lower than expected earnings this week thanks to weak Tamiflu sales and an even weaker dollar. But the company most in need of divine intervention? Pfizer. The company pflopped big-time, with profits down 18% for the quarter thanks to generic competition for Norvasc and Lipitor.

Can't get to DC or New York for a papal blessing? Fear not, IN VIVO Blog offers a benediction of a different sort...

Roche/ PIramed: Earlier this week Roche agreed to buy UK-based PIramed for $160 million. (The biotech will get another $15 million is payable on the achievement of a relatively easy milestone: initiation of Phase II studies on PIramed's oncology program.) PIramed is at the vanguard of PI3-kinase inhibition, a position that attracted attention from Genentech--and an oncology deal worth up to $230 million--back in 2005, and we surmise Roche decided to share the love. Only last month Genentech and PIramed announced progress in the collaboration, as lead compound GDC-0941 hit the clinic in the US and the UK. PIramed even managed to hang onto an option to commercialize compounds emerging from the collaboration ex-US. (Our 2004 profile of PIramed is here, and our 2006 analysis of the Genentech deal is here.) Roche's acquisition of PIramed is, in contrast to the miserable news of late from Blighty Biotech, a jolt of good fortune. Merlin and JPMorgan, PIramed's two backers, have made a solid return--their original ₤10 million investment (then worth about $17 million) has blossomed rather nicely.

Natus Medical/Sonamed: Natus Medical is all grown up. The child care health products company announced its plans to purchase Sonamed, a privately held maker of products that screen newborns for hearing problems. Terms of the deals weren’t disclosed, but both boards have approved the deal. In the announcement, Natus Chief Executive Jim Hawkins says Sonamed’s Clarity screening device will fit into Natus’ current line of products for hearing loss, brain injury, jaundice and other maladies afflicting newborns. Two-thirds of the Sonamed’s $3.5 million in annual revenue came from the sale of disposable products, giving it a high gross profit margin, a possible boon to Natus. Just a week ago, Natus wrapped up $15 million in a secondary sale of stock, possibly to help finance the deal. This is Natus' fourth acquisition in three years. Earlier this year, Natus announced a broad restructuring plan that would help it digest its three previous buy-outs: Excel-Tech, Olympic Medical, and Bio-Logic Systems.

CV Therapeutics/ TPG-Axon: One week after receiving regulatory approval for Lexiscan, an injection that increases arterial blood flow during heart tests, CV Therapeutics sold a 50% interest in its North American royalties to private equity player TPG-Axon Capital in a deal worth up to $185 million. In 2000, CV inked a deal with Fujisawa Healthcare (now Astellas Pharma) in which it gave up North American rights to Lexiscan in exchange for milestone payments, development funding, and double-digit royalties on the product. CV retains ex-North American rights to the product and expects to submit a marketing authorization application to the European Medicines Agency by the end of the year. TPG-Axon is a spin-out of Texas Pacific Group. Financings of this kind have become increasingly common in recent months as private equity players come to the rescue of needy companies unable to tap the stingy public markets. Two weeks ago, IN VIVO Blog noted similar cash-for-royalties tie-ups between Paul Capital and Plethora Solutions and Deerfield Management and VIVUS Inc.

Pfizer/Avant: Another week, another Pfizer deal in a specialty-focused market. (Have we mentioned this is a trend?) On Wednesday came news that Pfizer was licensing Avant Immunotherapeutics' vaccine for a rare brain cancer called glioblastoma multiforme (GBM) for an initial sum of $40 million, as well as a $10 million equity stake. If Avant's Phase II immunotherapy, called CDX-110, continues to meet its clincal and regulatory endpoints, the Needham, MA-based biotech stands to receive milestones of more than $390 million as well as royalties. CDX-110 targets a tumor-specific variant of the epidermal growth factor receptor (EGFR) called EGFRvIII that researchers believe contributes to malignant cell growth in about 40% of GBM tumors. This is the second big immunotherapy deal we've seen in as many weeks: on April 2 came news that Takeda was teaming up with Cell Genesys to develop that company's GVAX Prostate immunotherapy. (We'll have more in this month's START-UP about the deal.) It seems highly unlikely that Pfizer's bus dev team would have signed this kind of deal just five years ago: after all, there are just 10,000 new cases of this kind of brain cancer annually in the US. But Pfizer has been eager to build capability in oncology, especially in the area of so-called cancer vaccines. Recall that last November the company purchased Coley Therapeutics for $164 million.

GSK/Regulus Therapeutics: GSK announced its second deal in the young field of microRNA inhibition yesterday. The pharma plans to team up with Regulus Therapeutics to develop microRNA antagonists against four undisclosed inflammatory targets through proof-of-concept, at which point GSK can claim an option. For this privilege, GSK will pay the biotech $20 million up-front, including a $5 million note that will someday convert to Regulus common stock. Total milestones (both pre- and post-POC) are up to $144.5 million per project, and Regulus will receive up to double-digit royalties on sales. If the deal seems a bit familiar that may be because only a few months ago, in December 2007, GSK's infectious disease CEDD inked a similar deal with Danish microRNA player Santaris for up to four different virology programs, that includes an option on Santaris' SPC3649 program targeting microRNA-122 in HCV. (That program was recently the subject of a write-up in Nature). Though only a few months old, Regulus is not a typical start-up; it is a well-funded JV between antisense leader Isis and RNAi leader Alnylam. (Look for a feature about Isis and its platform strategy in the April IN VIVO.) Part of Regulus's strategy is to quickly establish a base of IP around microRNA targets, as Isis did with antisense and Alnylam with RNAi.


