On Tuesday, the chair of the Federal Reserve warned that valuations in biotech stocks were stretched, which sparked a selloff across the sector. On Friday, the week's only biotech IPO, Sage Therapeutics (SAGE), spiked 67% on its first day of trading after it priced above the range. TubeMogul (TUBE), a SaaS platform provider for digital video ads, jumped 64% after slashing its range. Since May 1, 57 IPOs averaged first-day pops of 11%, which was surpassed by each of today's 5 IPOs. Pricing pressure and unanticipated demand had a noticeable impact on the week's IPOs, as none priced within their originally proposed range.
Inside job: Half of the week's IPOs added insider buying
When insiders demonstrate their commitment by purchasing shares at the IPO price, investors view it as a sweetener to the deal. Four the the week's eight IPOs had insider buying: the three weakest performers (Globant (GLOB); Roka (ROKA); CareDx (CDNA)) and TubeMogul, which gained 64% on its first day. TubeMogul is notable for including an additional $5 million of insider buying when it slashed its range, so that insiders purchased 57% of the deal. Additionally, insiders from TerraForm Power (TERP) bought $65 million of shares in a concurrent private placement.
Year's 40th biotech IPO has the sector's 5th-best debut
Sage Therapeutics, an early-stage biotech developing treatments for life-threatening epileptic seizures, popped 67% today. The company had large backers and, while early stage, its initial results are very positive in a potentially large market with an unmet need. 40 biotechs have raised $2.65 billion in 2014, and Sage had the 5th best debut for the group, and the 9th best across all 156 IPOs. Sage's follow-through could prove more challenging, as the four biotechs with higher first-day returns have averaged -18% since their outstanding debuts. Another epilepsy biotech, Marinus Pharmaceuticals (MRNS), set terms for its IPO in two weeks, and is no doubt hoping for a response similar to Sage's.
Power-hungry investors continue to seek yield
Only one IPO raised over $100 million this week: TerraForm Power, the spinoff of SunEdison's solar power assets. The company operates a portfolio of solar assets under long-term fixed-price contracts, It completes the separation of SunEdison's two main business lines, after its silicon wafer business (SEMI) went public in May. Yieldcos spun out of energy companies have been well-received, with June's Abengoa Yield (ABY) and NextEra Energy Partners LP (NEP) both up 38% after they priced above the range.
TubeMogul slashes range and spikes 64%, almost reaching original midpoint
TubeMogul priced 42% below its original midpoint, the steepest discount of 2014 for a private tech company's IPO. The company traded up 64% to finish the day at $11.50, still below the original $12 midpoint. TubeMogul seems to have targeted an aggressive initial valuation, given that recent adtech IPOs have had poor trading, including 2013 IPOs Tremor Video and YuMe, as well as April IPO The Rubicon Project (RUBI).
Of note, technology companies like Yodle, Yodlee, Mobileye and Box have held back their IPOs, as TubeMogul was the only tech to set terms in the past two weeks. Tech IPOs typically have a quick turnaround from when they initially file.
Two IPOs with a tech-angle price below the range and trade up
Globant, an Argentina-based IT outsourcer focused on mobile, cloud and big data, gained 13% after pricing below its range. The IPO had insiders selling 46% of the deal, but later added insider buying, an unusual circumstance. Trupanion (TRUP), which offers medical insurance coverage for cats and dogs, priced its IPO nearly 30% below the midpoint. The company relies heavily on its website, which attracts 85% of new members, yet investors may have valued it more in line with a traditional high-growth property insurance company.
Two diagnostics companies trade flat after a valuation haircut
Even after insiders lent a lifeline on IPOs that priced below the original range, the week's two diagnostic companies, Roka Bioscience and CareDx, ended the week flat. Roka, which claims its equipment is faster and more accurate at testing food for pathogens like Salmonella and Listeria, has booked significant losses so far with high customer concentration. CareDx sells molecular diagnostic tests for heart transplant patients, and while it has experienced high growth, the company also remains unprofitable, with an accumulated deficit of $161 million.
The week's smallest deal, iRadimed (IRMD), traded up 41% after pricing above its range. The company makes non-magnetic IV infusion pumps that are safe to use in MRIs.
| IPO pricings (week of July 14, 2014) | ||||
| Company (Ticker) | Business | Deal Size ($mm) | IPO Price vs. Midpoint | Return as of 7/18 |
| Sage Therapeutics (SAGE) | Biotech: Life-threatening seizures | $90 | 20% | 67% |
| TubeMogul (TUBE)* | SaaS platform for digital video ads | $44 | -42% | 64% |
| iRadimed (IRMD) | MRI-safe IV infusion pumps | $13 | 14% | 41% |
| TerraForm Power (TERP) | Spinoff of SunEdison solar assets | $502 | 25% | 32% |
| Trupanion (TRUP) | Medical insurance for cats and dogs |
$71 | -29% | 14% |
| Globant (GLOB)* | Argentina-based outsourced IT | $59 | -17% | 13% |
| Roka Bioscience (ROKA)* | Food safety testing equipment |
$60 | -20% | 0% |
| CareDx (CDNA)* | Diagnostics for heart transplants |
$40 | -38% | 0% |
IPO market snapshot
So far this year, 156 IPOs have raised $32.3 billion and produced an average first day return of 15%. Since reaching a high-point two weeks ago, total returns for recent IPOs (past 90 days) fell from 23% to 16%. Aftermarket follow-through is down from 13% to 6%. As mentioned in Wednesday's IPO Pipeline Update, more IPO candidates may see the window closing and try to go public before the late August dry period, as seen by the 15 IPOs that set terms this past week.
The Renaissance IPO ETF (symbol: IPO), a float cap-weighted basket of newly public companies and indicator of post-IPO performance, has gained 1.0% compared with +7.0% for the S&P 500. Over the last 30 days, the IPO ETF has fallen 2.4% compared with +1.1% for the S&P 500, as investors expressed renewed concerns over unproven and unprofitable companies. The active IPO pipeline includes 137 companies looking to raise a total of $51.4 billion.
