LONDON - The London Stock Exchange had rather humble beginnings. It was born in 1698 as Jonathon's Coffee House, where patrons would meet to discuss and trade stocks over coffee. Eventually that grew into the licensed entity, which was formed in 1801. The open trading floor went extinct in 1986, when electronic trading replaced it, and in 2004 the exchange moved to its current location of 10 Paternoster Square, nestled next to one of London's major tourist attractions, St. Paul's Cathedral.

Today the LSE is on something of a power grab. In the last financial year, 622 companies from 32 countries joined an LSE market, raising a total of £21 billion (US$38.1 billion). European life sciences companies in 2005 raised £379 million in initial public offerings, with nearly 80 percent (£300 million) of it done on an LSE market.

Of particular note is AIM - the Alternative Investment Market - which was launched in mid-1995 as a home for smaller-cap firms, for those devoid of revenue or for those otherwise perhaps volatile; in other words, a place well suited for biotech.

AIM opened with 10 firms, all from the UK, but by the end of 1995, it had 118 UK and three international companies listed. By 2003's end, it totaled 754 companies, with 60 being international. Since then, it's been "a feeding frenzy," as one company executive told BioWorld Financial Watch, and through May of this year, the number had exploded to 1,528 companies, 262 of them international, with a total market value of £74.2 billion.

The question is, why?

Partially it's outreach - LSE has focused on growing itself, specifically AIM, and has especially targeted biotech firms, among other industries. It held last week its first "The London Edge Initiative: Life Sciences" meeting in an attempt to put pre-IPO biotech and specialty pharma companies in contact with advisers, government agents, investors and LSE specialists.

But also fueling this growth are the shortcomings of Nasdaq, in particular the stiff and costly requirements of Sarbanes-Oxley, which have left many smaller companies out in the cold, and LSE has been there, opening its doors and inviting them in.

Asterand Inc. Becomes Asterand plc

For Asterand Inc., a human tissue supply and services company, AIM was simply a way to achieve a listing, and it did so through a merger with Pharmagene plc, which was focused on human tissue-based drug discovery and traded on AIM.

"The reason we decided to consider the AIM market was because of discussions I've had with directors and executives in Nasdaq-listed companies," said Randal Charlton, CEO of Asterand. "They confirmed that the effect of Sarbanes-Oxley was to add significantly to the cost of maintaining a Nasdaq listing.

"The broad figure was that if you don't have $100 million in revenue, then don't think about going on Nasdaq," he said, adding that certain Nasdaq-listed firms had told him it would "cost at least a million a year to comply" with Sarbanes-Oxley.

The merger was announced in September and completed early this year. What was left was Asterand plc, publicly listed on AIM. Although it did not raise money at that time, it plans to do so.

"In 2007 and beyond, hopefully by that time, the investors will have confidence that we have the company headed in the right direction," Charlton told BioWorld Financial Watch.

U.S. investors can purchase Asterand shares, although the fees are higher since the company is UK listed. Being on AIM also has meant more work - Charlton has had to "go out and beat on doors of fund managers all over again," to raise awareness for his firm, and while it finally got its first analyst report (a positive one), it "took us five months to do it."

Not to mention more time spent in airplanes.

"That is the truth," Charlton said, who had just returned from London. "I've been over there once a month since the merger. You have to have a presence there."

The Trouble With SOX

Born from the corporate scandals that helped devalue the U.S. markets a few years ago, Sarbanes-Oxley (SOX) was supposed to provide transparency for investors. And perhaps it has, but the cost of complying with its regulations might be slowly eroding Nasdaq's position as the No. 1 market for smaller, innovative companies.

Martin Graham, director of market services at LSE and head of AIM, told registrants at the London Edge Initiative that SOX "has been a disaster."

"I won't bore you with my thoughts on U.S. regulation," he said.

That attitude - a rolling of the eyes when the topic is mentioned - is common. Transgene SA, based in France and developer of gene-based therapeutic vaccines and immunotherapy products for cancer and infectious diseases, went public in 1998, raising about $57 million through a simultaneous listing on Nasdaq and the Nouveau March market. Although it maintains a listing on the Eurolist Paris, it delisted from Nasdaq this year in frustration.

"It's always cost vs. benefit," said Philippe Archinard, Transgene's CEO, and the cost of SOX was no longer worth it for Transgene, which was suffering from low trading volume on Nasdaq anyway. He acknowledged that SOX was meant to protect investors but told BioWorld Financial Watch it can have a deleterious effect on small firms and was the main reason for the delisting.

LSE's Graham said that for a company with a $75 million to $750 million market cap, it costs on average $1.2 million annually to maintain compliance with Sarbanes-Oxley regulations. It's tough to get an exact handle on what it costs, but others have suggested his estimate is accurate.

A few bottom-end examples shed some light. A new company with a market cap of £100 million issuing shares on the main market of the LSE would pay an admission fee of £46,451. It would pay £4,122.50 annually to LSE to keep that listing, again based on a £100 million market cap.

A company seeking admission to AIM would pay a fee of £4,340, with the same amount due yearly to maintain that listing.

Things aren't drastically more expensive on Wall Street. Admission fees for the Nasdaq National Market are based on the number of shares scheduled for the initial listing. The fee for a company listing up to 30 million shares would be $100,000 ($5,000 non-refundable), and it increases from there. The annual fee for Nasdaq National Market also depends on the number of shares - for up to 10 million, the fee is $24,500.

But throw in the costs of SOX compliance, and many small companies are being pushed out of the game. Much of those costs come from paying independent auditors to verify company books - something not required on LSE. Companies on LSE report figures just twice a year, saving time and money, and while accounting methods aren't that different, said Richard Stewart, CEO of Amarin Corp. plc, the UK doesn't require "Pricewaterhouse to sign off" on all the bookkeeping.

Amarin is focused on central nervous system disorders. Thursday it announced that it had achieved its target enrollment of 300 patients in its North American Phase III trial of Miraxion in Huntington's disease. It is due to begin selling its shares on AIM on July 11, going along with its Nasdaq listing.

"We view [AIM] as a mechanism of adding additional investor interest in Europe," Stewart said. Forty percent of the company's institutional investors are European, some of which are "precluded from buying Nasdaq-listed stocks," he said.

Amarin was public before Sarbanes-Oxley came into effect, so "we had to comply with SOX," he said, "but for those that had the choice, I think they would look at AIM very carefully."