Two more biotech drug makers conducted initial public offerings (IPOs) yesterday and joined the stock market listings. Pharmion
These two join a spate of recent biotech entries, including Myogen
The media take is that when stocks of newly public companies fail to rise beyond their offering price, they have "disappointed." Disappointed who, I ask (leaving "whom" in the dust, so don't bother e-mailing me)? Nothing could be farther from the truth.
IPOs are financing events for companies, period. Think about it. Companies go public to raise money. An IPO is a liquidity event that allows investors -- company founders, venture capitalists -- a market in which to sell their shares and reap the rewards for their entrepreneurial risks, and to fill the company treasury with cash necessary for survival, development and expansion.
That's why companies go public at two times: When the market is wildly enthusiastic about its industry and when the company is absolutely desperate for cash. Are these times you want to get in?
No. The only time you want to buy early is the rare case where investment bankers misjudge demand and underprice the stock. This is very, very rare -- think eBay
To find the occasional and rare biotech or other IPO opportunity, do the same research you would with any other investment. If you think that a private company offering shares represents an opportunity, first read its S-1 (Registration Statement) filed with the SEC and available through www.sec.gov.
For Pharmion and NitroMed, you would find that the first has products on the market and the second none, and that while revenues are rising rapidly for both, each is losing money. Examine cash burn per quarter and gauge how much longer the projected IPO cash will last at that burn rate.
Motley Fool Senior Analyst Tom Jacobs writes the monthly investing column for the journal Nature Biotechnology.