Pharma IPOs Are Good Medicine

NEW YORK ( TheStreet -- Health care stocks may be making a full recovery thanks to the Supreme Court's recent ruling to upholding the Obamacare mandate.

For one, the court's decision could lead an increase in M&A deals in the second half of 2012. Uprooted legacy business models have opened up new opportunities for both health care and pharmaceutical sector, according to a recent survey by PricewaterhouseCooper.

In the pharma sector, PwC believes the big names will right size their portfolios with divestitures by selling off assets that are no longer core revenue generators or in key markets. The good news for some companies is that capital is likely to used for tuck-in acquisitions or to beef up their emerging markets agendas. Customers are asking firms to lay out all strategic options for them, whether it is finding a buyer, divesting a business or going public, says PwC's Tim Hartnett.

The IPO market could benefit as well. So far, new offerings from health care companies have been few and far between in 2012. According to Renaissance Capital, only 6 deals have been done year-to-date in the sector with total proceeds of $400 million. The average first day of return has been 2.8%, but the average total return is a healthy 37.1%. Not too shabby.

The deals tend to be small pharmaceutical companies looking for public money in order to complete their clinical trials. Cancer drugs just don't seem to wow the market like they once did. As a result, many of these offerings tend to drop their prices right before they hit the market, making them even better deals.

Supernus Pharmaceuticals ( SUPN) originally planned to price shares in the range of $12-$14, but ended up pricing in April at $5. Shares of the company, which makes epilepsy and ADHD drugs, closed Friday at $13.26, or a return of 165%. Supernus recently announced it's received a tentative letter of approval from the Food and Drug Administration for Trokendi XR, a proposed extended-release treatment for epilepsy, and expects to launch its first drug in 2013.

NewLinks Genetics ( NLNK) makes cancer drugs and had originally planned to price at $11, but ended up debuting at $7. The stock finished Friday at $12.70, up 81.4%.

Another example is Clovis Oncology ( CLVS), which priced at the bottom of its planned range of $13-$15.00. The stock finished Friday at $19.64, up 51%. So, it does seem that with the drug company IPOs flying under the radar, investors are getting well-priced stocks.

The only recent bomb so far was last year's Horizon Pharmaceuticals ( HZNP). The stock came to market at $9, and closed Friday at $7.20, down 20%. The arthritis drug maker is expected to get some news this month from the FDA regarding its time-release formula for the steroid prednisone.

There are now 15 healthcare deals in the pipeline with two scheduled for the next two weeks. Hyperion Therapeutics which hopes to price in the range of $11-$13. They are developing a drug called Ravicti that reduces the amount of ammonia in the blood. It is under FDA review. Hyperion plans to use the proceeds for completing the clinical development of Ravicti and the commercial launch. They seem confident.

Meantime, Globus Medical is a medical device company that specializes in products that promote spinal healing. Its price range is $16-$18 per share and the company is hoping to go public in the first week of August.

The use of proceeds description in Globus Medical's prospectus is a bit of a red flag. The real purpose behind the offering seems to giving employees a way to sell their stock; otherwise, they have no plans.

The filing states, "We do not have any specific uses of the net proceeds planned, nor have we determined the amounts that we will actually spend on those uses." It goes on to ask investors to just trust management's judgment on how best to spend the money. If they aren't sure about how to use their proceeds, I would think investors might want to wait on that one.

Biotech offerings were once the darlings of the IPO world, but got pushed aside by hip Internet stocks. As a result of their wallflower status, investors are getting some great prices. That makes up somewhat for the risks they take buying drug companies that have yet to make any money or earn FDA approval.

Call it the wellness side effect.

-- Written by Debra Borchardt in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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