VentureBeat

(UPDATED: See below.)

It’s been a long, barren summer for biotech IPOs, but ImaRx, the blood-clot company we featured here, finally managed to bull its way into the public markets. The company, which withdrew an earlier $75 million IPO and lowered its offering price on the current one, finally finally priced its IPO at its most recent target of $5 a share, selling three million shares for an anemic take of $15 million, excepting fees and possible overallotment sales.

That makes ImaRx the first biotech to make it to the public markets via an IPO in almost two months. The slowdown hasn’t stopped companies from filing — yesterday Archemix joined the list, and the day before brought us Cumberland Pharmaceuticals setting its offering price. Still, the backlog is building: Over at Signals Magazine, Jennifer van Brunt counts 12 outstanding IPO filings (13, actually, but only because she still lists NovaCardia, which which Merck bought out yesterday), the oldest of which — Light Sciences Oncology — has been at the starting line for over a year.

Much of the holdup reflects the fact that most of the biotechs that have gone public this year haven’t done well at all in the market. Response Genetics, for instance, went public on June 4, and has since fallen 13 percent. Jazz Pharmaceuticals, which we hazed here, here and here, lowered its offering price several times and is still down 20 percent. Amicus Therapeutics, which actually has an interesting technology, is down 23 percent. (Stock data courtesy of Renaissance Capital’s IPOHome.)

And so it goes, right down the line. Of the 17 biotech IPOs this year, only six — Sirtris Pharmaceuticals, Biodel, Pharmasset, Orexigen Therapeutics, Tongjitang Chinese Medicines, Optimer Pharmaceuticals — are trading above their offering price. Biotech investors are used to long odds, but at the moment, it’s hard to blame them for being a bit standoffish where new offerings are concerned. They’ll soon get a chance to test their mettle again, as the next few weeks are expected to bring Sucampo Pharmaceuticals and Cumberland Pharmaceuticals to the gate.

UPDATE: This item, which began life as a brief notice of the ImaRx IPO pricing, has morphed into a fuller take on the miserable state of the biotech IPO market.

UPDATE REDUX: So far, the odds of ImaRx breaking the IPO slump are looking pretty long. At about 10:45 a.m. Pacific time, the stock is trading down at $4.75, down five percent.

FINAL UPDATE: ImaRx closed its first day at $4.79, down 4.2 percent.

Reuters is reporting that Jazz Pharmaceuticals, maker of the controversial drug Xyrem, priced its six million IPO shares at $18 apiece — roughly 30% below its earlier, most optimistic hopes. Just this morning, Jazz lowered its expected range to $20 to $21, down from an earlier projection of $24 to $26.

That leaves the specialty-pharma company, which had raised $265 million in venture funding and private equity, gross proceeds of $108 million — or up to $124.2 million if its underwriters purchase a 900,000 share overallotment. Jazz had earlier hoped to raise almost $180 million in the offering. Based on its projection of 24.5 million shares outstanding following the offering, the company is now valued at $441 million. That’s still a mighty high valuation for a company that had 2006 revenues of less than $50 million.

My previous coverage of the Jazz IPO, here and here, laid out the case that the company — a “specialty pharmaceutical” outfit whose business consists of buying cast-off drugs from other companies — was woefully overhyped, with an initial offering that represented the peak of an investment bubble in specialty pharmas. Backed by the New York private-equity firm Kohlberg Kravis Roberts and several prominent Silicon Valley VCs, including Versant Ventures and Prospect Venture Partners, however, Jazz maintained an aura of inevitability despite the weakness of its fundamental business.

Then the NYT weighed in this morning with a story pointing out that the company’s lead drug Xyrem — an approved treatment for narcolepsy — is basically GHB, a controlled substance known as a club and date-rape drug. Although Jazz had disclosed the “negative publicity” associated with Xyrem in its filings, no one — myself included — had previously made much of this fact. (Of course, it didn’t help that Jazz obscured the connection between Xyrem and GHB by describing its drug’s active ingredient as a “derivative” of GHB, rather than GHB itself.) Although it’s impossible to know whether the NYT story was responsible, Jazz almost immediately knocked down its offering price, and then failed even to clear that lowered bar later in the day.

