CEL-SCI Corporation, 9/16/2009 PIPE. PIPE stands for “Private Investment in Public Equity.” In current times, PIPE investors are often private equity funds of various stripes, including ones with the misnomer “hedge funds.” Because the origin of PIPE money is private funds, we classify these offerings under Private Placements instead of Public Offerings. Like shelf offerings (see ICF), PIPEs are a sign of the times and again represent a backdoor method of raising capital. CEL-SCI is a public company trading on AMEX with a $200M market cap. But it is bio-tech, and bio-tech plays by a different set of public market rules. How so many of these biotech companies got public in the first place is a mystery. We’re not saying that they should not be public—it is just that many public biotech companies fly in the face of traditional investment parameters. CEL-SCI loses about $10 million a year at the operating line. It is working on important drugs in the cancer arena. But the beast has to be fed, and we know that the public market window is shut tight for almost everybody. That’s why PIPEs are the vehicle of choice. For a private equity fund, there is the semblance of public market liquidity when the funds invest using a PIPE. PIPE money can be very expensive for the company. It requires a company like CEL-SCI to sell common equity at a base price in a down market plus give the private equity investor more future return in the form of significant warrants. Additional deal terms get piled on top of the economics. Despite a $200M market cap, traditional Wall Street is not helping CEL-SCI. In CEL-SCI’s case, Rodman and Renshaw, a boutique investment bank that specializes in biotech and these tough raises, conducted the offering. The company has to give up a lot just to stay afloat. I have a college classmate, a former writer for “Saturday Night Live,” who once wrote this great line, “When things get tough, the tough get things.” And that’s how a PIPE works.
