IPO VIEW-Biotech IPO spurt to test U.S. market

* Seen as test for risk appetite

* Market welcoming for biotech firms -analysts, investors

* Aging population may bolster support for the companies

By Alina Selyukh and Clare Baldwin

NEW YORK, Feb 4 (Reuters) - A string of initial public offerings by small U.S. drug companies is putting investors' appetite for risk under the microscope, offering bare balance sheets but the possibility of profits from growing healthcare demand.

Pain drug maker Pacira Pharmaceuticals (PCRX.O) and Endocyte Inc (ECYT.O), which makes drugs for cancer and inflammatory diseases, went public this week. Next week, oral testosterone maker Clarus Therapeutics, pain drug maker AcelRx Pharmaceuticals and antibiotic maker IASO Pharma plan to go public.

None of the companies is profitable and some don't even have revenue.

That's not unusual for biotech companies, which spend a lot on research and development and cannot sell their drugs until the U.S. Food and Drug Administration approves them -- but a successful flotation requires a healthy IPO market.

Such deals can be a tough sell for IPO investors, who are already taking a risk on an unvetted company and may not want to take a chance on something that has yet to start making money.

"The risk of default is very, very large," said Josef Schuster, founder of Chicago-based IPO investment firm IPOX Schuster.

But, he said, "If you hit the home run, they can triple or quadruple."

With such uncertain prospects, biotech IPOs all but dried up during the financial crisis. Bioheart Inc's meagre $5.8 million IPO on Feb. 19, 2008, was the only one for that entire year and through August 2009, according to Ipreo, which provides capital markets data and analytic services.

Now that U.S. stocks are on a tear and investors are clamoring for higher-return opportunities, money managers are eager to revisit the portion of their portfolios devoted to riskier stocks -- and face a handful of choices.

"The environment right now is showing that people are very comfortable (with these companies) even though there is a lot of volatility," said Robert Francello, head of equity trading for Apex Capital in San Francisco.

"They don't need that much capital . . . the bigger the risk, the smaller the investment," Francello said.

A senior investment banker agreed.

"I think what you are seeing today is there is more of a bid on the speculative side," the banker said.

LOOKING FORWARD TO AGING

All of the biotech offerings in the United States this week and next are small, under $100 million.

The spurt of these IPOs began with Pacira and Endocyte, which raised roughly the amount they had planned but struggled to set terms, ultimately slashing their offering prices and offsetting them with a bigger number of shares sold.

The offer price discounts are also a common feature for biotechnology IPOs, which historically have discounted offerings 8.7 percent compared with 1.5 percent for the rest of the market, according to Ipreo.

Endocyte climbed almost 29 percent to $7.73 on Friday when it made its market debut. Pacira, which began trading on Thursday, has been mostly flat since, adding only 3 cents to its $7 IPO price.

It's not clear what will happen to the companies or their drugs but there are some signs of optimism.

For example, underwriters for the IASO Pharma Inc IPO next week -- Ladenburg Thalmann & Co, Boenning & Scattergood Inc and Maxim Group LLC -- have warrants allowing them to buy shares for 110 percent of the IPO price after the deal closes.

That means the banks would only make money from the warrants if the stock rises at least 10 percent.

Setting aside the specifics of the individual companies, part of what may be driving faith in the untested drug makers is growth expectations for the healthcare sector.

More than 40.6 million Americans, or just under 35 percent of U.S. adults, are currently between the ages of 44 and 65, according to the latest U.S. Census data. As they age over the next two decades, the number of Americans over the age of 65 will more than double and so raise the need for healthcare products and services.

"Not only do you have the market doing much better to insulate you from a lot of market moves, but a whole generation is getting older, so you see the interest in the industry as a whole," Francello said. (Reporting by Alina Selyukh and Clare Baldwin; Editing by Gary Hill)