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ImmuLogic Pharmaceuticals

Case Submission for New Enterprise Finance to Prof. Sabarinathan


Anup C V (1011009) Purnima Gopalakrishnan (1011044) Subin Kuriyil ()

1. Critically examine the perspectives of each of the actors presented in Cases B1 to B4. What is the key motivation of each of the actors? How do these motivations from the ideal interests of ImmunoLogic as a company? Malcolm Gefter: He founded ImmuLogic in 1987. He was one of the leading researchers in the field of immunology. He had extensive connections with the industry through consulting, industry connections, director of biotechnology start up Angenics. ImmuLogic was based on 2 key premises: 1. Treatment of allergies 2. Treatment of auto immune diseases This was commercialised through Immulogic. He remained professional and objective in his dealings with them despite his involvement in the development of the firm. He sold back 1/3rd of his shares to reduce his vested interests in the company and allow him to give dispassionate strategic direction to the company. His argument for IPO: 1) Need for IPO to allow negotiation and better position before negotiating strategic alliance with larger pharmaceutical firms to commercialise allergy drugs 2) Competitor Cytels offering might disadvantage ImmuLogic given limited investors in technology He understood the implications of a hot issue IPO and believed valuation could be potentially carried out using comparable valuations of other biotech companies and Immulogic s own valuation from round C financing. Potential Divergence from ImmuLogic interests: He potentially stands to gain from the 500,000 shares he holds if a hot issue results in share price increases. Also because he is the founder of this firm his ambition to commercialise it might be clouding his perspective and cause him to go for an IPO too soon which may not be in the best interests of Immulogic as it might influence future offerings. Henry Mc Cance: He is a partner at a VC firm, Greylock. This VC did not focus purely on exit options but took on an active role by involving themselves in management and development of the company they invested in. The firm had very close longstanding ties with a small number of investors, individuals and annual management fees were incentivised basis the operating budget versus assets managed. The VC had previously invested in early biotech companies as a lead investor. They already possessed an understanding of the challenges in a biotech company, the risks entailed and the stage of the company at which IPOs were issued. They had the reputation of a savvy investor as all their early investments turned out very successful.

The close ties Greylock had with the geography and parent University of Immulogic led to an early interest in the firm. They used the opinions of leaders of other early bio tech firms and the opinions of Gefters peers in the scientific community to evaluate the viability of Immulogics proposition. Gefters personality and knowledge across fields of science and business created trust in the venture. Potential Divergence from Immulogic interests: The VC has no particular expertise in the field of biotechnology and is not in the best position to judge the readiness of Immulogic for an IPO. Their potential decision is clouded by their past experience with biotech firms. They believe that profitability is not a driving factor for IPOs in the biotech industry and it is a weapon of negotiation to go for an IPO. They feel that though high risk Immulogic is a high quality investment. Another reason for a hurried decision could be the need to get into line for an IPO quickly and signal quality given the trends in the industry. Also the window for biotech offerings would be limited and would close soon. While in the short run, the VC did not stand to gain from a hot issue, given comparable data subsequent IPO offerings could benefit them and associated investors significantly. ( Chart and Table B2-1). Even if the hot issue did result in better trading and the VC could not benefit due to the lock in period, they might be able to sell at a later point. Their relationship with the underwriter could result in a potential under pricing of the IPO which is not in the interest of the funds to be raised for Immulogics functioning. Katherine Kirk: She was an underwriter with Hambrecht and Quist who was researching Immulogic as part of her research into potential clients who were promising. She felt that it was too early for an IPO in 1990. She believed that valuation of firm would be affected by a failed IPO and believed that human trials were the right point to look into an IPO. Her job also involved advising the CEO on the strategy to enter the IPO process. However business trends contrary to this made Immulogic question the need to wait for clinical trials. Key relationships by H and Q were its long standing relationships with mutual funds, pension managers and other purchasers. Most of them purchase it for resale. Potential Divergence from goals of Immulogic: It was potentially a great source of revenue to underwrite an IPO for a growing firm in light of secondary offerings especially high technology IPOs. Selling concessions would ensue for both investment banks and underwriters. They ensured IPOs would be hot deals. The prices were set such that prices would surge as trading opened. VCs initially invested were also clients. They had to balance the pricing to keep investors and VCs happy. The Tables B3-3 and B3-4 reflect the downturn variations in recent times for biotechnology. Philip Gross: VP at Harvard Management Company. Biotechnology in his opinion was a high risk high return venture. It was attractive due to potential for large returns and risky in terms of market swing. Their emerging industry fund focussed on biotechnology post which there was a shift to value investing where undervalued companies were invested in. They did not take huge risks. Analysts were responsible for up turns and down turns of the portfolios they were managing.

Potential Divergence from Interests of Immulogic: He was not generally in the business of IPOs. He believed that it was necessary to evaluate the company from an independent perspective in terms of science. He also valued firms based on comparable projected 1997 earnings which were likely to over value the firm. He also felt that the current condition of the market was not best and a single reversal could collapse the market. 5. Given the situation at Immulogic whose views do you think will prevail in terms of its strategy going forward? The Venture Capitalist is most likely to prevail in terms of strategy decisions. The VC believes in active role of management and development. They are most likely to pressure the firm to go ahead with an IPO given very close ties with investors. The previous experience of investment in early biotech which was very successful would influence their decision to go ahead with IPO. They also had extensive ties with the founder given that MIT was a limited partner at Greylock. They had established the scientific credentials of the firm. They believed strongly in the using IPO raised capital as a balance sheet weapon in negotiating the strategic alliances and future IPOs. This would be in line with the attitude of the founder. He believed in the same principle and stood to benefit from an IPO same as VCs. The VC was of the opinion that the window for IPO would be very limited and there was a need to get into line as quickly as possible to signal quality. They would bring the underwriter on board as they had a previous relationship with H and Q and could influence any recommendations given that they could make the decision to potentially move to a different underwriter. The underwriters and the clients stood to gain from a hot issue IPO as did the venture capitalists. As the VC had the most influence on the key actors in the IPO offering and also stood to gain from it the most, their strategy was likely to be the one to go ahead with.