Market Watch : IPO Test for Cruttenden
It’s tough enough to find buyers for blue chip stocks nowadays. Yet Newport Beach-based brokerage Cruttenden & Co. is taking the gutsy step of trying to sell a new stock offering of a virtual start-up company. If Cruttenden can pull it off in this bear market, it may earn a lot more respect from its larger competitors.
Cruttenden is working with brokerage Dain Bosworth Inc. in Minneapolis to launch the initial public offering of Irvine-based Oncotech Inc. The firm, incorporated in 1985, has developed new technology that can help doctors determine which types of treatment are most effective for different cancer patients.
The potential market for Oncotech’s tests is huge: More than 1 million people are diagnosed with cancer each year in the United States. A major problem is that doctors often aren’t sure which treatment is best for an individual patient. Some tumors, for example, are highly resistant to chemotherapy. But a doctor may have no idea how the tumor--or the patient--will respond until the treatment is well under way.
Oncotech’s tests use tumor tissue samples to determine whether the tumor will react to particular treatment regimens. The big payoff from the tests is that a patient can be spared the painful side effects of treatments that won’t work anyway.
Oncotech’s tests are attracting rising interest in the medical community: Revenue jumped to $1.07 million in 1989 from $195,954 in 1988. In the first six months of this year, revenue totaled $707,841, up 86% from the same period in 1989.
But the firm still is losing money because of high development costs. The first-half 1990 loss was $1.13 million.
Gregory Presson, Cruttenden’s corporate finance chief, admits that Oncotech probably is 18 to 24 months from break-even. But he said the excitement over the technology is what led Cruttenden to chance a public stock offering.
What makes the move even more risky is that this is Cruttenden’s first attempt at managing a new stock offering. The brokerage has had a strong presence in Newport for many years, but underwriting is a high-stakes business for a small firm. Because of that, Presson says Oncotech wanted a more experienced hand helping with the offering. So Cruttenden tapped Dain Bosworth, whose Minneapolis base is home to many of the same types of medical-tech firms that populate Orange County.
Oncotech wants to sell 1.3 million shares to investors. Initially, the firm had hoped for a price of about $8 a share. But rival investment bankers say the weakness in the stock market suggests that the best the firm can hope for is a price of about $5. That would raise $6.5 million for Oncotech, which would be used for equipment, research and marketing. Management and the firm’s original financiers would retain 61% of the stock.
Presson hopes to sell the shares late this week. He says institutional investors have been “very excited” about Oncotech at Cruttenden’s “road show” presentations. Cruttenden’s goal is to sell 85% of the shares to institutions, the rest to individuals.
Can Cruttenden make the deal fly? The key issue, Presson admits, will be keeping the stock above the offering price once it begins trading. The experience of many investors who have purchased new stocks this year has been disastrous: Many of the stocks have plunged well below their offering prices. Thus, some investors’ attitude is, why buy a new stock in an offering when you can probably get it cheaper after it begins trading?
Presson says Cruttenden believes that most of the buyers for Oncotech will be “long-term holders” rather than traders who would bail out if the stock doesn’t rise immediately. Of course, the long-term holder is the buyer most investment bankers target, but institutions often say one thing and do another.
In any case, the Oncotech offering will be a good litmus test of investors’ willingness to finance the kind of promising young Southland companies that badly need funding today. And it will be a major test of Cruttenden’s ability to make a name for itself in the dicey but lucrative business of stock underwriting.
Briefly: Ever wonder why they call them “bull” and “bear” markets? The bear term apparently originated in the early 1700s in England, from a proverb warning against “selling the bearskin before one has caught the bear.” In other words, even back then there were “short” sellers who were selling securities they didn’t own, on the expectation that they could repay the borrowed securities later for less. Another explanation is that bull and bear derive from the ways the two animals fight: The bull throws its horns upward; the bear stands and swipes downward. But in truth, “it’s never really been settled” where the terms actually came into use, or why, says market historian Yale Hirsch of Stock Trader’s Almanac in Old Tappan, N.J. . . .
Traders of Caesars World stock are still waiting to see if someone was accumulating the shares earlier in October. Anyone buying more than 5% would have to publicly declare the stake. But as of Oct. 17, the only 5%-plus holder was the Wisconsin Investment Board, which owned 8.9%, according to Caesars’ proxy for its annual meeting set for Nov. 29.
NO LOVE FOR NEW STOCKS How the initial public offerings (IPOs) of a few Southland firms have fared this year:
IPO Fri. Pct. Stock price close chng. Pinkerton’s $14.00 $21.87 +56% Modtech 10.00 10.50 +5% Tokos Medical 12.00 8.75 -27% Wahlco Environ. 13.00 9.12 -30% Dynasty Classics 11.25 6.50 -42% Advanced Logic 13.00 7.25 -44% Vidmark 12.50 3.75 -70% STOR 8.00 1.50 -81%
