Developing medicines is a minefield that Tranzyme Pharma has navigated well so far. But the Durham company is about to embark on one of its trickiest missions.
Unlike its two rivals, which had to cut costs, delay projects or sell itself in past months, Tranzyme has had enough cash to sit out the financial crisis of the past 18 months. With the recession easing and Wall Street coming back to life, the company is about to act on one of three options: Go public, sell part or all of itself or go back to its investors hat in hand one more time.
Tranzyme’s board of directors and executive management will have to weigh costs and benefits of each option, said Mike Constantino, who oversees Ernst & Young’s life science business in the Southeast. “They have to look into their own crystal ball.”
Like any investor, they will want to squeeze the most out of their stake in the company, Constantino said. But, he added, “this is a very interesting time.”
Initial public offerings of stock, favored by venture capitalists because IPOs can recoup large investments plus gains, all but vanished when the burst housing bubble turned into a full-fledged financial crisis about a year ago. (See Renaissance Capital graphic on right.)
Elixir Pharmaceuticals, a Tranzyme rival, filed for an IPO in September 2007 and withdrew the filing in May 2008. Tranzyme, which had toyed with the idea to go public about the same time, also scrapped its IPO plans.
As investors became tight-fisted, venture capital fundraising and investment declined sharply.
With sources of cash limited, research and development companies cut costs and then turned to other deals that brought in money or kept the research alive. Some sold themselves. Others sold the rights to some of their medicines to large drugmakers.
Tranzyme was able to stretch the about $20 million in venture capital it received in 2007. But now, the company cannot wait much longer.
To stay competitive, Tranzyme has to figure out a way to pay for the large, international tests it must embark on next to get regulatory approval for its experimental drugs.
Vipin Garg, Tranzyme’s chief executive, said the company may still find a large drugmaker willing to buy it or the rights to develop and commercialize its drugs. Existing and possibly new investors may be willing to put another $30 million into the company, enough to get a first product ready to go to market.
But Wall Street’s rekindled appetite for biotech and pharma stock sales in past weeks could prompt Tranzyme to revive its IPO plans, Garg said.
After being dead in the water for months, the market looks like its coming back, said John Fitzgibbon, who tracks IPOs on iposcoop.com.
Wave of IPOs to come?
Several publicly traded pharmaceutical companies were able to sell large chunks of stock, including Inspire Pharmaceuticals of Durham, which raised $115 million on Aug. 10. The same day, Cumberland Pharmaceuticals, a specialty pharmaceutical company in Nashville, Tenn., pulled off the first IPO of a health care company in 12 months, according to Renaissance Capital.
Fitzgibbon expected a wave of IPOs after Labor Day. Venture capitalists are under a lot of pressure to recoup investments, he said. “There’s a big backup.”
Ernst & Young’s Constantino also projected a possible flurry of activity on Wall Street after Labor Day. If the IPO window opens, he said, it could stay open into the first quarter next year and allow Triangle biotech companies such as Tranzyme and Talecris Biotherapeutics to take the plunge. Talecris, which makes blood-based therapies, aims to raise as much as $1 billion in one of the Triangle’s largest IPOs.
In the past eight years, Tranzyme raised about $55 million in venture capital and moved its drug development ahead steadily without the unpleasant surprises that so often accompany a biotech company’s maturation. It’s an accomplishment that earned Garg this year’s Ernst & Young Entrepreneur of the Year award in the Carolinas.
Targeting gastrointestinal problems with custom-made ghrelin drugs was a strategy that proved smart financially and scientifically.
In three different tests TZP-101, Tranzyme’s most advanced drug, was safe and highly effective, according to results announced in October and April. The oral version, TZP-102, is being tested as a treatment for chronic gastroparesis, which particularly affects patients with diabetes.
By mid-2010, the company could have two therapies ready to advance into final testing and a pipeline of other ghrelin drugs in the wings.
Garg acknowledged that an IPO that raises $50 million to $100 million would allow Tranzyme to go ahead with the testing and build a sales force to bring its drugs to market.
A sale is likely to accomplish the same, but Trazyme would no longer be an independent company and the Triangle would lose a corporate headquarters.
And then, there’s the punt: Asking Tranzyme’s existing investors for another cash injection to gain time.
The call is the board’s.