Bad Medicine Hits the IPO Market

The initial public offering market for health care ended the year in much the same way it behaved throughout 2004 -- lots of deals and lots of disappointments.

The good news is that underwriters engineered 50 public offerings of medical companies in 2004, which is more than the combined total of 44 from the prior three years.

The not-so-good news is that of those 50 IPOs, underwriters cut offering prices on a whopping 60% of the issues to bring them to market, according to Greenwich, Conn.-based Renaissance Capital. For all other IPOs, the rate of discounted offerings was 29.5%.

"The only IPO market faux pas was the medical market," said David Menlow, president of IPO Financial Network in Millburn, N.J. "It was a very trying time for us to see this force-feeding of issues" by underwriters. "Investors didn't want these deals at those prices."

Many discounted deals involved biotech companies; some IPOs were discounted more than once before finding willing investors. Many of those health care IPO offering prices were more than 40% below the initial range.

Renaissance Capital calculates the discount by dividing the offering price by the midpoint in the original price range. Thus, Memory Pharmaceuticals ( MEMY), which had a $7 offering price, went public at 50% below the midpoint of its original price range of $13 to $15.

Memory was one of 30 medical IPOs that hit the market below their original price ranges. In fact, 14 of the 15 IPOs with the biggest rates of discounted offering prices were health care companies.

For medical companies, "2004 was a good year in general because they were able to raise money," said Melanie Hase, a Renaissance Capital analyst. "But the negative was that companies in early-stage testing of products were priced at a discount. It was great that investors were willing to invest, but they weren't willing to take such a risk at an early stage."

Healthy Returns
The best-performing health care IPOs in 2004
Company & Ticker Dec. 29 Closing Price Change From Offering Price
Kinetic Concepts (KCI) $75.93 +153.1%
Syneron Medical (ELOS) 30.18 151.5
Eyetech Pharmaceuticals (EYET) 45.27 115.6
Source: Renaissance Capital

Stock Market Ills
The worst-performing health care IPOs in 2004
Company & Ticker Dec. 29 Closing Price Change From Offering Price
Xcyte Therapies (XCYT) $2.66 -66.8%
Corgentech (CGTK) 8.11 -49.3
Corcept Therapeutics (CORT) 6.75 -43.8
Source: Renaissance Capital

Seventeen health care IPOs, or 34% of the total, went public at prices above their original price range. Among other IPOs, the rate of offering prices exceeding their price ranges was 13.9%.

However, 56.6% of these non-medical IPOs had offering prices that matched their original price ranges, confirming Menlow's observation that investors liked what they saw when presented with a non-medical IPO. Among health care IPOs, only three companies, or 6%, went public at prices that matched original price ranges.

Looking to 2005

Menlow suggested that 2004's experience won't sink in for underwriters, or their clients, in 2005 for the assortment of biotech, pharmaceutical, medical device and health care services IPOs bubbling under the surface.

"I think investors will respond to the conditions in the marketplace," Menlow said. "Underwriters will try to lead investors to the water trough. The question is: Will they drink?"

There are at least 15 medical IPOs waiting for acceptable market conditions, says Renaissance Capital. That figure excludes the two medical IPOs that were postponed and seven others that were withdrawn in 2004.

Hase said medical IPOs, especially biotech IPOs, need an improving economy to stimulate investor interest. "In the last few years, the window for biotech companies was shut," she said. "With improving market conditions in 2004, the window was open."

Hase said biotech companies seeking to go public in 2005 will get a better reception if general economic conditions improve; if they have experienced management; if they have a product on the market or in late-stage clinical testing; and if they have a marketing and/or development partner.

Eyetech Pharmaceuticals ( EYET), which has Pfizer ( PFE) as a partner, meets all of those criteria, Hase said. Eyetech went public at $21 a share in late January; its drug Macugen for wet age-related macular degeneration was recently approved by the FDA. Its stock closed Dec. 29 at $45.27, about $4 below its historical high.

Crunching the Numbers

If you're counting sheer volume, then 2004 was a good year for medical and health care IPOs. The 50 health care deals accounted for 23.1% of all IPOs in 2004, just ahead of the 42 deals (21.8%) in the high-tech field.

In dollar terms, medical deals raised a total of $3.6 billion, placing fourth among the categories compiled by Renaissance Capital. The 42 financial IPOs raised $13.2 billion, followed by 47 technology IPOs worth $9.22 billion and 19 business services IPOs worth $4.4 billion.

But medical IPOs tended to produce more big losers than big winners. Of the top 20 performing IPOs in 2004, three were health care companies. They are Kinetic Concepts ( KCI) (whose stock rose 153.1% from its offering price); Syneron Medical ( ELOS) (up 151.5%); and Eyetech (up 115.6%).

Kinetic Concepts, which provides wound-healing products, ranked eighth among all IPOs. Syneron, which provides laser systems for removing hair and wrinkles, ranked ninth. Eyetech ranked 19th.

Three of the five worst-performing IPOs were medical companies, as were seven of the 20 worst performers, when comparing offering prices to Dec. 29 closing prices.

Xcyte Therapies ( XCYT), which is working on drugs for cancer and infectious diseases, lost 66.8% of its market value. Corgentech ( CGTK), which is developing drugs to prevent vein graft failure, lost 49.3%. Corcept Therapeutics ( CORT), which is working on drugs to treat psychiatric and neurological diseases, dropped 43.8%. Xcyte was the second worst performer among all IPOs; Corgentech was fourth; and Corcept was fifth.

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