Biomedical Stocks Beat a Retreat

By BARBARA MARSH

June 26, 1996 12 AM PT

TIMES STAFF WRITER

Latecomers to the yearlong bull market for biomedical stocks may soon find the party’s over.

The rush of initial public offerings by a multitude of medical device makers began last summer, as investors sought risky opportunities with big potential rewards. They grabbed for stocks with solid promise, including companies with new products used in less-invasive surgery. They went also for companies that were little more than a frothy dream, sometimes bidding up the price as much as twofold in the first day of trading.

But in recent weeks, investors have grown nervous. Stock prices for biomedical and other health-care stocks have retreated. First-day gains on initial offerings across the market have averaged 6% since June 15, compared with 21% in the first five months of the year.

Recently, some new issues, including Irvine-based CardioVascular Dynamics Inc., have fallen in price on the first day.

Robert Faulkner, an analyst at Hambrecht & Quist LLP, said Tuesday, “It’s too early to say the market’s dead, but it feels like it’s on life support.”

But more biomedical companies here and elsewhere still hope to go public this year. Among the half a dozen nationally that have already filed offerings, Masimo Corp., a Mission Viejo developer of patient monitoring systems, wants to raise $30 million.

William H. Markle, a company vice president, questions the naysayers who believe the industry’s market run is coming to a close. “People have been saying the party’s been over for months, but you really never know. It just seems to keep going.”

Meanwhile, other local companies are preparing filings. Lisa Frost, a partner at Deloitte & Touche, says she has two prospective deals by local medical-related companies on her desk.

“One just started [preparing] and they are really gung-ho,” she says.

On top of those, there are the wishful thinkers who still dream of doing an offering this year.

Sources say that Micro Therapeutics Inc. of San Clemente recently lined up $8 million in new venture capital financing but still would like to raise more than $20 million publicly this year.

In a market that seemed so hot for so long, “You’d have to be brain dead if you hadn’t considered it,” says Thomas Berryman, the company’s chief financial officer.

However, Berryman wouldn’t confirm that the company is still doing so.

Clearly the last year has been the sort that many a small biomedical outfit dreams of.

Stock values lifted last year as worries about cost pressures on the industry diminished with the failure of Clinton’s health care plan. In addition, many small companies had solid results--or product approvals--to peddle to investors.

As a result, biomedical stocks became one of the market’s hottest sectors.

Since the beginning of last year, medical equipment companies have raised about $4 billion from the stock market, compared with about $3.2 billion for the market’s prior peak in 1991-2, according to Securities Data Co. in New York. In the recent year and a half, about 78 offerings have sold, compared with 105 in the earlier period.

In January, Tustin-based VitalCom Inc., a company which made $1.6 million on sales of $24 million last year, found the market so receptive that it raised millions more than expected. In May, Imagyn Medical Inc., of Laguna Niguel, and Irvine-based Biopsys Medical Inc., separately showed how loss-ridden companies with little or no sales could clean up. Biopsys’ stock jumped 26% in its first day of trading to $19, then closed at $18.875, up $3.75 from the offering price. Imagyn raised millions more than it expected.

Now, however, with the market for new issues shaky, analysts say public companies may have a harder time selling their stock than before.

Consider Premier Laser Systems Inc., a loss-ridden Irvine maker of medical lasers which has filed to raise $25 million in an offering tentatively priced at $10 a share.

So far, prospective investors have seemed receptive, says Daniel Caruso Jr., a senior vice-president. But he acknowledges the company may reconsider the pricing and size of its offering and weigh the possibility of trying to expand its pre-market sales effort to European investors.

Meanwhile, some local biomedical companies have no interest in going public in a market flush with trifling companies with no sales or earnings.

Applied Medical Resources Inc., a profitable, privately held Laguna Beach maker of surgical items, expects sales of $27 million this year, compared with $16.5 million last year, says Said Hilal, its president and chief executive. It employs 350 people, plans to hire 43 more, and could use some financing to fuel its growth. But after considering a public offering, Applied decided to raise up to $10 million in debt this year instead. Hilal, noting the precariousness of stock valuations now, says “I’m not sure whether this market is a window of opportunity--or a guillotine.”

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Health Care Sector Comparison

The Hambrecht & Quist index of 44 health-care stocks shows the sector losing steam since the beginning of the year. Here’s how it compares to the Nasdaq composite index:

1995: Hambrecht & Quist: Nasdaq

Jan.: 389.80: 755.20

Feb.: 398.79: 793.73

March: 428.00: 817.21

April: 422.57: 843.98

May: 424.60: 864.58

June: 439.64: 933.45

July: 476.94: 1,001.21

Aug.: 505.98: 1,020.11

Sept.: 549.55: 1,043.54

Oct.: 559.16: 1,036.06

Nov.: 571.41: 1,059.20