The Cetus IPO
In March of 1981, Cetus Corporation of Berkeley and Emeryville, California made an initial public offering of stock that garnered net proceeds of over $100 million. At the time, it was the largest IPO in U.S. corporate history. Genentech’s sensational stock market entry the previous October had raised $35 million, made headlines in newspapers around the world, and thrust the phrase ‘genetic engineering’ into the public consciousness. The Cetus offering was an exclamation point and a powerful confirmation of public interest. It evinced the growing magnitude of the stock market’s appetite for opportunities in biotechnology in those early, heady days.
Cetus was founded in 1971 by Ron Cape, a biochemist with a Harvard MBA, and Peter Farley, a physician with a Stanford MBA. The company was built around technologies developed by Donald Glaser, UC-Berkeley’s Nobel Prize-winning physicist turned molecular biologist. Glaser had refi ned methods of automated mass screening in bacterial genetics. The commercial objective was to identify microorganisms that could improve fermentation yields and the industrial production of antibiotics, vitamins, chemicals, foods, fertilizers, and fuels.
As the IPO approached, ten years on, Cetus was in the midst of a technological transition. It had become apparent to Cape and Farley in the late 1970s that recombinant DNA was destined to transform industrial biology. The entrepreneurial duo moved quickly to incorporate the new technology. They recruited Stanley Cohen to Cetus’ scientific advisory board, built out molecular biology labs, and started hiring gene cloners from elite universities. By 1981, much of the company’s perceived value derived from its plans to apply rDNA techniques to the manufacture of therapeutic proteins (beta interferon and IL-2, in particular). The new direction attracted investors, and after the magnificent stock market introduction, Farley was able to call Cetus “the only adequately funded genetic engineering company.”
Writing on biotech valuation, LSF Advisory Board member Stelios Papadopoulos has called the Cetus IPO "glorious." He also notes that it occurred on the crest of a wave. Lured by prospects of a big payday, several other early biotech firms (including Genetic Systems, Ribi Immunochem, and Hybritech), rushed to follow Cetus into the IPO market in 1981. In each instance, the results were disappointing. Wall Street’s first great wave of biotech investing had already crashed; embedded skepticism overtaking radiant enthusiasm. Industry folk learned to expect peaks and troughs in the biotechnology IPO markets, a pattern which has continued through the present. According to Papadopoulos, the lasting lesson of the Cetus IPO is summed up in the oft-repeated credo of biotech CEOs: “raise money when you can, not when you need it.”