While little valuation information has been provided so far in the ABH IPO filings, the company did disclose that it plans to raise $200m. I decided to look at recent IPOs to get a feel for what percentage of the company is generally offered to raise that sum of money. It’s pretty weak, but it might give us a hint of what is to come.
I looked at the 100 most recent IPOs as reported by IPOscoop.com, using their data for shares sold, and IPO share price. I then added shares outstanding as reported by TDAmeritrade. After compiling the data I decided to take out the 16 financial companies. The data for these companies didn’t seem to follow the general pattern and were highly variable (6 of the 16 sold 70% or more of their shares in their IPOs vs. 0 of the other 84 companies).
43 of the 84 sold between 20 and 30% of their stock with 16 selling 10-19% and 13 31-40% and 12 at 41-68%. While 68% was the high, 57% was the second highest percentage.
There were 11 non-financial companies that received between $150-250m in their IPOs. They sold 10-30% of their equity with an average of 20%.
17 of the companies are in the healthcare industry. This comparison didn’t seem all that useful to me since 9 of the companies had virtually no revenue (I believe all of these were development stage biotechs). The three (not including HCA’s $30b in revenue) companies with substantial revenues had $80m, $100m and $220m in revenue.
The $80m revenue company is ShangPharma, a Chinese R&D outsourcing company with a market cap of $287m when it went public last October. 2010 Revenue represented a 25% growth rate over 2009 and the company’s gross margins are about 33%.
Epocrates , the $100m revenue company is a medical information company that had a market cap of $311m when it went public in February. The company has 70% gross margins but is only growing revenue at about a 10% annual rate.
Tornier, which is the $220m revenue company, is a Netherlands based medical device maker that went public in February with a market cap of $766m. The company has about 70% gross margins and has grown revenue at about a 13% annual rate the past two years.
None of these companies seem to be a good comp for ABH which, with $146m in sales, nearly 80% gross margin and most importantly a roughly 70% revenue growth rate would seem to deserve a higher level of valuation.
Still, the data from these three companies imply that the IPO market cap should be at least 3x revenue for a solid company growing at a double-digit rate. For ABH, that floor would seem to be around $500m market cap, which would represent $7/SFE share. I believe that is a very low number. My guess is that the company is targeting a $1b market cap that for 20% of the stock would yield $200m in proceeds.
To me, the big concern is the security of the company’s competitive advantage. While the company has many patents, at least one is scheduled to expire in 2012. I have no idea how critical that patent or any other patent is to the company’s competitive position. If ABH's position is secure then I believe a $1b market cap is entirely reasonable.
The patent expiration should have little effect on ABH's prospects. Dermagraft is a living tissue product. Any would-be competitor would have to take its product through comprehensive trials--a living tissue product is very different from a small-molecule pharmaceutical. The patents by no means provide a complete recipe for producing Dermagraft. ABH also has plenty of proprietary process knowledge not revealed in the patent filings.