The good news is that the IPO market for biotech stocks is receptive to new offerings.
The bad news is that the valuations and size of the offerings are well below expectations.
This usually means that 1) your bankers aren’t doing their homework, or 2) they are blowing smoke up your tailpipe, or 3) both.
If you haven’t been through an IPO it is a process representative of a peacock mating ritual. You pitch to 70-80 potential investors. Your bankers will then circle back with the investors to get a level of interest. Over the course of the roadshow that interest will become less or greater depending on a whole host of variables many of which have nothing to do with your company. As you get closer to pricing these indications of interest become soft or hard circles on share orders expected to be placed.
A day before pricing the order book is pulled together which dictates final demand of the deal. There is always a level of over-subscription that is desired because 1) it helps determine the final pricing and 2) you need trading in the aftermarket to support the stock. It is at this point that the downsizing happens if the orders are not as great as were once thought.
Yesterday Anacor (ANCR) priced 12 million shares at $5 per share, down from 4.7 million shares at a expected range of $14-$16 per share. Earlier this week Zogenix (ZGNX) priced 14 million shares at $4 per share down from an expected 6 million shares at $12-$14. A few weeks ago Complete Genomics (GNOM) sold 6 million shares at $9 instead of an expected $12-14. On the other end of the scale Pacific Biosciences (PACB) priced at $16 back in October only to slide 25% from offering price in November.
To reiterate, the good news is that investors are buying the shares albeit at a lower price. Instead of increasing expectations of management and existing shareholders underwriters need to be more realistic in approaching the market to make it a win win for all. An investor doesn’t just wake up one day and say “I don’t like it at $12 but I do at $5”.
A year ago nobody could get out. Now they are and that should be viewed as positive news. It’s time to get real.