For the last couple of years, the market for initial public offerings of biotechs had been shut tight, locked, and barred. But what started as a small crack last year has grown wider over the last couple of months, as the capital markets have gotten strong enough to support many more entrants.
Let's face it: IPOs are exciting. The idea of getting in on the ground floor of the next Dendreon
Company |
IPO Date |
IPO price |
Yesterday's Closing Price |
Increase (Decrease) |
---|---|---|---|---|
Alimera Sciences |
4/22/10 |
$11.00 |
$10.95 |
(0.5%) |
AVEO Pharmaceuticals |
3/12/10 |
$9.00 |
$9.31 |
3.4% |
Anthera Pharmaceuticals |
3/1/10 |
$7.00 |
$7.02 |
0.3% |
Ironwood Pharmaceuticals |
2/2/10 |
$11.25 |
$13.18 |
17.2% |
China Nuokang Bio-Pharmaceutical |
12/10/09 |
$9.00 |
$6.80 |
(24.4%) |
Omeros |
10/8/09 |
$10.00 |
$6.15 |
(38.5%) |
Talecris Biotherapeutics |
10/1/09 |
$19.00 |
$18.59 |
(2.2%) |
Cumberland Pharmaceuticals |
8/10/09 |
$17.00 |
$10.56 |
(37.9%) |
Source: The Burrill Report and Capital IQ, a division of Standard & Poor's.
One of these stocks is not like the others
Do you see it in the table? It's not that hard to miss. Ironwood is the only contender with a decent post-IPO return.
There doesn't seem to be any news to explain the nice return since its IPO in February; investors just appear more interested in Ironwood's lead drug, linaclotide, than they were previously. And with good reason.
The drug, which is partnered with Forest Labs
Ironwood is a drug developer, but it's not a particularly risky one, and investors seem to like that.
Another slam dunk … except it wasn't
Cumberland seemed like a safe bet. When the company IPO'd last summer, it already had three FDA approved drugs: an antidote for overdoses of acetaminophen, the active ingredient in Johnson & Johnson's
With Cumberland, no one factor seems responsible for the damage to the share price; investors just haven't been able to get excited about the drug company. With just $0.01 per share in profits in the fourth quarter, down from the year before, who can blame them?
To increase its share price, Cumberland needs to create a buzz. Increasing profits seems like the easiest way to accomplish that.
Let someone else find the homeruns
David Gardner's third sign of a Rule Breaker -- strong past price appreciation -- is especially useful when looking at post-IPO drug companies. Raising money is an integral part of drug development, and it doesn't stop when a company sells shares at its IPO. Unfortunately, secondary offerings are a necessary evil of the business.
It's much easier to raise those funds if your stock has risen. For one thing, investors are more likely to buy the newly-offered shares. More importantly, at a higher price, current shareholders see less dilution from the secondary offering.
Instead of looking to buy on the day a stock debuts, consider putting the stock on your watch list and waiting for shares to increase. Sure, you'll miss some price appreciation, but the increase in value can actually decrease the risk in owning the drugmaker. Avoiding the Cumberlands is just as important as finding the Ironwoods.