Wall Street wants proof of progress

The IPO pipeline is jammed with 19 life science startups. But VCs need to think twice before advising their companies to make the jump into the public market. Of the 16 VC-backed biotech and medical device companies that went public in the first half of the year, about one-third are trading below their IPO prices. Many cut their offering spreads even before investors sent their share prices south.

Not surprisingly, the winners were those companies that could show progress toward regulatory approval for their products. Novacea, for example, posted positive clinical results for its DN-101 anti-cancer drug about a week after its offering. Analysts ate it up and the company’s stock price shot up about 40% over its offering price.

Sounds impressive, until you realize Novacea’s underwriters cut its offering price to $6.50 from an initial spread of $11 to $13. No wonder the stock has performed well in the aftermarket. And it certainly didn’t hurt that New Enterprise Associates upped its commitment, buying into the IPO. Still, NEA Partner Mike Rabb has no regrets: “We did the right thing by accessing cheaper capital,” he says. —Alexander Haislip