May 18, 2008 / 2:28 PM / 11 years ago

Stem cell IPO faces long odds

NEW YORK (Reuters) - The odds would seem to be against an initial public offering for a biotech company with no profits and no products on the market, but stem-cell company Aldagen evidently feels lucky.

The company registered with U.S. regulators on May 9 to publicly offer up to $80.5 million worth of common stock, even as the credit crunch dampens investor demand for IPOs.

“These are the worst capital markets for biotech in the last five years,” said Steve Brozak, an analyst at WBB Securities. “Their technology is good, but it’s a tough equity market.”

Aldagen has extra difficulties, too — it is working on drugs that involve stem cells, which have proven to be a difficult part of the biotech market to navigate. Chief Operating Officer Ed Field declined to comment.

“There has never been a small stem-cell company that has issued an IPO and then been successful in bringing products to market,” said Amy Stevens, an analyst at the Susquehanna Financial Group. “It’s completely uncharted waters and that’s the highest risk associated with the companies.”

These waters have made many investors seasick as the majority of publicly listed stem cell shares have suffered heavy declines.

StemCells Inc’s STEM.O shares have dropped more than 40 percent over the past year and shares of Aastrom Biosciences Inc ASTM.O have fallen more than 70 percent.

Neuralstem Inc (CUR.A) and NeoStem Inc NBS.A have plunged more than 47 percent and 69 percent respectively since their August debuts on the American Stock Exchange. And BioHeart Inc BHRT.O, which went public in February, has lost over a third of its market value since its first day of trading.

“Stem cell stocks have contributed to a lot of tax losses for investors,” Brozak said.


Aldagen harvests its stem cells from tissues, which are not exposed to the same political controversy afflicting embryonic stem cells.

Aldagen, which has four drugs in various stages of clinical trials, plans to use the proceeds of the IPO to fund testing, develop new products, and market therapies, according to its prospectus.

In April, the Durham, North Carolina-based company raised more than $18 million in a private placement of convertible preferred stock.

Before moving ahead with its offering, analysts said they would expect Aldagen to wait for exuberance, or at least a little more optimism, to return to the IPO market.

Aldagen may also look for signs of confidence from health care companies, Brozak said. For example, if large pharmaceutical companies acquire or partner up with stem cell firms, Aldagen may be emboldened to move ahead with its IPO, Brozak said.

Companies like Aldagen might also watch how secondary offerings of larger biotechs fare in the public market. If the markets digest these types of offerings well, it might signal the time is right to price its shares, Stevens said.

Valuing a company without profits is tricky, but in the case of stem-cell companies, investors often ignore the income statement and focus on the potential revenue of products the company has in its pipeline, said Ren Benjamin, an analyst at investment bank Rodman & Renshaw Capital Group Inc.

Discounting revenue for a company not yet turning a profit was a common way of valuing Internet stocks in the late 1990s.

But Aldagen’s drugs may not generate outsized revenue.

Its most developed drug, a therapy that speeds patient recovery after blood transplants, is in the final stage of FDA testing, but is unlikely to set the world on fire.

“It looks just one level better than treatments already out there,” Stevens said. “In this current market, stem cell companies have been going after the lower hanging fruit — addressing unmet needs while choosing therapies that will not be likely to cause deaths to patients.”

Editing by Brian Moss

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