IPOs: A Financing Event

Posted by | August 16, 2010

IPOs - A Financing EventOn the heels of continued IPO activity, there has been a flurry of media coverage — both positive and negative — regarding the companies that have gone public and the overall macroeconomic environment. Most recently, there has been a lot of coverage of one of Safeguard’s partner companies, NuPathe, which is developing a single-use transdermal sumatriptan patch for the treatment of acute migraine, called Zelrix™.

While Q3 2010 data is not yet available, it’s important to note that the second quarter of 2010 witnessed the best quarterly total for venture-backed initial public offerings (IPOs) since the fourth quarter of 2007, according to the exit poll report by Thomson Reuters and the National Venture Capital Association (NVCA). The quarter ended with 17 venture-backed IPOs, marking the third consecutive quarter for increased offerings, by number and by dollar amount.

While the NVCA commented that the “exit activity” showed continued momentum during the second quarter as a result of the IPOs, from Safeguard’s vantage point, an IPO does not equate to an “exit” event for our partner companies. Instead, today, we look at the IPO as a financing event.

For all of our partner companies, we believe that three financing options exist:

  • Raise capital in public offering;
  • Receive additional capital from existing capital providers/investors; and/or
  • Receive additional capital from strategic partners to ultimately fund longer term initiatives.

For pre-revenue life sciences partner companies Tengion (IPO’d on April 9, 2010, Nasdaq: TNGN) and NuPathe (IPO’d on Friday, Aug. 6, 2010, Nasdaq: PATH), both companies went public in order to gain access to capital to advance their products through the FDA regulatory process and ultimately to commercialize their products and technologies.

The fact that both companies priced below their initial targets is more a reflection of the sluggish market than it is on the company and/or its technology. There is a lot of uncertainty out there regarding where the economy is heading, global impact, etc. However, the fact that NuPathe priced at $10 in a week of bad economic news demonstrates the promise of its technology and the management team.

In analyzing these companies’ IPOs, I think it’s critical to look at the entire picture versus a single stock chart with no context of the macroeconomic environment.

Of the 17 IPOs in the second quarter 2010, five were trading at or above their offering prices as of June 30, 2010, according to the NVCA’s quarterly report — that’s only 30 percent of the companies — evidence that there are more factors at play in public markets and that continued economic uncertainty has resulted in a lot of volatility. Coverage by The Wall Street Journal and Seeking Alpha on recent IPOs pricing below initial targets echoes our sentiment about the macroeconomic environment.

Under Safeguard’s current management team, Safeguard has deployed $176 million of capital into its high-growth life sciences and technology partner companies. We believe that the potential for several exit transactions over the course of the next year is real. Ultimately, quality companies always attract attention, and we believe that there are quite a few in our portfolio.

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