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Kythera Biopharmaceuticals (KYTH) made its public debut on Thursday. Shares of the clinical-stage biopharmaceutical company focused on the development and commercialization of products for the aesthetic medicine market, ended their first day up 23.7% up at $19.79 per share.

The public offering

Kythera Biopharmaceuticals is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market. The company focuses on the facial aesthetics market, which represents the majority of the overall aesthetic market. Kythera has a product candidate, ATX-101 which is a potential injectable drug, currently in the Phase III clinical development, which targets the reduction of the "double chin."

The company sold 4.4 million shares for $16 a piece. Kythera raised $70 million in gross proceeds in the offering process. Based on the offer price of $16.00, the company is valued at $278 million.

The offering is a great success. The offer price was set at the high end of the preliminary price range of $14-$16 per share. Furthermore, the firm and bankers increased the size of the offering by 10% to 4.4 million shares.

In total, 25% of the company's shares outstanding were offered. At Friday's closing price of $19.79 per share, the company is valued at $344 million.

Major banks which brought the company public were J.P. Morgan, Goldman Sachs, Lazard and Leerink Swann.

Valuation

Founded in 2005, Kythera Biopharmaceuticals partners together with German based Bayer outside of the North-American market. Bayer recently completed two important Phase III trials of ATX-101 in Europe. The positive results from the trials provide the basis for Bayer's submission for approval of ATX-101 in Europe. Results from the tests in the US are expected to come in mid-2013.

The aesthetics market has grown dramatically in the US over the past years. According to the American Society of Aesthetic Plastic Surgery, consumers spend $10 billion on 9.2 million surgical and non-surgical aesthetics procedures in 2011.

For the annual year of 2011, Kythera generated $13.0 million in license income, up from $4.5 million in 2010. As a result of growing revenues, net losses fell from $16.0 million in 2010, to $11.2 million in 2011.

For the first six months of 2012, the company tripled its license revenues to $19.7 million. Net losses narrowed from $3.2 million in the first half of 2011 to just $2.4 million in 2012.

Kythera expects to use the majority of net proceeds from the offering to fund the US Phase III clinical trials of ATX-101. The remainder will be used for working capital, and general corporate purposes including research and development.

Excluding the offering proceeds, the company operates with roughly $27.5 million in cash, equivalents and marketable securities. The company operates without any debt as preferred stock is converted into common stock. Including the $70 million gross proceeds from the offering, the net cash position will come in around $90 million.

As such, the valuation of Kythera's operating assets comes in at around $250 million. Based on a rough annual revenue estimate of $50 million for 2012, the market values the operating assets at 5 times annual revenues. The company is expected to roughly break even for the full year.

Investment Thesis

The offering of Kythera is a success. Initially, the company was supposed to go public for a price between $14 and $16 per share. Shares were eventually sold for $16 per share, and ended their first trading day at $19.79 per share. Shares fell back to $19.10 per share on Friday.

As such, shares are trading some 27% above the midpoint of the first guided price range. The company will retain all available funds and future earnings to fund the development and expansion of the business. Therefore investors should not anticipate to receive dividends anytime soon.

The sentiment around the offering has been good. The company is showing impressive growth in licensing revenues, although from a low base. Furthermore net losses have been relative modest and have narrowed significantly. Still, the company expects to lose money in the coming years on the back of registration and development costs of ATX-101 in the US and Canada.

Kythera has made a good deal with a strong partner. Bayer has the rights for ATX-101 in the rest of the world, and pays licensing fees to Kythera which consequently can report meaningful revenues. The deal allows Kythera to narrow its net losses in anticipation of costs associated with the licensing of ATX-101 in Canada and the US. Kythera holds the exclusive rights for these two markets. However it will be at least 2015 before Kythera expects to report revenues from ATX-101 sales, if all goes well.

Generally I am not interested to participate in public offerings of small biotechnological companies. Especially not in case they only have one product in the pipeline and are reporting losses. Kythera is a bit of a special case as a result of the partnership with Bayer. Despite some financial security built in as a result of the deal, the eventual success of the company depends on the success of ATX-101. Given that my understanding of the chances of a successful approval trajectory is limited, I remain on the sidelines.

Source: Kythera Biopharmaceuticals: Successful Offering Of This One-Drug Company Backed By Bayer