Medical IPOs Still Cursed

Firms in the health sector are again finding it difficult to go public without a sizable discount.
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Initial public offerings of medical companies came at a furious pace during the first half of the year, outnumbering IPOs in 10 other business categories.

It's likely that insiders at many of these medical firms were furious, too. Three-fourths of the companies went public at prices below what they and their investment bankers had been expecting.

Discounted offerings have been common among biotech and drug debuts over the years, but 2006 has been an especially big disappointment, says the IPO-tracking firm Renaissance Capital.

During the first six months of this year, 16 of 21 medical IPOs went public below their original suggested offering price, according to the firm's Web site,

www.IPOhome.com. Four IPOs entered the market at a premium to their original price, and one matched the projected price. Since midyear, there's been one more medical IPO, and it also was discounted.

By comparison, eight of 16 medical IPOs went public at discounts during the first half of 2005. In 2004, Renaissance Capital says 17 of 31 medical IPOs were below the price that had been sought.

By Aug. 22, a whopping 78% of medical IPOs came out below their hoped-for price. Among all other IPOs, the rate was 26%.

Renaissance Capital calculates discounts by comparing the final offering price against the midpoint of the initial price range suggested by investment bankers. For example, if an IPO's initial range is $11 to $13 and the offering price is $6, the discount is 50%.

Discounted IPOs are distressingly common among biotech companies as they try to raise more money to finance later-stage clinical trials. Unless they make licensing deals with a partner or find venture capitalists willing to invest even more money, these start-ups "have no choice," says Melanie Hase, a vice president at Renaissance Capital. "In essence, they're going public too early. They don't often get what they're asking for."

When the general economic climate turns sour, "biotech firms always get hit the hardest," she says. That means they must accept a lower-than-desired price or postpone their IPO until things improve, Hase adds. Six medical IPOs have been withdrawn this year.

Makers of medical devices usually have an easier time going public -- even in tough times -- especially if they already have products on the market, Hase says. But they can run into problems, too. This year's results feature a number of disappointing offerings from device companies.

If device makers don't secure adequate reimbursements from Medicare and Medicaid, they will face difficulties getting their devices covered by private insurers, thus discouraging their IPO prospects, Hase says. The best bet for investors gambling on a device-company offering is to find one with strong existing sales, a good market opportunity, favorable reimbursement rates, good distribution and experienced management.

Despite the problems, medical IPOs continue to flood the market. Among 11 business categories, such as technology and financial services, medical IPOs led the pack during the first half of 2006, says Renaissance Capital. Medical companies also produced the most IPOs in 2001, 2004 and 2005.

The first-half total of 21 medical IPOs in 2006 is greater than the full-year totals in 1999, 2002 and 2003.

Even more could be on the way. This year, 25 health-related companies have announced their intention to go public, Renaissance Capital says.

For the first half of the year,

Accorda Therapeutics

(ACOR) - Get Report

and

SGX Pharmaceuticals

(SGXP)

experienced the worst performances in the sector. Each went public at $6, a 50% discount.

Luna Innovations

(LUNA) - Get Report

, a specialty chemical company, also went public at $6 and a 50% discount. Nine other medical IPOs had offering prices that were discounted by 25% to 46%.

Investors holding shares of discounted medical IPOs will no doubt hope for a comeback for their investments. If their companies' initial offerings were discounted, then perhaps the stocks could produce a nice gain down the road, according to the glass-is-half-full philosophy.

Unfortunately, that hasn't been the case this year. Renaissance Capital says that as of Aug. 22, 17 medical IPOs were trading below their offering price, including Accorda and SGX Pharmaceuticals.

Unlike big offerings, such as

MasterCard

(MA) - Get Report

at $2.4 billion, or

Pacific Airport Group

(PAC) - Get Report

at $871 million, most medical IPOs are relatively small. This year, only five were above $100 million, including four that barely surpassed that amount.

The biggest was

HealthSpring

(HS)

, a managed-care company that raised $367 million. HealthSpring was one of four medical companies that went public at a premium this year, pricing in early February at $19.50, or 14.7% above its original price range.

The best premium for a medical IPO came from

Visicu

(EICU)

, which went public in early April at $16, or 33% above its initial range. Visicu provides patient-monitoring tools for intensive-care units.

NightHawk Radiology Services

(NHWK)

also went public at $16, a 23% premium. NightHawk reads and analyzes X-rays, CT scans and MRIs.

Earlier this week, NightHawk and HealthSpring were trading just above their offering prices, but Visicu was trading well below its IPO price.