Trading Up
BIOTECH: Companies Make Move From OTC To Big Stock Exchanges
By Meghana Keshavan
Monday, September 16, 2013
Organovo Inc. has become a poster child for the penny stocks. The San Diego biotech recently
traded up from the over-the-counter market and is now listed on the New York Stock Exchange.
Taking the over-the-counter route to a larger exchange is challenging and circuitous, but
Organovo has pulled it off seamlessly, analysts say. Uplisting is increasingly a move that many
small, publicly traded biotechnology companies aspire to make — but it remains difficult to
achieve.
San Diego-based Sorrento Therapeutics Inc., for instance, is in the midst of filing for a switch to
the Nasdaq. And Carlsbad-based International Stem Cell Corp. hopes, ultimately, to make the
leap to a national securities exchange as well.
Of some 450 San Diego biotech companies, about 20 traded on the OTC market, about 40 on the
Nasdaq and about 10 on the NYSE; the rest remain private, funded by individual investors or by
venture capital. About 150 biotechnology companies around the country trade on OTC.
Organovo (NYSE: ONVO) has earned a high profile nationally with its 3-D bioprinting
technology that methodically layers cells to build functional and complex human tissues. It
joined the OTC stocks in February 2012 following a reverse merger — acquiring a public shell
called Organovo Holdings Inc. — and moved to the NYSE in July.
Uplisting was part of Organovo’s plan early on, said CEO Keith Murphy. The company, founded
in 2009, didn’t initially fit the requirements to go public with an initial public offering.
“If you’re going public on the OTC market because you need financing desperately, maybe
you’re not headed in the right direction,” Murphy said. “But if you have a solid grounding and
can do it opportunistically, it can work quite well.”
Organovo Fared Well
Organovo fared well indeed on the OTC market, opening at about $1.65 in 2012 — many of its
peers trade for a fraction of that as they enter the penny stock market. Since it has uplisted, the
company’s stock has risen to about $5.25 per share. The company, which employs about 35 and
holds a market capitalization of about $402 million, raised $15 million when it went public in
2012. It was able to raise an additional $45 million in August, thanks to a new investor base
found on the NYSE.
OTC companies vary widely in their market capitalizations and stock value. On Sept. 11,
International Stem Cell (OTC: ISCO) traded at 15 cents per share, with a market capitalization of
about $20 million. Sorrento Therapeutics (OTC: SRNE) traded at $9 per share, with a market
capitalization of $149 million.
“You’re not going to have every company going at the rate of Organovo, but it’s been a great
investment story for the OTC markets,” said Cromwell Coulson, CEO of the New York-based
OTC Markets Group.
These over-the-counter exchanges serve as a sort of catch-all for companies that need to raise
capital but aren’t large enough to trade on a national security exchange.
Going public on these smaller markets can be particularly lucrative for biotechnology
companies, which require large infusions of capital up front. It can help them gain exposure and
investor interest at an early stage, and can be a less costly route to a listing on the NYSE or the
Nasdaq, said Nikhil Varaiya, a finance professor specializing in public markets at San Diego
State University.
Advantages and Disadvantages
In terms of liquidity and capitalization, there are virtually no minimal requirements to trade on
the OTC market. But such OTC stocks tend to fall under the radar, Varaiya said. Such companies
tend to have low valuations and capitalizations, and often quietly go out of business, he said.
The OTC markets have held a dubious reputation for several years, but they have attempted to
rebrand themselves for the past five. This is thanks, in large part, to the efforts being made by
OTC Markets Group to welcome promising companies — like Organovo — to trade OTC as
they prepare to uplist to the larger public markets.
“We like to see companies graduate to the higher exchanges,” Coulson said.
Coulson said that he’s positioning the OTC markets to appeal to smaller companies that could
benefit from going public.
“Nasdaq used to be a marketplace for small technology and science growth companies — a
perfect fit for the biotechnology sector,” Coulson said. “But as they grew to become the Pepsi to
the New York Stock Exchange’s Coke, small companies became less of their business — and
we’re stepping in.”
Rich Vincent, chief financial officer of Sorrento Therapeutics, said that it’s a complicated chess
game to get uplisted from an OTC listing. To help catalyze a transition to the Nasdaq, Sorrento
Therapeutics recently completed a $28.2 million merger with Fountain Valley, Calif.-based
Igdrasol Inc.
Need a Certain Profile
Biotech companies need to fit a certain profile to appear alluring to investors, Vincent said.
Normally, companies uplist when their drugs are in the midst of clinical trials, but Sorrento
Therapeutics’ cancer therapies were still in the discovery phase.
“We really didn’t have the right story — our assets weren’t advanced far enough — so we took a
different direction,” Vincent said.
Sorrento Therapeutics acquired Igdrasol because it already sells a cancer drug in South Korea —
making it a better fit for the Nasdaq.
The company also recently completed a 1-to-25 stock split — a common move OTC companies
make to raise their stock price as they ready themselves for a leap to a larger exchange. Before
Aug. 1, stock was trading on the OTC markets at about 21 cents per share, and following the July
stock split the price was $5.20.
International Stem Cell hopes to position itself for a move to one of the Nasdaq exchanges once
its Parkinson’s disease therapy progresses further down the drug development pipeline. The
prospect of the company’s shares being available to a much larger pool of investors and traded at
a higher volume is motivating for the small company, said Simon Craw, executive vice president
of business development and investor relations.
‘Lots of Downsides’
But it’s tricky for a small biotech company to trade publicly, Craw said.
“There are a lot of downsides, honestly,” Craw said.
The company pays about $1 million per year to maintain its public company status. Legal
expenses, audits and U.S. Securities and Exchange Commission filing costs add up, Craw said.
Though the company’s increasingly able to reach out to a wider pool of investors — it recently
worked with investment bank Roth Capital to raise $3 million — it’s still facing challenges to
raise capital.
On the plus side, Craw said there’s a lack of transparency around private companies and a lack of
liquidity in their stock that being publicly traded alleviates. If someone has a stake in a private
company and wants to sell it, they can only sell it to those who are part of the company. But with
a public stock, even if it’s traded over the counter, the individual can put those shares up for sale,
Craw said, which has given peace of mind to the company’s many investors.
“There’s a certain transparency associated with the Nasdaq that OTC suffers from a little bit,”
Craw said. “But we’re still thankful for some of the flexibility it’s offered us over the years.”