Brian O'Connell
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Some savvy scribe once said that initial public offerings were Wall Street's version of a Christmas gift. Investors shook
the boxes for weeks, admired the colorful wrapping, and wondered just what was inside. When the big day came, presents were
opened and opinions were formed that could either help or haunt a new publicly traded company for months, even years. What
companies didn't want was the investment equivalent of returning their "gifts" the morning after Christmas.
Hey, it's no coincidence that the term "Black Friday" is used primarily to describe Wall Street and the post-holiday shopping
season. Traders use the term to describe the epic 1929 stock market disaster, and retailers cite Black Friday — the day after
Thanksgiving — as the day that can make or break their year, from a financial point of view.
Yes, I know it's only September and the holidays are months away, but I like the comparison between Christmas gifts and IPOs
— particularly biotech IPOs.
Investors tend to get excited when biotech companies go public, even if it's against their better nature. A knowledgeable
investor realizes the odds are against you when betting on a new biotech issue. According to Pharmaceutical Research and Manufacturers
of America, FDA approves only one out of five drugs that survives to get into human clinical trials. And, of 20 select biotech
IPOs reviewed by the investment firm Burrill & Co. in 2004, only four have rolled out within their initial price range.
Wait, there's more if you can take it. IPOFinancial.com reports that about 25% of life sciences firms that introduced IPOs to the market in a 52-week period from spring 2003 through
spring 2004 are trading above their offering price.
Merry Christmas
The good news? For starters, the overall life sciences market outperformed the broader financial markets through the first
half of the year (Table 1). That means biotech IPOs can count on some momentum going forward into the last half of the year.
There are more positive developments on the biotech IPO front. The industry entered 2004 with a strong balance sheet — about
$16 billion in cash and a wide-open pipeline full of new drugs and products. With FDA approval of 25 new drugs in 2003 (up
25% from 2003), investors had good reason to look forward to a spate of new biotech IPO rollouts in 2004. Indeed, Wall Street
analysts expect 2004 to be a windfall year for biotech companies, with revenue growth estimated at 20% and sales expected
to reach $47 billion in 2004.
Bumps in the Road
With a firm foundation for growth, you'd think the industry would be chock full of IPO success stories so far this year. Unfortunately,
that just hasn't happened.
Whether it's a perceived glut of biotech IPOs or uncertainty over — pick one — the economy, the war on terror, the presidential
race, the Red Sox pitching — investors have generally shied away from new biotech issues, to the point where companies are
being forced to cut the pricing of their IPO shares just to make a deal with underwriters and get out on the market.