Wyeth/ ViroPharma: It's official. Wyeth and ViroPharma officially called an end to their hepatitis C partnership around ViroPharma's small molecule non-nucleoside inhibitor, HCV-796. In August, the companies announced potential safety concerns--including an increasd risk of liver disease--associated with the medicine and halted a mid-stage clinical trial of the drug. "Significant activities were undertaken to determine a clear path forward for HCV-796; however, the risk associated with potential hepatotoxicity ultimately posed too high of a hurdle to merit further development," said Vincent Milano, who just took over as ViroPharma's president and CEO last month from Michel de Rosen. ViroPharma's HCV-796 is by no means the only hepatitis therapy dogged by safety concerns. Both Idenix and Anadys and their pharma partner Novartis were forced to retrench after bad news about their HCV drugs surfaced last year.

Image by Flickr user davescunningplan used with permission through a creative commons license.

CardioNet and The Bear (Market)

Following the closing of its $110 million round a year ago, CardioNet Inc. execs were confident their company would soon go public. At one point, one backer of the company--when IN VIVO Blog asked if CardioNet would go public sometime soon--answered our query with a rhetorical question: Does a bear (do its business) in the woods?

We took that as a yes, but not any old yes. It was a confident, perhaps cocky, yes that suggested CardioNet might be immune to the ills plaguing other device companies.

Well, as Larry Bird used to say. It ain't being cocky if you can back it up. Sure enough, CardioNet did go public, going out today at $18 per share. For any other company, an $18 opening share might be a triumph. For CardioNet, it was the absolute lowest price the company could go while abiding by the terms of the unusually structured $110 million financing.

As we've explained a few times, go to our article here or earlier posting here, buyers in that private round acquired shares that would convert into common shares at the time of the IPO, giving them a discount on the offering. Among the investors taking part were venture investors Sanderling Ventures and Foundation Medical Partners as well as H&Q Funds, but they were relatively small investors. Hedge fund reportedly were the biggest buyers.

According to the company's S-1, CardioNet sold 114,839 shares of "mandatorily redeemable convertible preferred stock" at a purchase price of $1,000 per share, giving the company $114.8 million.

The conversion of those "convertible preferred stock" depended on the offering price of the shares. Had CardioNet gone out at say $23 per share, the mid-point of the previous range, those convertible preferred stock would have converted into 5.9 million of common stock.

According to the S-1 filed when CardioNet adjusted the price to $18-$20, the conversion would have amounted to 7.2 million shares if the company priced at $19. So ultimately, investors in the round obtained more than 7 million shares.

But the deal included some fine print that essentially put a floor on the pricing of the IPO.

From the S-1:

Each share of the mandatorily redeemable convertible preferred stock will convert into shares of common stock in connection with the offering at a conversion ratio of $1,000 divided by 87.5% of the initial public offering price, subject to a maximum denominator of $23.40 per share and a minimum denominator of $15.70 per share.

By our math, 87.5% of $18--CardioNet's opening price--is $15.75. So CardioNet's $18 offering price rests on the price floor determined in the March 2007 financing. It looks to us that the company couldn't go any lower with an offering price and still abide by the terms.

Now the only remaining question is will the price hold? Early reports show it's holding--barely.

Further reading shows it wouldn't have been prudent to wait much longer. According to the S-1, after the end of 2007, the rate of common-shares per convertible preferred shares rose 5% each year, with the increase compounded quarterly. So the longer CardioNet waited, the more shares went to the investors in that final private round.

But one thing worth noting. According to the S-1 documents, Boston Scientific--which acquired a stake in the company through its purchase of Guidant--was scheduled to sell 400,000 shares at the offering. But, according Renaissance Capital's IPO Home site, selling shareholders sold 1.5 million shares through the offering, not 400,000. We're not sure who the additional sellers were. (UPDATE: Guidant/Boston Sci sold the additional shares as well.) (Doff of the cap to VentureBeat LifeScience for pointing that out for us.)

CardioNet is trading under the symbol, BEAT.
image by flickr user Vljay Pandey used under a creative commons license.

Back in the day

Riddle me this: What do hedge funds and steroids have in common? Both have undercut the significance of breaking long-held records, first in baseball (See Barry, above) and now venture capital.

The slew of venture capital surveys this week reported impressive totals for health care companies. In each case, biopharmaceutical and medical device companies finished the first quarter with record totals.

Why? The general press says investors finally have recognized that baby boomers will benefit from new technologies being developed by the companies. Yeah, well, most informed folks recognized that a very long time ago. But what’s really going on are hedge funds, private equity players and venture capital firms that are morphing into one or the other are pouring big bucks into companies with products, revenues and a legitimate shot at going public in one or two years because public investors are eagerly buying into these companies.

This is venture capital today, and there’s nothing wrong with that. This isn’t a traditionalist rant pining for the old days of day games, the reserve clause and start-ups built around pre-clinical products. But what’s off-putting is when venture capital counters include financings like the $110 million raised by CardioNet Inc. into the figures. In that case, a syndicate of hedge fund investors put up significant capital in exchange for discounted shares in the company’s pending (they hope) IPO. (For more complete terms see article in your April Start-Up.)

If the company goes public—and it should file this year—it’s a great deal for the company and its venture investors. But should deals in which public investors are pouring huge dollars into privately held companies simply to obtain the right to buy cheaply into an IPO be counted as a venture capital investment? Probably not. Should they be banned from venture capital figures just as steroids have been banned finally from major league sports? Hard to say. But just as Barry Bond’s assumed steroid use is tainting his charge to be the all-time home run king, big-ticket financings backed by hedge funds with their eyes on IPOs skews the record fund-raisings of today when they’re matched against years past.