Reverse Merger: An Alternative to IPO

A reverse merger, also known as a reverse takeover, occurs when a private company merges with a public company, which no longer has a viable business, to essentially gain access to public financial markets. Reverse mergers generally cost less and take less time than IPOs but the failure rate tends to be higher than traditional IPOs. Even so, as many as half of all companies that go public choose to go the reverse merger route.

Last week, TorreyPines Therapeutics merged with Axonyx, and PharmAthene merged with Siga Technologies. Both TorreyPines Therapeutics and PharmAthene were privately funded, while Axonyx and Siga were already trading on the NASDAQ. TorreyPines Therapeutics, funded by Alta Partners, Sorrento Associates, SR One, and others, focuses on developing small molecule therapeutics to treat CNS disorders. The company has a number of products in development; two are in Phase I development for migraine and Alzheimer’s disease. PharmAthene, funded by MPM Capital, MDS Capital, HealthCare Ventures, and Bear Sterns Health Innoventures, focuses on chemical and biological weapons countermeasures.

Given the high hurdles to IPO, reverse mergers will likely continue in the biotechnology space. It will be interesting to see how reverse mergers compare to IPOs this year.

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