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Repeated price cuts take glow off Endocyte IPO

February 12, 2011

Endocyte Inc. succeeded in going public, which is no small achievement. But you can forgive directors and executives if they’re not feeling the euphoria that often grips insiders in the aftermath of an initial public offering.

West Lafayette-based Endocyte raised the money it was seeking—$79 million—but only after slashing the offering price. The upshot is that new investors got in for $6 a share—which is less than the average price paid by prior investors, a Securities and Exchange Commission filing reveals.

The 54-person company, which operates out of 14,000 square feet in Purdue Research Park and also has a 4,400-square-foot corporate office in Indianapolis—disclosed on Jan. 12 that it expected to go public for about $14 a share. But on Feb. 3, it cut the price to $7. The following day, it chopped another dollar off the price before plunging ahead with the IPO.

A company’s cutting its IPO price more than 50 percent is “highly unusual,” said David Menlow, president of IPOfinancial.com in Millburn, N.J.

He thinks it reflects Endocyte’s use of a second-tier lead underwriter—Toronto’s RBC Capital Markets—as well as uncertainty surrounding the company’s business. Endocyte is developing a cancer treatment that delivers high doses of drugs to diseased cells while leaving healthy cells untouched.

The cancer-fighting drug is linked to a substance that targets receptors that are overexpressed in cancerous cells. Endocyte uses companion imaging technology to identify patients who have the overexpressed receptors and thus are more likely to benefit from treatment.

It may prove to be a breakthrough approach to fighting ovarian cancer, which is extremely hard to treat, as well as other cancers. But the company must conduct phase three trials and win regulatory approval before it would pocket any sales.

“This is probably an indication of the market’s unwillingness to get behind pharmaceutical companies that lack something imminent that will be positive news they can deliver to shareholders,” Menlow said.

The dynamics of the deal changed drastically over the past month. If Endocyte had pulled off the offering at $14 a share, new investors would have paid double the $7 average price paid by existing shareholders.

Under the final deal, new investors got in for about 15 percent less than the average paid by prior investors. The existing investors also ended up with a smaller slice of the ownership pie, since the company had to issue more shares to raise the money it needed. The new investors now own 49 percent of the business rather than the 31-percent stake they would have held if Endocyte hadn’t cut the price.

Even the original terms would have been less lucrative than is typical for investors who buy in before a company’s IPO. For instance, the founders of Vera Bradley Inc., the Fort Wayne-based handbag maker, paid virtually nothing for their stock and enjoyed a huge windfall when the company went public for $16 a share in October.

The last Indianapolis company to go public, HHGregg Inc. in 2007, did so for $13 a share, $8 a share more than the average price paid by prior investors.

Endocyte officials and major investors in the firm declined to comment, citing SEC restrictions. But the reason the investors haven’t hit financial pay dirt seems clear enough: Endocyte has slugged through years of research—an expensive process that required repeated infusions of capital, diluting the stakes of the earliest backers.

The company has raised more than $90 million in private investment since its founding in 1995. Local backers include CID Capital, Clarian Health Ventures, the Indiana Future Fund and the pension fund of the Christian Church (Disciples of Christ).

The disappointing IPO price ultimately might not matter much if Endocyte successfully brings its technology to market—a development that surely would ignite a runup in the shares. (The stock’s already faring well on NASDAQ; it was trading Feb. 10 at $7.25, 21 percent above the IPO price).

In deciding to slash the IPO price, rather than to shelve the offering, Endocyte’s board may have been thinking long term, Menlow said. The company likely will need to raise millions more down the road, and being public positions it to do so.

“The mentality of management in many cases is, they just want access to the capital markets,” he said. “It represents a foothold for them to do secondary offerings. It’s harder to raise money privately than float a secondary offering.”•

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