Biotech firm going public on a budget through merger

Rarely do the worlds of stem-cell research and Native American artifacts collide. But Dr. Michael D. West, the scientist behind Advanced Cell Technology Inc. of Worcester, has made it happen.

ACT plans to go public this month through a reverse merger into the shell of a publicly traded company, Two Moons Kachinas Corp. The Utah firm was founded in 2000 to sell kachina dolls, collectible figurines carved from cottonwood roots that were originally used in annual Native American ceremonies promoting fertility and abundant crops. Trade in the kachinas has not been brisk. On its website, only two of the 22 listed figurines, the owl and the sun-faced kachina, have been sold. In its most recent report to the Securities and Exchange Commission, Two Moons Kachinas reported revenue of $2,500.

Describing the firm's recent activities, president David C. Merrell said: ''We have placed photographs of the kachinas on our website and may consider putting one or two kachinas up for auction, with a minimum bid price, on an Internet auction site. We also have arrangements with two retail specialty stores, and we attended the Marin County American Indian Arts Show."

But Two Moons has a new lease on life as the vehicle for ACT to go public on the cheap. William M. Caldwell, chief executive of ACT, said a traditional initial public offering involving an investment bank, lawyers, and an elaborate road show to sell shares to new investors just didn't make sense.

''At the stage the company is at, going the traditional IPO route is very expensive," he said. ''This method dramatically reduced the costs associated with being able to access the public markets."

This week, the company plans to complete a financing round in which unnamed venture capitalists and private investors pump $8 million into Advanced Cell. By the end of the month, the firm will complete the merger with the Two Moons shell, and its shares will begin trading on the the OTC Bulletin Board, an obscure, illiquid exchange generally used by companies that don't meet the capital requirements of the Nasdaq Stock Market.

Some biotech financiers call it a smart move.

''There's been a whiff of sleaziness about this financing mechanism, but looking at Advanced Cell's filings, this does not appear to have been done in a sleazy way," said Douglas M. Fambrough, a principal at Oxford Bioscience Partners, a life-science venture capital firm in Boston. ''This is what we would call a clean shell -- there's nothing to the existing business. Investors aren't getting anything other than ACT."

Moreover, said Fambrough, traditional IPOs don't come with the advantages they once offered. Wall Street firms underwriting the investment banking could once promise coverage by equity analysts for newly public firms, a key step toward boosting trading volume and liquidity. The settlement of conflict-of-interest charges with New York Attorney General Eliot Spitzer and other regulators put an end to that perk.

''The IPO is just not as good as it used to be," said Fambrough, noting that one company Oxford invested in recently went public in a reverse merger.

Still, the reverse merger hasn't completely risen above its seedy image as a financial marriage of convenience.

''There's a negative image out there about this type of transaction," said Fred Wainwright, executive director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business. ''There have been unique circumstances where individuals have created pump-and-dump type situations," he said, referring to stock scams promoters use to build excitement about a company's shares, just so they can quickly sell the shares they own at a profit.

The nontraditional transaction seems characteristic of Advanced Cell Technology, which has thumbed its nose at the biotechnology establishment every step of the way. West, the scientist behind ACT, garnered headlines when he claimed to have cloned human embryos in late 2001. He has made bold predictions for curing degenerative diseases using stem cells, but has largely failed to make good on his aggressive timetables. Fund-raising has been a continual problem.

Most recently, the company in September won positive coverage for experimental work in which it coaxed stem cells into developing into specialized eye cells, prompting some to claim a potential treatment for macular degeneration, a major cause of blindness in the elderly. Dr. Robert Lanza, ACT's medical director, said the firm is testing the cell therapy in rodents and may soon experiment in larger animals. ''To say this is three to five years from the clinic is very conservative," he said.

The new financing coincides with other signs of growth at ACT. Caldwell said the firm has moved into larger facilities in Worcester and plans to open a satellite research office in California. The West Coast office is intended to take advantage of funding under California's $3 billion stem-cell research program.

''Given the fact that we have as good a portfolio of intellectual property as well as research surrounding embryonic stem cells, we feel we could be a good partner for some of the institutions on the West Coast," he said.

Merrell, the entrepreneur behind the Indian doll business, said he would have no operational role after the merger but would remain a shareholder of the successor company, with less than 10 percent of the shares outstanding.

He didn't seem to have any regrets about getting out of the artifact business. Operational success, he said, was ''limited."

Jeffrey Krasner can be reached at krasner@globe.com.