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LipoScience (LPDX) made its public debut on Friday, January 25th. Shares of the diagnostic company based on nuclear magnetic resonance technology ended their first day with gains of 16.1% at $10.45 per share. Shares extended their gains in the first three weeks after the offering, closing at $11.00 per share on the past Friday.

The Public Offering

LipoScience has developed the NMR LipoProfile test which directly measures the number of low density lipoprotein particles in the blood, which provides good information about the risk for heart diseases. So far, some 8 million tests have been ordered and the automatic analyzer system "Vantera" has been cleared by the Food and Drug Administration. LipoScience sold 5.0 million shares for $9 a piece. LipoScience raised $45 million in gross proceeds in the offering process. Based on the offer price of $9.00, the company is valued at approximately $125 million.

Despite the opening day pop in the share price, the offering was disappointing. The offer price was set far below the preliminary $13-$15 price range set by the firm and its bankers. In total, 36% of the company's shares outstanding were offered. At Friday's closing price of $11.00, the firm is valued at $153 million. The major banks that brought the company public were Barclays, UBS and Piper Jaffray.

Valuation

LipoScience hopes that the Vantera system will become the clinical standard of care, to assess a broad range of cardiovascular, metabolic and other diseases.

The company reported annual revenues of $45.8 million for 2011. The company reported a net loss of $0.5 million for the year, and a loss of $1.2 million attributable to common shareholders. For the first nine months of 2012, the company generated revenues of $41.2 million, up 24% on the year before. The company reported a profit of $1.1 million for the period.

LipoScience expects to receive roughly $45 million in gross proceeds from the offering, or roughly $39 million in net proceeds. The company will use the proceeds to pay dividends on preferred stock, hire more sales and marketing personnel and fund future research and development programs. Based on Friday's valuation of $153 million, the market values the firm at 2.8 times 2012s expected annual revenues of $55 million. The company is on track to report a modest profit for the year.

Investment Thesis

As noted above, the offering of LipoScience has not been a great success despite the strong returns on the initial day. While shares are trading some 22% above the offer price of $9.00, they are still trading some 21% below the midpoint of the preliminary offer range of $13-$15 per share.

In the days leading into the offering, the offer range got revised downwards to $9-$10 per share. This is quite disappointing, given that the company received the clearance for its Vantera systems approximately 6 months ago. As such, the system can be used on a decentralized basis, while it is only used at one location at the moment. LipoScience expects to deliver the first system to clinical laboratory customers in the first quarter of 2013.

Investors are relieved despite the large discount of the offering. Shares did bounce back in the first day of trading as the long term fundamentals are good, especially after the FDA approval. Problematic is that the company expects to report significant losses in the next years, as the company attempts to standardize its LipoProfile test as industry standard.

I remain on the sidelines for now, unsure about the pace of the rollout of the Vantera systems and the degree of operating losses in the medium term future. At the same time, the company is breaking even at this point in time, and it grows revenues at an aggressive pace. I await the coming quarterly reports, and the developments of the Vantera sales, before making up an opinion.

Source: LipoScience - Disappointing Offering In A Strong Public Offering Season