Expert down on locally backed IPO

Friday, August 27, 2010, Investor's Edge

Business Courier of Cincinnati - by Steve Watkins Courier Staff Reporter

Three Cincinnati companies are among the largest shareholders of an Indiana cancer drug developer that is about to go public.

Endocyte Inc., based in West Lafayette, Ind., filed plans Aug. 17 to raise $86.3 million in an initial public offering. Pricing and a date of the offering have not been determined.

Insurance provider Cincinnati Financial Corp. and downtown-based venture capital companies Blue Chip Venture Co. and Triathlon Medical Ventures Fund are three of the seven largest shareholders.

Early investors tend to make a lucrative return when a company goes public. They often sell significant stakes in the IPO.

But that’s not happening here. Officials at Blue Chip and Cincinnati Financial each said they’re not selling in the offering. And Triathlon likely won’t either, an IPO expert said.

"I think (Endocyte) is desperate for money," said Francis Gaskins, president of Los Angeles-based IPO analysis firm IPOdesktop.com. "Investors aren’t going to bail out the (current) shareholders."

Endocyte has not yet reached key Phase 3 clinical trials on any of its drugs. It doesn’t expect to get to that point until next year. And it can take a few years after that before drugs can hit the market.

As a result, it has no revenue and is losing money. It spent $7.6 million on research and development in the first half of this year and lost $11 million. It lost $16 million last year.

Cincinnati Financial has about $11.5 million invested in Endocyte, giving it 11.6 percent of the stock. It first invested in July 2001.

"We felt the technology was promising and could have significant impact in diagnosing and treating certain diseases," said Marty Hollenbeck, Cincinnati Financial’s chief investment officer.

Blue Chip invested about $7 million in Endocyte, starting in 2004. It invested two rounds of capital, said Jack Wyant, a Blue Chip managing director.

"It’s a pretty promising company," he said.

Endocyte’s technology is based on using vitamins such as folate, a B-12 derivative, to kill diseased cells and leave healthy ones behind, according to Triathlon’s website.

"Its ways to treat cancer are considered unique," Wyant said. "We thought it had a higher chance of success. But it doesn’t happen overnight."

Its investment in Endocyte is about an average size for Blue Chip, Wyant said.

Triathlon started its $5.8 million investment in November 2005. Endocyte is one of its larger investments, said Suzette Dutch, a Triathlon managing partner.

"We’re very supportive of the company and we’re enthusiastic," she said.

The future performance of Endocyte’s stock will determine how lucrative the investment turns out to be. But recent history hasn’t been kind. Over the past 12 months, 10 health care stocks averaged a 22 percent decline after going public, according to Greenwich, Conn.-based Renaissance Capital.

Gaskins doesn’t think Endocyte will even be able to complete the IPO, because its Phase 3 trials and revenue prospects are so far away.

"They’re way early on this," Gaskins said. "There’s a lot of money between here and there. That won’t fly in today’s market."

Instead, Endocyte should seek a strategic partner that would buy the company, he said.