In theory, investors considering an investment in an Initial Public Offering (IPO) should follow many of the same principles that apply to picking winning stocks already trading in public markets.
In practice, the “must read” information contained in the IPO Prospectus published by about to list companies can be challenging to interpret. In August of 2017 the ASIC (Australian Securities and Investments Commission) issued Report 540: Investors in Initial Public Offerings.
The Report found that not only did retail investors find an IPO Prospectus difficult to read, but also expressed suspicions regarding the trustworthy nature of the information presented. Commentary from financial media sites and subscription services was seen as providing valuable insight.
Investors can find list after list of “tips” for successfully navigating the world of IPO investing. A few include the strict advice to stay away from companies not yet having products for sale in the marketplace with growing revenues paying the way for eventual profitability.
At first glance that advice makes sense, but unfortunately in screens out many, if not most, IPOs in early development stage. Retail investors with stars in their eyes hoping to latch onto the next AfterPay Touch Group (APT) gravitate towards IPOs promising breakthroughs in the sectors in which they operate. The obvious and frequently ignored problem is the word “promising.” No matter the size of the market nor the potential impact, the development cycle of a successful offering can be long and expensive.
One risk that on sober reflection seems buried in IPO investing is the fact IPOs attract investors of all stripes. While all investors are looking to make a profit with their investments, the time frame in which they are willing to wait varies. Since the share price moves up when there are more buyers than sellers and goes down when there are more sellers than buyers, long-term investors with a minimum five year time frame can see their dreams shattered when short-term investors decide whatever profits they have achieved are enough and begin to bail out.
Why this observation gets so little attention is a mystery, given the presence of “lock-down” periods with IPOs. Within the ASX Listing Rules for IPOs there is an appendix that states the rules for holding shares in escrow to protect longer term investors:
- Early investors, that is investors who were issued securities or the right to subscribe for securities, before the issuer being approved to list.
- Vendors who have been issued securities in exchange for assets or services they have provided. This could include sellers of assets to an issuer, professional advisers who accept securities for their services, or promoters of the issuer’s capital raising.
- Current directors of the company.
- The period of escrow varies but is typically 12 or 24 months.
Lockdowns acknowledge the negative impact on long-term investors of mass insider selling. That is why the more cautious financial commentators offering advice to prospective IPO investors suggest waiting to invest until the lockdown period has expired. Yet few mention the fact the pool of investors climbing onboard as soon as the company lists includes many newcomers ready to ride the wave and climb off at the first hint of share price weakness. Even the stunning performance of APT has not been without dips.
While the ASX has seen many long-term successes in the IPO market, the risks of early entry remain formidable for retailers. The dazzling share price appreciation quoted in most financial coverage of a successful IPO uses the Issue Price as the baseline measure, not the initial trading price as the stock opens.
The reason is simple. IPOs rely on institutional and high net worth investors, with both able to buy in at the issue price, which up until recently was not available to the retail investor.
That changed when onmarket.com.au came along and opened the door for retail investors to bid on select IPOs. The website is an essential tool for anyone considering investing in IPOs.
OnMarket tracks the performance of all ASX IPOs, not just the ones available through them, although the time frame is quite short. Investors who regularly follow the IPO market know most IPOs that roar out the gate take a few, or more, stutter steps when long-term investor expectations are disappointed, or the short termers begin to take profits. Here are 2019’s best performers.
2019 Top 10 IPO Performers at December 31
The pattern followed by too many IPO’s may be something akin to classic “buyers’ remorse.” No matter how torrid the initial pace, the slightest bit of less than stellar news can spring the active and momentum traders toward the door with some long-term investors losing faith and following suit.
Global markets have been troubled recently with mounting concerns over the impact of a potential pandemic from the coronavirus on the global economy. Whether for that reason or some other issue, only two of the Top Ten Performers have managed double digit gains in the new trading year.
- Uniti Wireless (UWL) -6%
- Ostepore Ltd (OSX) -14%
- Splitit Payments (SPT) -6%
- Viva Leisure Ltd (VVA) +3%
- Ecofibre (EOF) +14%
- VGI Partners (VGI) -12%
- Pointsbet Holdings (PBH) +7%
- Invex Therapeutics (IVC) +28%
- OptiComm Ltd (OPC) -2%
- Aerometrex Ltd (AMX) +6%
The two are from the HealthCare Sector, which along with information technology routinely makes the many lists of economic megatrends tantalising investors. There is no denying the global population is ageing while at the same time seniors are living longer. What’s more, the size of the baby boomer generation marching into old age is substantial, providing tailwinds for many quality healthcare stocks for decades.
