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Investors looking for contradictions easily found them in the initial public offerings for medical companies last year.

And there's a good chance they'll see a repeat performance this year, meaning plentiful offerings, many withdrawn IPOs and numerous deals in which underwriters have to knock down the offering prices.

In 2005, for the second consecutive year, medical IPOs outnumbered any other category, according to Renaissance Capital, a Greenwich, Conn., firm that provides research on new offerings. Last year, there were 34 health-care IPOs among the 194 offerings. Most were drug, biotech or medical-device companies, but Renaissance Capital's health-care category also includes services companies.

The health-care field also produced a sickening number of withdrawn IPOs, or deals that were pulled from the market. Fourteen of 45 IPOs withdrawn last year had a medical connection.

Medical IPO hopefuls and their underwriters "have to understand that investors are very picky," says Melanie Hase, an analyst at Renaissance Capital. "Investors are wary because many small companies fail."

Another measurement of investor wariness is the final offering price vs. the initial offering price. Using this yardstick, medical IPOs have done poorly.

Hefty Discounts

Last year, 24 of the successful health-care IPOs -- 70% of the total -- had final offering prices below their underwriters' original efforts. Among nonmedical IPOs, 36 companies, or 23% of the rest of the new offerings, went public at prices beneath their investment bankers' initial proposals.

In 2004, three-fifths of medical IPOs were discounted vs. 30% of the nonmedical IPOs.

Renaissance Capital measures the amount of the discount by comparing the midpoint of an IPO's original price range to the final offering price. For example, if the initial range is $9 to $11 and the final price is $8, Renaissance says the IPO was discounted 20%, or $10 minus $8.

Hase says there could be considerable discounting in 2006 among medical IPOs if the lineup is similar to the last two years. The formula for discounted IPOs includes companies with inexperienced management, a lack of marketing or licensing deals with bigger companies and products that are in early stages of clinical trials.

The riskiest IPOs are biopharmaceutical companies. "Especially with products in early stages of development, the investor risk is huge," Hase says.

Hase expects many health-care companies to try IPOs in 2006 as long as the general economic climate remains good. Renaissance counts 21 potential health-care IPOs waiting in the wings. Of those firms, 13 are drug or biotech companies, two are medical device makers and the others provide services.

IPO analyst David Menlow says underwriters will keep trying to take medical companies public even if products are in early-stage testing and even if the companies don't offer a clear timetable for commercializing their creations.

"There is a tremendous proclivity in pushing the envelope in biopharmaceuticals," says Menlow, president of the IPO Financial Network in Millburn, N.J. Menlow says he's always amazed at the "feeding frenzy mentality" of investors betting on biotechs that don't provide firm guidance for research and commercialization.

"They're investing in perception rather than reality," Menlow says. "That's part of the reason why people got into trouble in the 1990s." He's referring of course to the biotech/ Internet/ technology boom.

Menlow says he's encouraged that 14 medical IPOs were withdrawn last year because it demonstrates some discipline among investors. "The key is the buyer," he says. "The supply is always there."

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Menlow counsels biotech IPO investors to focus on companies with experienced management, products in late-stage clinical trials and marketing or licensing agreements with larger firms. Potential buyers "need to take a disciplined and structured approach," he says. "They need to understand the product."

Winners & Losers

Last year's medical IPOs were split between companies whose stocks closed above or matched their offering prices and those that fell below.

Happy investors could pat themselves on the back for picking

Adams Respiratory Therapeutics

( ARXT),

China Medical Technologies

( CMED) or

Threshold Pharmaceuticals


, each of which gained more than 100% from their offering price to their closing price on Dec. 28.

These stocks were among the top 12 performers of last year's IPOs. Adams Respiratory Therapeutics placed fifth with a 147% gain.

Those who weren't as lucky bet on

Avalon Pharmaceuticals

( AVRX),





( FVRL), each of which lost more than 40% from their offering price through Dec. 28.

Five of the 13 worst IPOs were health care-related. Avalon was No. 3 on the list, as its stock fell 57% from its offering price.

Closing prices tell only part of the IPO story, and one illustration is Threshold Pharmaceuticals. To people who bought the stock after the company went public, their investment looked very good -- up 114%. But to insiders hoping for a giant payday from an IPO, the investment didn't look as good.

The offer price was 53% below what underwriters wanted. Threshold's investment bankers envisioned an IPO at $14 to $16, but then they cut the price to $8 to $10 before settling on $7 in early February.

Threshold's pricing represented the second-biggest discount last year. The largest belonged to

Advanced Life Sciences Holdings


, whose $5 offer price was 58% below the first range. By the end of last month, the stock was trading at $3.58 a share.

Eight of the 16 biggest discounted offering prices belonged to medical companies. The shares of four of those eight closed below their offering prices as of Dec. 28.