The story for initial public offerings in 1996 is a simple good news/bad news scenario. The good news: The first half of the year was terrific for healthcare IPOs. The bad news: It's all downhill from here.
Between January and the end of June, healthcare companies came to market with a wealth of offerings that were embraced by investors. Companies struck it rich in dozens of niches. For example, Nashville, Tenn.-based Renal Care Group raised $70 million to expand its network of kidney dialysis centers, and Boston-based BioTransplant raised $25 million to breed pigs that can serve as organ donors for humans.
In fact, May was the single biggest month ever for offerings of companies in the healthcare service and product markets, according to Advest, a Boston-based investment bank. There were 16 deals in May, followed by 15 in June.
Beginning early this month, investors were treated to a roller-coaster ride, most of it in a downward direction. Between July 1 and 15, the Dow Jones industrial average fell 380 points.
That prompted underwriters to postpone IPOs, the most significant one in healthcare being GynCor's. The Chicago-based company that specializes in physician practice management of obstetricians and gynecologists had planned to make a
$31 million IPO the week of July 15. The offering made sense, especially since deals involving physician practice management companies-referred to by the acronym PPM-have been red-hot on Wall Street for nearly two years.
During the first half of 1996, one of the biggest money-raisers was West Palm Beach, Fla.-based PhyMatrix, which netted $107.5 million. Not only is the company a PPM but it carries the IPO magic touch of founder Abe Gosman. Gosman went public twice with his long-term-care company, Mediplex Group, Boston, before selling it to Albuquerque, N.M.-based Sun Healthcare Group two years ago.
Gosman's new company also has been a winner for investors. Going public at $15, the stock was trading at $25.50 last week.
That success wasn't enough to offset other developments. Although the Dow's plunge hit all industries, poor earnings reports at a handful of managed-care companies and one PPM, American Oncology Resources, were blamed for market jitters that could carry through much of the second half of this year.
"Some of the biggest earnings disasters were in healthcare, and some of them weren't a minor miss; they were major blow-ups," said Jeffrey R. Jay, M.D., general partner of J.H. Whitney & Co., a Stamford, Conn.-based investment firm.
In fact, Houston-based American Oncology, which specializes in oncology group practices, called off a $275 million secondary stock offering after its shares fell 44% following a negative earnings report. American Oncology said it expected second-quarter profits of 9 cents to 10 cents per share, but Wall Street was expecting 11 cents per share.
Jay said he knew of three healthcare IPOs that were ready to go public in the next month. But because of the volatile market those offerings have been pushed back to September or October.
The market for new healthcare issues "is not going to turn around on a dime. It's going to take some good earnings announcements," Jay said.
Managed-care companies did fairly well in the first half. The largest IPO was Sarasota, Fla.-based Riscorp, which raised $190 million. Another smaller company, Sunstar Healthcare, raised $6.5 million. Melbourne, Fla.-based Sunstar is a Medicare risk contractor.
However, the hottest niche for the future appears to be assisted living, which is housing that includes low-intensity medical services for the elderly. Of the five largest IPOs now pending, four are assisted-living companies that together plan to raise more than $300 million.
However, the gold rush into assisted living may not be easy. Earlier this month, Karrington Health, a Columbus, Ohio-based assisted-living chain, priced its IPO at $13 per share. That was down from the $15-to-$17 range at which the company filed the offering in May.
Whether that will affect a $107 million offering by Owings Mills, Md.-based Integrated Living Communities is debatable, since Integrated already has a longstanding reputation on Wall Street. The company is a spinoff of Integrated Health Services, a subacute-care chain also based in Owings Mills that will retain a 19% share of the new company.
Observers say the chilling in the IPO market means some companies simply may not grow as fast as they wanted. They need capital to grow and often use IPO proceeds as currency for acquisitions.
For example, GynCor manages 17 reproductive medicine centers and 28 physicians in the Chicago, New York City and Tampa/St. Petersburg, Fla., areas. It has big plans for rapid expansion, but it primarily uses stock for those transactions, according to the company's prospectus.