Who’s looking forward to seeing how Jazz trades tomorrow?

Jazz Pharmaceuticals, the generally unexciting specialty-pharmaceutical maker that hoped to raise $179.4 million in an IPO, has collided with reality.

The Palo Alto, Calif. company today slashed its expected IPO price by a fifth.

We’ve written before about Jazz and its wildly overrated strategy of salvaging poorly performing or cast-off drugs from other companies. David Hamilton, of VentureBeat LifeSciences, is on the trail, noting other worrying signs, such as the fact that the active ingredient in Jazz’s lead drug, a narcolepsy treatment called Xyrem, is derived from gamma hydroxybutyrate (GHB), a “club drug” linked to overdose deaths and use in date rape.

(UPDATED: See below.) Jazz Pharmaceuticals, the generally unexciting specialty-pharmaceutical maker that had hoped to raise $179.4 million in an IPO, has collided with reality.

The company today lowered its expected IPO take to a maximum of $144.9 million, a drop of almost 20 percent, based on an expected offering of up to 6.9 million shares at a price of $20 to $21 apiece. Jazz had previously intended to price its shares between $24 and $26. Here is its amended SEC filing.

I previously wrote about Jazz and its wildly overrated strategy of salvaging poorly performing or cast-off drugs from other companies here, so the company’s IPO pullback doesn’t come as a huge surprise. Even at the lower price, however, the offering is still pretty extravagant compared to what most biotech and pharma companies going public can expect these days.

One thing that did come as a surprise — and which I’m kicking myself for not having noticed the last time I went through the company’s S-1 — is the fact that the active ingredient in Jazz’s lead drug, a narcolepsy treatment called Xyrem, is derived from gamma hydroxybutyrate (GHB), a “club drug” linked to overdose deaths and use in date rape. What’s more, Jazz is under investigation by the feds regarding allegations that it has illegally promoted Xyrem for unapproved use in fibromyalgia and other conditions. It disclosed that it is currently negotiating a settlement that would include a guilty plea and a $20.5 million fine in order to avoid prosecution.

Alex Berenson of the NYT has more here; his earlier article on the indictment of a Brooklyn physician accused of illegally promoting Xyrem is here.

UPDATE: In its S-1, Jazz refers to Xyrem’s active ingredient, sodium oxybate, as a “derivative” of GHB. The NYT, however, bluntly stated in this morning’s article that Xyrem “is gamma hydroxybutyrate, or GHB.” Who’s right?

Give this one to the NYT. Jazz’s S-1 contradicts the prescription label for Xyrem, which leads off with a black-box warning that states (emphasis added):

Sodium oxybate is GHB, a known drug of abuse. Abuse has been associated with some important central nervous system (CNS) adverse events (including death). Even at recommended doses, use has been associated with confusion, depression and other neuropsychiatric events. Reports of respiratory depression occurred in clinical trials. Almost all of the patients who received sodium oxybate during clinical trials were receiving CNS stimulants.

Check out the warning yourself here (You’ll have to click on the “For Healthcare Professionals” button, which will pop up the warning.) Since the content of warning boxes has to be negotiated with the FDA, I give the label description more credence than Jazz’s S-1. I’ve called the company to ask them to explain the discrepancy; an outside PR rep returned the call, but hasn’t come back with an answer yet.

For disclosure gluttons, here’s an excerpt of the relevant S-1 passage (JZP-6 is an anticipated liquid form of Xyrem):

We could be materially adversely affected if we or our products are subject to negative publicity. For example, sodium oxybate, the active pharmaceutical ingredient in Xyrem and JZP-6, is a derivative of gamma hydroxybutyrate, or GHB, which has been a drug of abuse and may not be sold legally in the United States. If physicians and patients perceive Xyrem and JZP-6 to be the same as or similar to GHB, sales of Xyrem and JZP-6 could be adversely affected.

