Biotechs Face New Year Hangover From IPO Overhang - TheStreet

Venture capitalists could be dumping a blizzard of biotech stocks onto the market early next year, dampening demand for the risky paper.

That's when a record number of six-month lockups expire for the bumper crop of biotech

IPOs that hit the market this year. After lockups expire, early investors and other insiders can sell the shares they may have picked up for pennies, generating hefty gains.

According to

Lehman Brothers

, lockups on 22 biotech IPOs are slated to expire between Jan. 13 and Feb. 10, the largest number ever. If the early venture capital investors offer all their stock, more than 367 million shares will hit the market.

Of course, the extent of VC stock sales depends on a number of factors, including the strength of the market and VC fund demands for capital to reinvest. But recent experience suggests that investors are more wary than ever of pending lockups and are selling in advance of these overhangs, possibly to buy the stock back later on the cheap.

Pressure

"It's a real issue," says Rick Young, biotech analyst with

Stephens

, a regional broker in Little Rock, Ark. "There are a lot of people looking at lockups as a way of shorting stocks."

Lehman, for instance, found that 10 biotechs whose lockups expired in October were trading down 24% in the two weeks prior to their expirations. And as a group, the 22 stocks that are slated for lockup expiration early next year were already trading down 50% from early October, compared to a 16% drop for the large-cap dominated

Amex biotech index

in the same period.

"The influx of stock

could act as a negative catalyst and effectively kick the group over the edge," warns Rachel Leheny, Lehman biotech analyst, in a note.

Genome Fever

Although analysts say it's difficult to gauge the effect of lockups at a time when the biotech indices are trending down and investors are dumping stock for tax-loss purposes and because of worries over an economic slowdown. Still, oversupply only means rising stock prices during phases when momentum-crazed investors are gripped by Internet or genome fever.

Of course, bulls see a silver lining to the lockup expiration cloud: the shower of new medical treatments nourished by the billions invested.

After years in the doldrums, the biotech market caught fire in late 1999, prompting more than 50 companies to file for IPOs this year in the U.S., raising some $4 billion, according to

CIBC World Markets

. Another 40 held follow-on offerings, raising another $15 billion in near billion-dollar offerings from companies including

Celera

(CRA)

,

Human Genome Sciences

(HGSI)

and

Millennium

(MLNM)

.

"These fund raisings planted seeds that will bring a huge positive inflow of new products that will drive cash flow and profits," says David Saks, manager for

Gruntal Medsciences

fund, a New York biotech and drug fund. Lockup expirations, he says, "are going to be a glitch in the trading that could be used as a buying opportunity."

Others agree. "Success or failure in clinical trials is the main driver of these stocks," says Tom Neale, fund manager with the

(RSSCX) - Get Report

Wilmington Small Cap Core fund, which has about 13% of its $97 million invested in biotechs like

Protein Design Labs

(PDLI) - Get Report

. "Technical issues

like lockup expirations are meaningful, but more of an accentuator rather than an initiator of stock movements."