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Analysts see signs of IPO market recovery, continuing volatility

Industry keeps eye on two local offerings

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As the initial public offering market continues its recovery, a local semiconductor company and antibiotic developer have joined the line of companies looking to go public. "These are really a great thing for San Diego," said Jeremy Glaser, a Mintz Levin attorney in the San Diego office. "We needed some more IPOs to get companies liquidity."

MaxLinear Inc. in Carlsbad and Trius Therapeutics in San Diego are among the more than 100 companies in the so-called IPO pipeline. Both notified regulators in November of their IPO plans but have yet to set a price range or schedule the dates of their respective debuts.

Even with a price range, it would be difficult to say how investors would receive either offering; the market can be fickle. However, many industry observers say both look like good contenders thus far.

MaxLinear, founded in 2003, has the advantage of being both profitable and in a popular sector. The semiconductor company makes television tuners for cable operators and various consumer electronics.

Technology IPOs have been the most popular during the last 12 months, with 18 deals averaging a 12.8 percent return on the first day, according to data from IPO research firm Renaissance Capital in Greenwich, Conn.

A quarter of the companies in the pipeline are technology companies, according to IPOScoop.com.

Thus, the MaxLinear deal, if priced correctly, is likely to attract more institutional investors because of its strong growth so far, said Eric Guja, Renaissance Capital research analyst.

He noted that Avago Technologies (Nasdaq: AVGO), a larger semiconductor that priced its IPO in August 2009, saw almost an 8 percent return on its first day and posted more than 16 percent return from its IPO.

"It's a sector play," agreed John Fitzgibbon, the editor and publisher of IPOScoop.com. "What bankers really want in this area is a company with growing revenues."

For 2009, MaxLinear reported net income of $4.3 million, or 4 cents per share, compared to an annual net loss of $1.9 million, or 13 cents per share. Annual net revenue grew almost 64 percent to $51.4 million in 2009 from the year before.

MaxLinear had almost $18 million in cash as of Dec. 31.

"They're well above a breakeven run rate," said Bud Leedom, who publishes the California Stock Report. "The profitability will allow them to have a smooth offering and maybe even have a premium."

MaxLinear plans to use the net proceeds from general corporate purposes, including working capital, and said in its prospectus that it may use a portion for acquisitions. The target amount to be raised was not disclosed.

MaxLinear intends to trade on the New York Stock Exchange under the ticker "MXL."

Morgan Stanley & Co. Inc. (NYSE: MS) and Deutsche Bank Securities Inc. are the book-running managers for the offering, and UBS Securities LLC, Thomas Weisel Partners LLC (Nasdaq: TWPG) and Needham & Company LLC are acting as co-managers.

Several industry observers agree that Trius Therapeutics is more of a speculative play: Most IPOs in the biotechnology sector are, as many companies seeking to go public are still pre-profitability.

Still, Trius satisfies biotech investors' preference for later-stage companies. Founded in 2004 as RexC Pharmaceuticals, Trius is looking to raise $86.3 million to fund a Phase 3 trial in mid-2010 for torzelid phosphate, a treatment for serious bacterial infections, including drug-resistant staph infections.

"Biotech has its own metric for valuation ... it's not about revenue but where you are clinically," Leedom said. "It's good in general to see biotech file and go through the (IPO) process; that shows there's an appetite for more speculative companies."

For 2009, Trius reported a net loss of $22.7 million, or $31.11 per share, compared to a net loss of $20.8 million, or $40.19 per share.

Revenues for the company, which totaled more than $5 million in 2009, have come primarily from a September 2008 contract with the National Institute of Allergy and Infectious Diseases and small business innovation research grants from the National Institutes of Health.

Trius will not be the first biotech to price this year. Ironwood Pharmaceuticals (Nasdaq: IRWD) struggled some on its first day but managed a 3.6 percent return.

However, Anthera Pharmaceuticals, which is also poised to enter Phase 3 and is scheduled to price Feb. 25 between $13 and $15 a share, will offer a better gauge as to how investors will welcome Trius, Guja said.

Trius plans to trade on Nasdaq under the symbol "TSRX."

Lead managers for the deal are Credit Suisse (NYSE: CS) and Piper Jaffray (NYSE: PJC), and the co-manager is Canaccord Adams.

The two companies are entering a market that is much improved from a year ago, when companies withdrew their IPO applications en masse after it became clear that paranoid investors would make for dismal returns.

The number of registrants this quarter is the highest in two years, the deal sizes are at levels more consistent with 2006-2007, and companies of all sizes and industries have moved into the pipeline, said Jackie Kelley, Americas IPO leader for Ernst & Young.

Some registrants in "multitracking mode" -- meaning they are looking at other options for raising capital aside from IPO -- may still pull out, but the statistics and company profiles are encouraging, Kelley added.

"What that says is the market is going back to a more normal level," she said. "If those companies (in registration) are successful ... it's going to lay a good foundation for 2010."

A strong IPO market would be good news for a capital-hungry biotech industry, which has seen venture capital pull back and focus solely on companies already in portfolio.

"The fact that Trius is going out is a sign that the door is opening," said Joe Panetta, president and CEO of local industry group Biocom. "To give them (venture capitalists) an exit strategy in the companies they're in will allow them to continue to invest."

Still, most market watchers agree that volatility in the market has to decrease to create a smoother path for IPOs.

The first 13 companies to price this year all struggled a bit on their first day, seeing downward pressure from investors because the stocks were priced too high, IPOScoop's Fitzgibbon said.

Leedom agreed that pricing the IPO correctly from the outset will be key.

"It's not a factor of the window slamming shut" if the first quarter of IPOs doesn't run smoothly, Leedom said, "it's how large a discount to par is it going to take to make these things fly."

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