From time to time, there is negative publicity about GHB and its effects, including with respect to illegal use, overdoses, serious injury and death and because sodium oxybate, the active pharmaceutical ingredient in Xyrem, is a derivative of GHB, Xyrem sometimes also receives negative mention in publicity relating to GHB. Because sodium oxybate is a derivative of GHB, patients, physicians and regulators may view Xyrem as the same as or similar to GHB. In addition, there are regulators and some law enforcement agencies that oppose the prescription and use of Xyrem generally….

Jazz Pharmaceuticals, a Palo Alto, Calif., outfit that licenses and acquires drugs from other companies, said it hopes to raise up to $179.4 million in a 6.9 million share offering — all based on a stable of unexciting drug retreads.

According to its SEC filing, Jazz now plans to price its shares between $24 and $26 apiece, for gross proceeds of between $165.6 million and $179.4 million. When it first announced its IPO plans in March, the company said it planned to raise $172.5 million with the offering.

That’s a princely sum for a company that has long personified the “specialty pharmaceuticals” fad that swept biotech venture capital earlier this decade. Companies like Jazz don’t discover drugs on their own; instead, they acquire rights to unwanted experimental drugs, generally from Big Pharma companies who figure the potential market isn’t worth the trouble of tying up capital and talent in development. In other words, specialty pharmas are a kind of arbitrage play, one that looks for profit between the mismatched expectations of Big Pharma managers and those of venture investors.

Even better so far as the latter were concerned, such in-licensed drug candidates could theoretically win FDA approval much faster than ones developed from scratch. In turn, that meant VCs could hope to cash out their investments much earlier — perhaps in as little as four or five years, compared to ten or more for an investment in a traditional early-stage biotech.

Few have played the specialty-pharma game better than Jazz. Founded in 2003 by former executives of Alza, which Johnson & Johnson had acquired for $10.5 billion two years earlier, Jazz was perfectly poised to attract venture capitalists eager for quick “exits” from their venture investments in the aftermath of the disastrous 1999-2000 biotech stock bubble. And flock they did for Jazz’s second funding round, when the company raised an eye-popping $250 million — a sum so large it merited its own NYT story. Even then, however, skeptics were beginning to wonder if the giant financing suggested that the specialty-pharma boomlet was about to play out.

In mid-2005, Jazz paid $123 million in cash to acquire Orphan Pharmaceuticals, an unprofitable, publicly traded specialty pharma with three marketed drugs for sleep disorders and other neurological problems. Total sales of those three treatments — still the only products Jazz has to sell — amounted to $42.9 million in 2006. Jazz, meanwhile, posted a $78 million operating loss last year, and continues to burn cash at a prodigious rate — $19.4 million in the first quarter alone. As of March 31, Jazz had racked up cumulative net losses of $213.4 million.

The company also executed a 1-for-11.06701 reverse stock split two days ago, presumably to avoid pricing its shares so low that institutional investors couldn’t participate in the offering.

Jazz, of course, has big plans for its existing and future drugs. It is trying to extend the use of its narcolepsy drug Xyrem into fibromyalgia and unspecified movement disorders. In January it struck a deal with Solvay Pharmaceuticals to market a time-release version of the antidepressant Luvox (fluvoxamine) in the U.S. Solvay withdrew Luvox from the market in 2002, two years after generic versions entered the market. Other drugs in the Jazz pipeline include new formulations of traditional anticonvulsant and anti-anxiety drugs.

In other words, Jazz offers very little to quicken the pulse of anyone looking for fancy new drugs that address serious unmet medical needs — just a lot of nose-to-the-grindstone, me-too style follow-ons. Maybe there really is a huge business to be made from such humdrum drugs, one that would justify the enormous piles of investor cash the business is plowing through. And maybe a stolid, cash-generating specialty pharma like Jazz is just what finicky and risk-averse pharma/biotech IPO investors are looking for. If so, it sure seems like a dispiriting way to take the “venture” out of venture investing.