Invex Therapeutics Ltd (IXC) is an excellent example of the kind of company some investment advisors would slap a “Caution – Potential Danger Ahead” on the front cover of the IPO Prospectus.
The company is working on repurposing a drug approved to treat type II diabetes, first by the US FDA in 2005 and by the European Medicines Agency (EMA) in 2006. The drug – Exenatide – once reformulated is expected to treat a variety of neurological conditions stemming from increased pressure in the brain.
The potential population includes those having experienced strokes, brain tumours, meningitis, thrombosis, hydrocephalus (water on the brain swelling) and traumatic brain injury.
On 13 January of 2020 the company announced the completion of a Phase II clinical trial of Exenatide, with top-line results to be released in either late Q1 or early Q2 of his year. Pending the results, Invex will conduct an additional trial to get regulatory approvals in the US and Europe.
Given the facts Invex has a single drug in its pipeline with no results available, positive or negative, and no projected timeline for commercial release, what is driving investor interest in this stock?
Multiple financial news websites are speculating the answer could lie in the time-honored investing strategy of “whale watching.”
Whale watchers keep track of investments of the most influential or wealthy investors. The “whale” backing Invex is mining magnate Andrew Forest.
Ecofibre (EOF) is considered by some to be more of a “pot” stock rather than a healthcare stock since the company’s extensive product line of hemp-based products are sold to consumers, wholesalers, and manufacturers. Hemp is a form of cannabis. The company operates four different business entities:
- Ananda Food produces hemp-related products (hemp seed, powdered hemp protein, hemp flour, and hemp oil) in Tasmania and sells them throughout Australia.
- Ananda Hemp is a vertically integrated business in the US producing hemp related nutraceutical products from seed to shelf for sale in the US.
- Ananda Professional manufactures Cannabidiol (CBD) products sold exclusively to pharmacists and other healthcare professionals.
- Hemp Black in the US is developing industrial use products for a variety of markets including fashion, leisure wear, and composites and building materials.
The company is generating growing revenue and turned profitable in FY 2019 — its first full year of commercialisation — reversing a loss of $8.6 million in 2018 to post a profit of $6 million, a 170% increase. Revenues were up 519%, rising from $5.7 million to $35.6 million while earning per share (EPS) increased 159%, jumping from a loss of $0.037 per share to a gain of $0.022 per share. Analysts have forecasted EPS growing to $0.046 in FY 2020 and then more than doubling to $0.093 in FY 2021.
For whatever reason, Osteopore Limited (OSX) has gone lukewarm with investors following a hot start in the month after its 29 September of 2019 listing date, despite having a solid financial track record of revenue generation, and three US FDA approved products selling in more than 70 countries through direct sales and a distributor network.
While not yet profitable – posting a loss of $870,249 dollars for the year ending 31 December of 2019 – revenues have grown in each of the last three calendar years, rising from $204,768 to $610,620, to 2018’s $934,878.
The company is one of several using advanced 3D Printing technology – bioprinting — to create medical treatments. Osteopore creates customisable bone grafts for surgical applications that dissolve over time. The three products are:
- Osteoplug is a polymer-based replacement for traditional grafting processes to close holes following neurosurgery. The synthetic graft absorbs needed nutrients from adjoining tissue leading to bone regeneration, covering the hole.
- Osteomesh is used for bone growth and remodeling following fractures and remaining surgical defects. Like Osteoplug, this synthetic grafting material uses the patient’s own nutrients to regenerate bone. The Osteomesh is eventually resorbed by the body and is by bone.
- Osteostrip is used to regenerate bone material removed in neural surgery to expose the brain. The Osteostrip promotes bond formation and like its counterpart treatments, eventually is absorbed by the patient’s body.
3D Printing was once a market darling sector, but the assumption that 3D printers would begin to appear in every consumer’s home around the world producing home goods was unrealistic. 3D Printing is an additive process, injecting layer after layer to create a product. However, the materials suitable for printing in the early days were largely plastic resin based, severely limiting their use. Investors may have ignored the improvement of suitable feedstock materials and the growing use of the technology in industrial applications, and now in medical applications, first with devices and now with human organs.
In Brazil researchers have produced 3D “mini-livers”, an early step in the development of fully functioning 3D livers, replacing organ transplants. In the US researchers at the Wake Forest Institute for Regenerative Medicine in North Carolina are using 3D bioprinting technology to reproduce a human ear. Here in Australia, major universities are collaborating with Melbourne’s St Vincent Hospital’s BioFab3D lab. The lab was established as a place to incorporate researchers, clinicians, and engineers into a multi-disciplinary effort to develop bio-printed prosthetic cartilage, muscle, bone, and organs for use in the treatment of trauma and disease.
While this may be a long-time coming, market opportunities over the next five years are substantial.