Trends in Healthcare IPOs (AVRX, CRYO, EICU, NHWK)

by: The Wall Street Transcript

Excerpt from The Wall Street Transcript's 6/12/06 interview with Renaissance Capital money manager Linda Killian:

Ms. Killian: One of the areas that we like a lot, which is kind of a new sector, is medical technology. We have two holdings in this area, NightHawk Radiology Holdings (NHWK) is a company that does remote readings of radiology. So if you go into a hospital and you have an X-ray or an MRI, instead of having to wait 24 hours for the radiologist to look at your sonogram or your MRI, this is done remotely by Board certified physicians who will then analyze your charts and send that analysis back immediately to the hospital. Hospitals like it because they don't have to have a lot of radiologists on staff; they can have one or two supervisory radiologists, but they can get very fast, high quality service.

Visicu (EICU) is an innovative company founded by intensive care physicians at Johns Hopkins University who, realizing that there are shortages of trained ICU staff throughout the US, wanted to automate and improve patient care in intensive care units. They were able to do this with centralized intensive care analytic units that use intelligence to monitor patients and thus, the supervising doctors and nurses are able to monitor these seriously ill patients on a 24/7 basis much more closely than if they were physically making rounds because there is not one second when a patient's body temperature, activities, and blood pressure are not being monitored.

TWST: There have been quite a lot of healthcare IPOs this year. Is this a growing trend?

Ms. Killian: I'm not sure that it is increasing right now. The trends in health care today reflect different underlying characteristics than they did 10 years ago. Back in the 1990s, the number of biotechs was driven by breakthroughs in genomics and the speculation about significant new drug discoveries. However, that initial excitement has not come to fruition. While we have not seen a whole lot of successful little biotechs come forward, there is a lot of money in venture capital that has been devoted over the past 10 years to biotechnology and small pharmaceutical company development. The trend now is for these venture-backed small pharmas to acquire late stage drugs so that they will be able to deliver a near-term revenue stream. Some of these companies have research pipelines with novel drug candidates; some don't. Virtually every biotech deal that comes to market is part of a venture portfolio.

It has, quite honestly, been a very mixed bag of companies and they're hard to assess because so much of their future value is going to play out in how well they do in the late stage clinical trials. Experience over the years has shown us that the results of the larger Phase III trials can be dramatically different from Phase I or Phase II trials. But I would say that right now, we're not seeing more or less than we saw last year; it is about the same.

Investors have gotten smarter about small pharmaceutical companies and biotechs ' they want good science, experienced management and a reasonably sized market opportunity. Most biotech investors own a portfolio of stocks, knowing that only one or two of them will commercialize a significant drug. It's not surprising that the biotechs are well represented in the list of worst performing IPOs. The overall second worst IPO performer over the last 12 months was CryoCor (OTCPK:CRYO), which is involved in developing a new system to treat chronic atrial fibrillation. Another one was Avalon Pharmaceuticals (AVRX), which is looking for new leukemia and lymphoma treatments.