Companies find ready market for IPOs

Several factors, including market stability, are making this a good time for businesses to go public, according to research from Chicago-based BDO USA.
Wendy Hambleton, partner in the capital markets practice at BDO USA, explains why the U.S. IPO market is likely to reach "pre-crisis levels" this year. Photo courtesy of BDO USA.

When Northbrook-based Nanosphere has needed capital, it has been able to find it, including on the open market.

The company, which makes advanced molecular diagnostic systems, has raised $300 million to date, including government grants, private equity and $103 million from a 2007 initial public offering after paying $10 million in related expenses. It closed a secondary offering of 15.7 million shares last month, raising about $32.1 million for working capital, said Roger Moody, chief financial officer.

“The funding allows us to establish a wide footprint so we get our systems placed in many, many hospitals,” Moody said. The firm, which employs 120 and has 150 patents plus 50 pending, isn’t yet profitable but does have its diagnostic systems in 50 hospitals and medical clinics. “This (funding) is what allows us to get to break even and generate cash flow,” Moody said.

 The ongoing credit crunch, combined with increased stability in the stock market, has encouraged small businesses to seek funds through initial public offerings or follow-on stock offerings, experts said. And many investors, confronted with the prospect of low returns elsewhere, are turning to small-cap stocks due to favorable market conditions.

IPO market gains strength

Executives at leading investment banks expect the number and size of initial public offerings on U.S. exchanges to continue climbing this year, suggesting a turnaround, according to a recent survey conducted by accounting and consulting firm BDO U.S.A. “2011 is looking like it could be the year where we get back to the pre-crisis levels,” said Wendy Hambleton, partner in the capital markets practice at BDO U.S.A., which is based in Chicago. “Deal numbers are up, and deal sizes are up,” she said.

New York-based Dealogic reported 90 companies went public on U.S. exchanges from January 1 through June 20, raising $29.15 billion. That compares with about $60 billion raised in about 270 initial public offerings in 2007, the last strong year before the market collapsed in 2008, Hambleton said.

Deal size in the United States has swelled due to pent up demand, Hambleton said. Many companies postponed initial public offerings when the market was down, and venture-capital and private-equity firms held on to portfolio investments longer than planned. As a result, many companies going public today are larger and more established than in other periods, she said.

During all of 2010, 170 companies went public, raising a total of $44.49 billion, up 64 percent in total dollar volume from $27.06 billion in 2009, when 64 IPOs were completed, Dealogic reported.

Follow-on stock offerings also climb

Follow-on stock offerings declined in size and number in 2010, to $171.56 billion raised from 625 stock offerings from $232.94 billion raised in 672 offerings in 2009, Dealogic reported. But the trend appears to be reversing. This year to date, 335 companies have issued follow-on offerings, raising $97.91 billion, Dealogic reported.

“The factors that make it a good market for an IPO are good across the broad market,” Hambleton said. “The market likes stability, regardless of whether it’s an IPO or an existing public company.”

Based on responses to a BDO survey of capital markets executives at leading investment banks, the market will likely strengthen. Nearly six out of 10   executives surveyed said they believed U.S. IPO activity would continue increasing during the second half of this year, and 18 percent said they expected a substantial increase.

Technology still hot

The hottest industries for IPOs include technology, with 74 percent of investment bankers surveyed predicting an increase, followed by energy, health care, biotech and media/telecom, according to the survey.

Besides investor demand for hot new stocks, the ongoing credit crunch also means more small business owners are weighing a public offering, Hambleton  said. When considering whether to go public, small business owners should keep in mind that investors generally favor companies that are profitable and show signs of stability, Hambleton said. In certain sectors, such as biotech, investors don’t necessarily expect profitability early on, she said.

Nanosphere posted a net of loss of $40.6 million in 2010, compared with a loss of $33.9 million in 2009. The company reported revenue of $2.0 million in 2010, down from $2.2 million in 2009, due to a decline in contract revenue. Product sales rose to $1.4 million in 2010 from $1.1 million in 2009.

Capital to prove the concept

While Nanosphere’s IPO in 2007 and recent follow-on offering were well-timed, the company doesn’t deliberately play the market, Moody said. “We raise money when the company needs to fund operations,” he said. “We hope when we need the money the market is ready.”

Besides broadening its footprint, the company is working on new early-stage research projects that require capital to prove the concepts, Moody said. Its diagnostic tests are based on nanotechnology that allows for quicker test results and earlier detection of diseases. For example, its test for troponin helps emergency room medical staff detect heart attacks faster, he said.

In the past, doctors had their choice of diagnostic tests that were typically slow and accurate or fast but inaccurate, Moody said. Nanosphere has “bridged the two worlds” by providing tests that are fast and highly accurate, he said.

While the company has found a ready market for its diagnostic tests, the costs involved with developing new technology and getting regulatory approval have postponed the break-even point.

Flush with new funding, the company plans to add jobs, particularly to market and distribute it products, Moody said.

— Ann Meyer