Markets & Finance

IPOs to Approach with Caution


The lazy days of summer are not usually a great time for companies looking to go public. And the current uncertainty that seems to grip the markets—even when they're climbing—means that this year could be worse than most. Last week, Five for the Money looked at initial public offerings that might be able to brave the tough conditions (see BusinessWeek.com, 6/28/06, "Five IPOs That Are Worth a Look"). This week, it's the unhappy flip side: companies whose public debuts could meet with a rough reception on Wall Street.

The companies on our list are not widely recognized brands. And amid the current instability, some market watchers say initial offerings from known entities will have greater appeal to investors. Successful offerings from J. Crew (JCG) and MasterCard (MA) appear to have borne this out, though it's worth pointing out that Vonage (VG), an exemplar of all that can go wrong in an IPO, is also a well-known consumer name. More important, each company on the list has specific characteristics, such as no available products, big-name competitors, or a history of red ink, that can make investors jumpy even in calmer times.

These five offerings present one other very tricky challenge to investors: pricing. While companies aiming to maximize IPO proceeds hope to price their deals at the high end of expectations, they may settle for a markdown in their eagerness to make it to market. A price drop can sometimes present opportunities for investors, especially those with a high tolerance for risk, but it is often interpreted as a sign of weakness by market players.

"Many people call it a buyer's market," says Suzanne Skipper, managing director of equity capital markets at investment firm Merriman Curhan Ford & Co. Of course, at the right price any of these might be worth the chance. Even so, with so few IPOs rocketing up on their first trading day, investors might do well to stay on the sidelines as these five candidates come to market.

1. First Solar

Just try to find a hotter topic than alternative energy. Unfortunately for First Solar, buzz is not the only ingredient to a successful IPO. The company manufactures solar modules based on a so-called thin-film semiconductor technology. The process, it says, is far cheaper than existing crystalline silicon and could eventually enable it to compete with fossil-fuel-generated energy. It looks like a phenomenal opportunity, but will its Credit Suisse and Morgan Stanley-led offering wow the market?

First Solar is beginning to deliver numbers. It reported sales of $48.1 million in 2005, up from $13.5 million in 2004, and reduced its net loss from $16.8 million to $6.6 million. It expects its net losses to increase this year as it looks to expand.

If other recent alt-energy IPOs are any guide, First Solar may not be received with open arms. The recent pricings of two profitable ethanol companies were mixed despite soaring demand and sharply higher per-gallon prices for the corn-derived fuel. In their offerings, VeraSun Energy (VSE) jumped on its first trading day while Aventine Renewable Energy (AVR) priced at the top of its range but is now trading below the offering price. In recent months the markets have also been lukewarm on solar outfits such as Evergreen Solar (ESLR) and SunPower (SPWR).

2. Amicus Therapeutics

When appraising small biotech outfits, investors like to see an enormous potential market and a drug pipeline with a strong chance of reaching it. By that standard, Amicus Therapeutics, which is developing drugs to treat certain human genetic diseases, might be going to the IPO well a bit early.

The company's lead product, a treatment for Fabry disease, a disorder in which the body cannot properly break down lipids, is in a midstage clinical trial, a process that will likely last several more years. Its proposed therapies for Gaucher disease and Pompe disease, both of which are also enzyme deficiencies, are less advanced in their development. The company says its therapies are designed to improve the functioning of the proteins in cells instead of the enzyme-replacement therapies now used in treatment.

Amicus has backing from big-name venture capital firms such as New Enterprise Associates. And the lead underwriters are Morgan Stanley and Goldman Sachs. Even so, investors might want to sit tight while the pipeline progresses.

3. Bidz.com

Though this online jewelry auctioneer has improved its numbers of late, there are indications that investors are dubious. Last week the company delayed its planned offering of about 6.2 million shares at $8 to $10 each. It has revised the terms of the deal to 3 million shares to price between $7 and $8, less than half the initial offering. ThinkEquity Partners and Pacific Growth are the lead underwriters.

While Bidz.com has a decent following—in 2005, it says, about 200,000 customers bought through its auctions—it faces daunting competition from industry giant eBay (EBAY) and a number of second-tier players. However, the company has been profitable since 2004, boosting revenue from $47.7 million in 2003 to $90.6 million in 2005.

Tom Taulli, an author who has studied IPOs and is an adjunct professor at the University of Southern California, says Bidz.com is a "small company [that] has a small niche." And the recent delay of the offering is another strike against it. "For these smaller Internet companies, investors are focusing more on the negative than the positive," he says.

4. BioVex Group

BioVex Group, a small biotech company that is developing cancer therapies, illustrates some other hazards of investing in young therapeutics companies. The company's lead product uses an "oncolytic virus technology" that is designed to destroy tumors while avoiding healthy tissue.

The company says that in clinical trials the treatment has shown that, in treating some cancers, it "destroyed" tumors without the side effects associated with chemotherapy and radiation treatments. However, it is still in midstage trials for melanoma and other cancers, with several years before the possibility of it becoming commercially available. And in trying to address cancer, BioVex is likely to encounter more competition than a company like Amicus, which is striving to dominate a much smaller niche.

The company, which is being led to market by Janney Montgomery Scott and Stifel Nicolaus, is also developing a vaccine for genital herpes, but it has not yet begun the long clinical-trials process. At this point, BioVex has no product revenues—it has received funds from "potential collaborative partners."

One other thing that might make an investor think twice: According to BioVex's SEC filing, the company's "independent accountants have expressed substantial doubt about our ability to continue as a going concern."

5. Artes Medical

As appearance-conscious baby boomers grow older, the potential for products that rejuvenate their fading looks seems enormous. Artes Medical is trying for a slice of the pie with a treatment to smooth facial wrinkles. However, given the company's current financial situation, investors might want to hold off on judging Artes, at least until its signature product appears.

Artes has developed ArteFill, a substance made partly of calfhide-derived collagen, that is designed to fill in the face to prevent sagging and wrinkles. Designed as a permanent solution to wrinkles, the company believes it is superior to existing treatments like Allergan's (AGN) Botox, which paralyzes away wrinkles but must be reinjected periodically.

The company expects to receive product approval this year. But it is not a proven outfit. As of the end of March, it had an accumulated deficit of about $61.1 million and its development-stage net losses increased from $6.1 million in 2003 to $22.2 million in 2005. Of course, a safe, effective product that makes older people look younger could make that $61 million look like a mere wrinkle. With its hopes riding on an offering led by Cowen & Co. and Lazard, for Artes, the trick will be reaching maturity while it hawks its own version of the fountain of youth.


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