The mere fact that Burrill & WR Hambrecht are touting their team-up to focus on bringing life science companies to the public markets is certainly big news. A savvy salt & pepper life science CEO (who orchestrated a >$1B M&A of his small cap clinical-stage entity) turned managing partner of a Sand Hill Rd. fund (who has now cultivated a portfolio of staggering exits) once schooled me on news releases of this magnitude and sophistication – net these docs are not put out into the universe until e.g. the deal is done, or the fund is closed, or the XYZ effort is certain to achieve its aim, etc. So considering the track record of success of these two sources, the Open IPO dutch auction news coming out of Burrill & WR Hambrecht is interpreted as an indicator that 1) life science IPO’s are going to ramp in the coming months and 2) the volume of IPO’s will not simply significantly ramp but will sufficiently ramp such that there is opportunity to carve out a meaningful business opportunity for Burrill & WR Hambrecht – therefore to “get there” a pipeline of “a lot” of deals must be materializing. And if the general quality of the 2009 IPO class is any indication these new issues had better have approved products or be darn close, e.g. NDA submitted and/or PDUFA date announced; we’ll take a closer look at who these potential entities may be by teasing out the date from OnBioVC.com, but that’s for another post…

Our prediction then is that new issues in the coming year will be greater in aggregate than the 6 (or 7) 2009 market entrants, but just exactly where then does the “Pandemonium” part figure in figure in? Life Science Deal Flow is not releasing a forecast on the number of 2010 deals anticipated…yet…but let’s say for example it is 10X to this year. If 60 to 70 deals are in the queue well, naturally all of the traditional investments banks, the big boys like JP Morgan (NYSE: JPM), Citigroup (NYSE: C), Jeffries, Credit Suisse (NYSE: CS), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Piper Jaffray (NYSE: PJC) and Bank of America – Merrill Lynch (NYSE: BAC) just to name a few, will likely stand to make millions (and perhaps billions) in banking fees and capital appreciation from the anticipated tsunami of deal flow. However, it is the unique approach of the Open IPO dutch auction process that will enable the average (qualified) guy and gal on the street to get in the IPO game. As soon as these individual investors are able receive a multiple (or percentage) on their initial investment the enthusiasm and excitement will undoubtedly go viral, perhaps first from chat around the conference room or golf course, then the blogosphere, Facebook and Twitter, and finally the mainstream media will pick up on the story. Before you know it Main St. will be clamoring for their bio IPO access  (and naturally the other sectors will respond similarly), then the Charles Schwab’s (NASDAQ: SCHW), E*Trade’s (NASDAQ: ETFC) and TD Ameritrade’s (NASDAQ: AMTD) of the world will all want to cash in on this new opportunity by serving up some sort of tiered access to these once out of vogue, then in vogue, then out of vogue, then in vogue, etc., shares. Now that would be…Pandemonium.

Assuming the Life Science Deal Flow crystal ball is on the money let’s then get back to our example of how this Burrill & WR Hambrecht Open IPO dutch auction will work:

Click [HERE] for the example set-up from Part #1.

• As the bids are received Burrill & WR Hambrecht may reject certain requests that they believe may have a manipulative or disruptive affect on the offering. As the bids come in they are sorted and the number of shares at each price is calculated, once the bidding window is closed the Open IPO process will then determine the clearing price by tallying the bids, ranking them from highest to lowest and then will calculate the highest bid price that will sell all 10 million shares of ABCgen – this price also represents the maximum offering price for ABCgen shares.

• Then it is incumbent upon ABCgen to elect the final offering price of the shares, either at the maximum offering price previously determined or they may elect to apply some discount to the max – clearly a variety of elements both internal to the business as well as external macro economic considerations and other variables will impact the price setting decision.

• What happens when in total more shares are bid for than are offered? In this scenario shares will then be allocated to successful bidders on a pro rate basis. For example say ABCgen received bids for 11 million shrs at or above the offering price for $11, the calculation is 10 million shrs / 11 million shrs which means that 90% of the bid would be filled.

• Now the results are in and the actual offering price for ABCgen is set not at $11 but actually for $11.50, having received bids for 11.5 million shrs or an oversubscription of 1.5 million shrs. Those individuals or institutions who bid below the offering price are left out in the cold. In our example:

1. Mr. Sigma, the portfolio manager of the $20 billion Next Century Bio Fund, bid on 7,500 shrs @ $8 so he is allocated…nada, for coming in too low.
2. Mr. Alpha, my Subaru mechanic and repair shop owner requested 200 shrs @ $12. He is allocated 87% (10 millions shrs / 11.5 million shrs) or 174 shrs (which may be rounded up by blocks of 100).
3. Mrs. Beta, my neighbor the aerospace engineer requested 1,000 shrs @$13. She is allocated 870 shrs (which may be rounded up by blocks of 100).

In summary ABCgen ended up raising $115M on the sale of 10 million shrs and after deducting offering fees and expenses is now off to build its US commercial enterprise and bring its new large molecule to market, continue clinical development of their early-stage pipeline assets and fund operations. A collective sigh of relief can be heard coming out of the board room and the c-suite as ABCgen after about seven years as a development stage company, now with FDA approval in hand, can finally get down to the business of the business.

There are a variety of benefits to the Open IPO dutch auction. For the investors it truly levels the playing field between institutional big boy and the individual by providing equal opportunity access; a fair allocation of shares free from preferential treatment; flexibility in the bidding process – meaning request for any number of shares at any price may be submitted; and naturally, equal prices are paid by all successful participants and no investor pays over their bid. From the company’s perspective there is a belief that the stock is being allocated to institutions and individuals who are not simply planning to unload their shares to cash in for a quick buck on day 1; the cost of the process is reduced relative to the more traditional public offering process; the dillutive effective may be minimized as deal sizes are not determined by the economic needs of the underwriting investment bank; and, simply the market truly drives the price of the IPO.

So, are you ready to get in the IPO game slightly ahead of the curve? If so and a qualified investor click [HERE] to open an account with Burrill & WR Hambrecht and be ready to bid away for those life science IPO shares. Avoid the utter chaos, tumult and uproar of the impending 2010 Bio IPO Pandemonium – chance favors the prepared mind.

Note: I have no ties of any kind to Burrill & WR Hambrecht (other than having an opportunity to have met G. Steven Burrill at an FBBp deal screen mtg) however, I would like to say that I will now happily accept client referral fees from Burrill & WR Hambrecht as well as handsome thank you gifts to downstream investors who have been handsomely rewarded via this process…