Last year was an active one for medical IPOs, and this year looks likely to keep pace.

There were 36 medical companies that went public in 2006, the third-largest number since 1999 when IPO-tracking firm Renaissance Capital started keeping records.

However, 78% of those medical companies went public at a discount to insiders' hopes and underwriters' expectations -- the worst performance ever for medical IPOs, says Renaissance Capital. By contrast, only 32% of last year's 162 non-medical IPOs went public at discounted prices.

Renaissance Capital defines a discount as the difference between an IPO's offer price and the midpoint of the price range first pitched by underwriters. For example, if a company seeks a range of $9 to $11 a share and it goes public at $5, the discount is 50%.

Medical IPOs, especially biotech offerings, are notorious for discounts. Even in 2000, the best year for medical IPOs, 44% of 80 public offerings were discounted.

Last year, "investors' risk tolerance may not have changed, but they wanted a bigger reward," says Melanie Hase, a vice president at Renaissance Capital. In this case, a bigger reward translates into a discounted offer price because investors won't pay an underwriter's sticker price.

The most vulnerable to discounts are companies that lack products on the market, have compounds in preclinical or early-stage clinical trials and/or don't have a wealthy partner to help develop and commercialize their products.

Last year, 72% of all IPOs were profitable, but most of the unprofitable ones were biotech and emerging technology companies, according to Renaissance Capital data.

"It's a very tenuous environment," says David Menlow, president of the IPO Financial Network. "Biopharmaceutical companies going public are considered damaged goods until they prove different."

Assessing the ideal climate for medical IPOs isn't easy; but there are a few signposts. "A stronger economy opens the window of opportunity," says Hase.

Vigorous merger and acquisitions activity could heighten prospects of companies trying to go public, adds Richard Peterson, director of capital markets for Thomson Financial. A rise in M&A deals "is a general statement of optimism and confidence in the future," he says.

The 2007 Roster

Medical mergers, acquisitions, licensing deals and collaborations have been hot, and analysts predict more action this year. Peterson says medical IPOs, especially biotech deals, are more idiosyncratic than other public offerings. Sometimes, a business sector can get hot, leading to a batch of IPOs. "In biotech, it's a product-specific-driven vehicle," he says.

Experts say investors should expect many deals and many discounts for medical IPOs this year. Early in the year, Renaissance Capital identified 26 medical companies that wanted to go public. Seven had come to market as of Feb. 8.

True to form, the first medical IPO of 2007, Oculus Innovative Sciences ( OCLS), was discounted. It went public at $8 a share on Jan. 24, down from its original price range of $12 to $14. Three other medical IPOs have gone public at discounts, too.

But medical device maker Accuray ( ARAY) went public at a higher price than underwriters originally requested and also had a spectacular first-day gain. Accuray went public Thursday at $18 vs. the underwriters' original range of $14 to $16. The stock closed at $28.47.

Despite their track record for giving insiders smaller-than-expected paydays, medical companies can still reward investors handsomely once they go public.

The 2006 Winners & Losers

Renaissance Capital says Omrix Biopharmaceuticals ( OMRI) had the second-best total return among all 198 IPOs last year when comparing offer price to the closing price on Dec. 29. Omrix, which priced its offering on Dec. 15, was up 203% by year-end, two weeks later. Acorda Therapeutics ( ACOR) placed fourth with a gain of 164%.

Acorda's total-return was aided by a big discount; underwriters wanted to go public at $11 to $13 a share; but they settled for $6. Omrix's underwriters wanted $15 to $17 a share; but they accepted $10.

Three of the five worst IPOs last year were health care companies -- Alphatec Holdings ( ATEC), down 59% from its offer price to the Dec. 29 closing price; Cardica ( CRDC), down 53%; and Restore Medical ( REST), down 47%.

To add insult to injury, each of these medical device makers went public at discounted offering prices. IPO experts say device companies usually do better than biotech companies because the former often have products already on the market.

Like most medical IPOs, these big total-return losers and winners raised less than $100 million apiece last year. One notable exception was Warner Chilcott ( WCRX), which raised $1.06 billion in September. Warner Chilcott is an established maker of dermatology and women's health care products. However, it has something in common with its small-cap brethren. It went public at $15 a share, below the $17 to $19 range that its underwriters first proposed.

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