Certain Biotech Investors Get an Edge --- Some shareholders resent the sharing of nonpublic information by way of private investments in public equities

"There's a hot new trend for healthcare investors, but it's generating quite a bit of controversy.

Publicly traded biotech companies are turning to PIPEs, or private investments in public equities, to help them get through a volatile period in equity markets. 

In the first quarter, U.S. biotechs raised a record $5.7 billion using the approach, according to Jefferies data.

PIPEs have been around for a while. They were once seen as a funding option used mainly by distressed companies frozen out of the public capital markets, but now they are being used by highly respected investors and companies.

The PIPE boom has proved symbiotic for cash-starved companies as well as for a few dozen specialist biotech investors such as Adage Capital, RA Capital, Logos Capital and Janus Henderson. For biotech companies, it is a cost-effective way to raise money and attract experienced investors while avoiding the choppier public markets. For fund managers, it is an opportunity to invest at an attractive price and band together to salvage companies they often already are invested in.

The problem, though, is that the PIPE boom is leaving out many investors, some of whom complain that it is essentially a form of legal insider trading. That is because many PIPEs give a select group access to nonpublic information, such as data from a cancer study that is about to be published. Once the deal is locked up, PIPEs are announced to the public, often alongside the information, leading to major share gains.

"These deals make generalist investors feel like the deck is stacked against them," said Daphne Zohar, founder and chief executive officer at privately held biopharmaceutical company Seaport Therapeutics. "As a CEO, I'd prefer not to use this mechanism because I want to do what's best for all of my shareholders."

The dirty secret is that unequal access to information has always been an aspect of capital markets. But the sheer volume of PIPEs is upsetting generalist investors, who are being left out. As it transforms from a niche feature of the biotech market to a more prominent financing option, it could lead to regulatory backfire.

"You have a situation in which the access to these deals is extremely limited; it seems like there are a dozen to two dozen parties that are kind of controlling the vast majority of the deal flow," says Jared Holz, a healthcare equity strategist at Mizuho. "We've never in the history of the sector seen PIPEs being done at such a velocity."

Anger about the way information and shares are being parceled out is leading some investors to voice their disapproval. In some cases, it is also leading to legal action. Earlier this month, Bloomberg reported an investor sued senior leaders of Taysha Gene Therapies saying its board and top executives manipulated the timing of positive disclosures and a PIPE to maximize profits for themselves and a group of investors tied to them.

According to the shareholder complaint, Taysha deliberately sat on positive early-study results for its gene therapy. Then, on Aug. 14, Taysha publicly announced both the promising data and the $150 million PIPE transaction, the lawsuit says, per Bloomberg. Participants in the stock placement "realized near immediate gains of $205 million," the suit says. Taysha declined to comment.

Another concern is that, while there are strict rules around trading the information shared during PIPEs, these deals could be leading to what is known as shadow insider trading -- a pervasive problem in biotech whereby an investor learns information about Company A and then uses it to make an investment in Company B. One such case, which wasn't tied to a PIPE, is now at the center of a high-profile Securities and Exchange Commission lawsuit, which alleges Medivation executive Matthew Panuwat purchased options tied to the shares of Incyte, a rival drugmaker, because he knew they would pay off when the market heard Pfizer was buying his company in 2016.

Seo Salimi, a partner at law firm Paul Hastings LLP, which advises biotechs on financing deals, said that when a company puts together such deals, it isn't always sure how the market will react to news.

"There are plenty of instances where companies, especially in oncology, have put out data which hits the primary and secondary endpoints, but the stock price goes down," he noted.

Investors in PIPEs say picking on the funding method is missing the broader point: Without them, many companies would struggle to raise cash in the current environment of high interest rates.

"You have companies that spend years running a clinical trial, taking big risks to get these drugs to patients, then watch it all come crashing down because of the volatility in public markets," says Oleg Nodelman, founder and portfolio manager at EcoR1 Capital, a biotech investor. "This approach gives biotech companies an opportunity to meet their funding needs in difficult times."

PIPEs are likely to carry on for a while, but their attractiveness might decline due to market forces. In February, large PIPEs led to over 40% average stock-price increases immediately after the deals were announced, according to Jefferies.

But as PIPE volumes surged in March, the average stock increase declined to over 16% following the announcements.

"Perhaps companies are draining this well too rapidly," the analysts noted.

PIPE deals aren't going away anytime soon, and neither is the controversy that surrounds them." [1]

1. Certain Biotech Investors Get an Edge --- Some shareholders resent the sharing of nonpublic information by way of private investments in public equities. Wainer, David.  Wall Street Journal, Eastern edition; New York, N.Y.. 16 Apr 2024: B.12.