Arch, Hutch Stand to Gain From “Hibernation on Demand” Through Ikaria IPO

11/2/10Follow @xconomy

It’s keep-your-fingers-crossed time for the people at Arch Venture Partners and the Fred Hutchinson Cancer Research Center in Seattle. Both organizations have millions of dollars at stake in the upcoming initial public offering of Ikaria.

Ikaria, a Clinton, NJ-based company developing futuristic “hibernation-on-demand” technology with roots at the Hutch, is hoping to cash in on its promise next week. The company is seeking to sell 10 million shares to IPO investors at a proposed range of $15 to $17 next week, according to Renaissance Capital. The deal could bring in as much as $195 million if Ikaria can command the high end of its price range, and underwriters like Goldman Sachs and Morgan Stanley exercise their right to buy another 1.5 million shares, according to a filing with the Securities and Exchange Commission.

If Ikaria can pull the trigger on this deal, it will be a windfall for Arch, the largest life sciences venture investor in Washington state. Arch, one of the founding investors in Ikaria back in 2005, has 3.5 million shares the company, which will be equal to a 7.8 percent ownership stake once the IPO is complete, according to the most recent SEC filing on October 26. If Ikaria prices its IPO at $16, or the mid-point of its proposed range, then the company will have a beginning market capitalization of $711 million, and Arch’s stake will be worth about $56 million, according to my calculations based on regulatory disclosures.

Neither Arch nor any other venture investor in Ikaria will be able to cash out immediately because it is prohibited from selling any shares for at least 180 days, as part of a typical “lock-up” agreement.

This transaction is in the midst of an SEC-mandated quiet period, so Arch’s managing director in Seattle, Bob Nelsen, said he has no comment. Same goes for Ulrich Mueller, the vice president of technology transfer at the Hutch.

It’s much harder to pin down the exact stake the Hutchinson Center has in the Ikaria IPO, but it’s clearly smaller than Arch’s. The Hutch, and Ikaria’s scientific founder Mark Roth, aren’t listed in regulatory filings among Ikaria shareholders who have a 5 percent ownership stake or greater.

Mark Roth

Mark Roth

Still, the Hutch has got to have high hopes for this deal. The Seattle-based cancer research center received 807,500 shares of common stock in Ikaria, plus 142,500 shares of preferred stock, when it was originally spun out of the center in 2005, according to an exhibit attached to the Ikaria investor prospectus. It’s unclear based on my reading of the SEC documents how many shares the Hutch still has, or what percentage that represents today. The company did complete a one-for-2.72 reverse stock split on October 25 as it made final preparations for the IPO, which means that pre-IPO holders will have about one-third as many shares as they did before the split.

Plenty of well-known individuals around Seattle have stakes in this deal. Roth, the scientific founder, was granted 2,187,790 shares in the original Hutch license agreement in 2005, according to a regulatory filing. Ben Shapiro, a former executive vice president at Merck, and a former member of the Ikaria board, had 5,000 shares of preferred stock after the Series A venture financing. Steve Gillis, a managing director at Arch and the co-founder of Immunex and Corixa, held 10,000 shares of preferred stock at that time. So did the Washington Research Foundation.

Ikaria’s stock ownership is a little more complicated than that of some companies, because it took an unusual route to its IPO. Ikaria merged with Clinton, NJ-based INO Therapeutics in February 2007 in a deal valued at the time at $670 million. That transaction combined the Ikaria’s high-risk, high-reward proposition of hibernation-on-demand with a steady, stable operations team at INO that already had a moneymaking product on the market. The combined entity, back in 2007, had a team of 300 employees, $160 million in annual revenue, and the only FDA-approved therapy for hypoxic respiratory failure in infants, a potentially deadly condition sometimes called “blue baby” syndrome.

Fast forward to the upcoming IPO. Ikaria has pitched itself to investors as a relatively safe option for cautious investors, because it generated $274 million in revenue in 2009, and turned a $13 million profit that year. Yet investors who yearn for big upside potential can still get a piece of the hibernation-on-demand concept from Roth, which made the pages of Science in 2005, and lots of coverage from mainstream media ever since.

The idea is essentially to develop drugs that can, in an emergency, or surgery, slow down breathing, heartbeat, and other metabolic functions without going too far and suffocating people. Medically, this could have significant value because it might, say, buy time for a trauma surgeon trying to save a car accident victim before he or she bleeds to death, or prevent brain damage from occurring in a stroke patient.

The company has developed an experimental drug, IK-1001, that’s a form of sodium sulfide designed to be given in a single dose, Ikaria said.

Back when Ikaria filed its original IPO prospectus in May, it described some of its progress with IK-1001 in clinical trials. As I wrote then, Ikaria started a mid-stage clinical trial of the drug for coronary artery bypass surgery, but terminated the study when it decided it needed a “rapid and reliable assay methodology for IK-1001.” The company said at the time it plans to re-start the trial to get some data on effectiveness once it has developed the assay.

The latest investor prospectus I’ve seen, dated October 26, doesn’t say much about IK-1001, other than it is in preclinical development. That’s a long way from proof of concept in clinical trials, much less FDA approval. So it will be interesting to see how far and fast this sexy drug development program can go if Ikaria rakes in the cash it is counting on through this IPO.

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