2007: The Year Of Biotech IPOs?

We have all read, including in these pages, that biotech IPOs are dead. Indeed, IPO pricing remains low, keeping returns for insiders to a minimum. The valuations of IPOs make venture capitalist investment in development-stage companies an even more dicey proposition than it was before. But the numbers for biotech IPO investors – at least in 2006 – tell a somewhat different story.

The volume of biotech IPOs was up in 2006, from 16 in 2005 to 21 last year – small numbers, but still a 31% increase. More significantly, after-market returns were up from an average of 7% to almost 40%.

Four of the biotech newbies broke 100% by year end: Omrix Biopharmaceuticals (OMRI) up 203%, Acorda Therapeutics (ACOR) higher by 164%, Vanda Pharmaceuticals (VNDA) up 147%, and Osiris Therapeutics (OSIR) 130% higher (see box). In fact, across all industries, Omrix was #2 overall, Acorda #3, Vanda #6 and Osiris #7, making biotech the strongest sector among the top 10 IPOs of 2006.

Of course, there were a few dogs in 2006, with eight of the 21 IPOs down at year end. The biggest losers were Replidyne (RDYN) down by 43%, SGX of San Diego (SGXP) off 42% (why did they go public?), and Catalyst CPRX) lower by 20%. As mentioned, pricing was a big challenge last year, with almost all the biotech IPOs pricing below their target ranges. If memory serves correctly, only Affymax (AFFY) hit its target range and rose from there.

In fact, it’s interesting to note the divergence in biotech IPO performance. Either they were way up (26% or more), or down (except for Targacept (TRGT), which was essentially flat). The most recent IPO, Affymax, jumped 36% since its issue on December 15th.

Significantly, the biotech IPOs of 2006 blew away Centient’s CBT200™ biotech index, which was down just under 1% at year end. In fact, if you had invested $1,000 in each of the 21 IPOs, you would have made $8,190 – not a bad return.

So maybe there is a market for biotech IPOs, and 2007 could prove to be the strongest market since before the 2000 bust. Companies with products, revenue and a proven market generated a strong return in 2006. But, if you were weak, the market ate you alive – witness SGX.

If you have put all the pieces together in your biotech company, you might want to go for an IPO this year. Otherwise, you’d better wait, or – if your investors are looking for a quicker return – find a friendly acquirer.

Disclosure: Author has no position in the above-mentioned stocks.