Wednesday, August 12, 2009

Health Care IPOs: Is that A Breeze?

Just one day after Cumberland Pharmaceuticals priced its shares, Emdeon followed suit, setting industry watchers abuzz. Could it be it's time to resurrect the acronym IPO? (Just in case you need a reminder, it's pronounced 'eye-pee-oh' and stands for initial public offering and yes, we'll use it in a sentence.)

There was clearly more investor enthusiasm for Emdeon's New York Stock exchange offering than Cumberland's NASDAQ listing. Cumberland priced it's shares $2 below the estimated range, and opened flat in its first day of trading, resulting in an $85 million raise. In contrast, the health care IT company, which processes half of all electronic medical bills in the U.S., debuted at the top of the estimated $13.50 -$15.50 range, and increased by 10% the number of shares sold to meet investor demand. The upshot? The company (founded only in 2006) and its PE backers sold 23.7 million shares--just under 11 million and 13 million respectively--and raised a total of nearly $370 million in the process.

Did someone just open a window? Was that an IPO breeze we felt?

Michael Brinkman, managing director of healthcare investing at Piper Jaffray & Co. thinks so. In an article in BioWorld Today, he proclaimed "the market is open." Based on interviews with roughtly a dozen buy-side investors, Brinkman thinks there are buyers for good biotech IPOs right now, but cautioned said financiers might not say the same thing 90 days from now given the fragility of the market.

How 'bout that for confidence? As we said in this post we're hard-pressed to proclaim a renaissance of biotech IPOs based on Cumberland offering. And Emdeon's IPO doesn't change our opinion one bit. Neither company, after all, shares many traits with the majority of cash-hungry discovery and development firms in venture capitalists' stables.

Take Cumberland, not so much a biotech as a specialty pharmaceutical play, founded back in 1999 with little internal research capability. The outfit currently markets three approved but largely undifferentiated products, including an antidote to acetaminophen poisoning. Acetadote, and an intravenous version of ibuprofen called Caldolor. Sound like a biotech to you? (If you said yes, we have another factoid worth consideration: Cumberland is profitable.)

Then there is Emdeon, another company with products and revenues--$444.4 million in the six months ending June 30, up 5% from the same period one year earlier. With its focus on linking health care providers like hospitals, pharmacies, and docs to private and public insurers, the start-up appears to provide a much needed solution to the overabundance of paperwork contributing to skyrocketing healthcare costs. And whatever health care plan is ultimately adopted by Congress, technical solutions like Emdeon's are a no-brainer and can count on bipartisan support from legislators. But Emdeon ain't biotech; it's information technology applied to health care.

It's not too surprising that the first US IPOs we've seen since ARYx raised money in 2007 are fully baked companies with products and revenues. Their less risky business plans fit the appetite of investors who are keen to avoid the gambles associated with drug discovery, especially after the financial jitters of the past year. Moreover, the offerings continue a trend started in February, when Bristol-Myers Squibb spun off its nutritional and infant formula maker, Mead Johnson, in an oversubscribed IPO worth $720 million.

For VCs, who've been saying for the past year (at least!) that they are building companies for acquisition not IPO, neither the Cumberland or Emdeon IPO is likely to spark a wholesale change in strategy. Let's be honest: neither company fits the profile. It took ten years to bake Cumberland, hardly a time frame that would capture VC interest. Emdeon may have only incorporated three years ago, but the technology has been around for far longer since it was cooked up by Healtheon, one of the grand-daddies of e-medicine.

And neither outfit listed venture backers as principal shareholders in their SEC filings (yes, we do read them). Aside from individuals, Cumberland's largest shareholder was S.C.O.U.T. Healthcare Fund, which is managed by Lawrence Greer, a Cumberland executive director. Emdeon's principal shareholders include private equity plays General Atlantic Partners and Hellman & Friedman.

Still, VCs are likely to welcome the news as a sign that the public markets, which have been frozen since well before the financial collapse of 2008, are finally thawing. Both offerings are a necessary first step if investors are ever going to return to funding more traditional biotech start-ups and are in-line with the increase in secondary offerings and traditional venture commitments we've been seeing recently (see our regularly Financings of the Fortnight edition for more on those deals).

Indeed, that's the reaction of many VCs we canvassed in a highly informal email blast after Cumberland announced its offering Monday night. One source replied:

"The venture industry is back to producing some high quality companies and public investors will realize they can buy these at relatively low prices, hold, and sell later at a higher price. The market is moving that direction again. IPOs will return, starting with the later-stage, lower-risk, lower-return companies, and moving towards earlier-stage, higher-risk, higher-return companies."
Who else is likely to test the IPO waters near-term? NycoMed, which earlier this week inked a deal with Forest Labs for its Phase III COPD drug Daxas, and also counts private-equity among its backers, is one possibility. Talecris, the blood plasma products developer that filed to go public last year and then shelved its offering because of a proposed merger with the Australian hemostasis player CSL, is another obvious candidate. Recall that planned tie-up fell through earlier this summer after the Federal Trade Commission opposed the deal. It's no secret the company's backers, Cerberus Capital Management and Ampersand Ventures, are eager for an exit. Need more prooof? In late July, Talecris filed updated registration statements with the SEC.

Notice some themes here? PE is looking for exits. Neither company is exactly a start-up biotech.

We'll likely know in a few months if the gentle breeze strengthens to a mighty IPO wind. Here's hoping.

(Image by flickrer rachelcreative used with permission via a creative commons license.)

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