(UPDATED: See below.) Is the air starting to hiss out of the private-equity bubbble? Looking at Talecris Biotherapeutics, a stodgy biotech controlled by private-equity firms Cerberus Capital Management and Ampersand Ventures that filed to raise as much as $1 billion in an initial offering last Friday, you’d be perfectly justified in thinking so.
For starters, the IPO is just ridiculously huge. Biotech offerings that raise more than $100 million are fairly rare; this year, for instance, only three out of 17 completed IPOs pulled in sums of that magnitude. The biggest biotech IPO in recent memory was Ribapharm’s $260 million offering in 2002, when the company briefly spun out of ICN. (ICN — now Valeant Pharmaceuticals — reacquired Ribapharm the following year.) Prior to that, you have to go back almost a decade, when Genentech raised $1.94 billion in its second IPO in July 1999.
Talecris, however, is no Genentech. The company, a former Bayer subsidiary, derives most of its income from “immune globulin intravenous” — more commonly known as gamma globulin, an injectable form of antibodies derived from donated blood plasma that helps protect immune-deficient patients from infection. (Talecris also sells other plasma-derived products for conditions such as hemophilia and alpha-1 antitrypsin deficiency.) It’s a solid but unexciting business: Last year, Talecris posted net income of $87.4 million on revenues of $1.1 billion. The company, which is based in Research Triangle Park, N.C., expects demand for its plasma products to grow between six percent and eight percent through 2010 — hardly the sort of dynamic growth investors typically expect from biotechnology companies. What’s more, Talecris’ financials are a mess, since the company reports ostensibly non-comparable figures for its pre-buyout and post-buyout existences, making it particularly to decipher the company’s business history.
It’s tempting to think that Talecris came up with the $1 billion IPO figure simply because that’s almost exactly what the company is carrying in long-term debt, a burden that stood at $1.1 billion as of the end of March. The company, however, says it will remain “highly leveraged” following the offering, although it will pay down some debt. The remainder of the proceeds are slated for paying a termination fee to cancel a management contract with Cerberus and Ampersand affiliates and for shareholder dividends — i.e., cash back to Cerberus and Ampersand.
There’s one particularly interesting sentence in the company’s S-1 filing about how the proceeds will be spent: “[T]he balance, if any, [will go] to fund working capital, capital expenditures and other general corporate purposes, which may include the acquisition or licensing of complementary technologies, products or businesses.” Or, as Morningnotes.com chief Ben Holmes told the Raleigh News and Observer, “That little phrase, ‘if any,’ tips us off that they’re going to drain this stuff right into their pockets.”
Talecris’ top executives are already making out like bandits. Executive chairman and CEO Lawrence Stern, for instance, pocketed nearly $20 million in cash and stock awards last year, while Alberto Martinez, the company’s president and chief operating officer, pulled down $12.8 million. Tellingly, very little of the compensation is in the form of stock options; Stern’s option grant last year was valued at only $169,547, and Martinez’s at $211,934. Instead, the two men have received piles of cash through the company’s “non-equity incentive plan” — $15 million for Stern, and $11.9 million for Martinez.
So what we have is a profitable but relatively slow-growing biotech with huge debts, run by executives who are themselves bleeding substantial amounts of cash out of the business, which is likely to remain heavily indebted after its owners siphon off most of the proceeds from an offering roughly four times the size of any other biotech IPO in almost a decade. Oh, and all this comes at a time when investors have been decidedly cool to biotech IPOs, especially after so many of these stocks tanked following their offerings. Remind me again why investors should be excited to pony up $1 billion for Talecris’ potential house of cards?
To be fair, the terms of the IPO haven’t been established, so no one knows how much Cerberus and Ampersand think Talecris is actually worth. On the other hand, given that tightening credit and recent market turmoil could signal the end of the the private-equity boom — today’s version of the leveraged-buyout mania of the 1980s — there’s also just a whiff of desperation about this particular IPO. Between the gigantic offering size and the poor track record of biotech IPOs over the past few years, it’s hard to escape the impression that the owners of Talecris are simply shooting for the moon in hopes of walking away with something — anything — to justify their investment.
UPDATED: Rewritten and expanded substantially to lay out the argument in more detail.
UPDATE REDUX: There’s an interesting NYT piece predicting an IPO glut as private-equity types try to unload their companies here.