Supply is the enemy of a bull market. Supply kills. Supply upended last year's bull at this time, and I am worried that it could do so again.
Let's start with the big dogs, the two large deals today: Go Daddy (GDDY), the money-losing web hosting company and Etsy (ETSY), the money-losing online crafts marketing site.
Both of these companies are long in the tooth and have generated substantial losses. Etsy's selling 16.7 million shares, hoping for a valuation of at least $1.78 billion for the Brooklyn-ased artisan version of Ebay (EBAY). I find this deal quizzical, because despite the immense losses this company has suffered, and a line in its prospectus saying "we have a history of operating losses and we may not achieve," CEO Chad Dickerson in a town hall two years ago said that the company has been profitable since 2009. Perhaps there are different degrees and shapes and sizes of profitability? Who knows. But I think this is the kind of deal that's very worrisome.
Then there's GoDaddy, which managed to raise $460 million in this IPO even as it, too, has generated gigantic losses of $143 million last year -- although that's certainly an improvement over 2013 when it dropped $200 million and 2012 when it dropped $279 million. Some might like that progression. I, personally, am uncomfortable with this deal, which has been kicking around for about a year before it's coming out to party this morning.
This line from the prospectus: "while we have experienced revenue growth over these periods, we may not be able to sustain or increase our growth or achieve profitability in the future on a consistent basis," does raise eyebrows for a company founded 18 years ago. Lots of those losses were generated from what some would regard as its series of infamous and sexist ad campaigns, specifically its lavish Super Bowl ads.
Now, these two deals wouldn't bother me all that much if they didn't come right on the heels of seven biotech offerings from seven companies that have lost varying degrees of money over multi-year periods.
Some of these deals are tiny, like the 22 million shares of Synta (SNTA), which is one of the popular small molecule companies, even as this one is an exception because it's down big this year. Its five years of losses haven't failed to entice buyers at a $1.75 price.
But Coherus Bioscience (CHRS) is capitalizing on its 87% gain for the year by raising $100 million. Why not? The company's a red-hot biosimilar enterprise, the new pseudo-generic rage on Wall Street. It's a done deal at $29, nicely in the hole from the last sale at $30.58, nice for a company with three straight years of loses.
Or how about Trillium Therapeutics (TRIL), with a pricing of 1.52 million shares at $19.50, a small discount from the last sale of $20.23? Trillium's one of dozens of companies that have ridden the wave of immunotherapy for oncology. It's got six years of losses and no revenues, but it's up 124%, so why not strike when the iron is hot?
Insomed (INSM) is a $1.48 billion company specializing in orphan lung disorders with a stock up 34% for the year; all the better to offer 10 million shares at $20.65, not too big a discount from the last sale at $20.80. Maybe people are attracted by its eight years of steady losses?
Cerulean Pharma (CERU), another oncology fighter with some cardiovascular indications, is trying to raise $50 million capitalizing on its 44% rally this year. It only has three years of losses, and its small size -- $183 million -- might attract some bargain hunters.
Then there's Raptor Pharma (RPTP), with its $75 million offering. Why not? While this $752 million company's stock is only up 3.3%, it's got nine years of steady losses, so why not offer stock when there is a thirst for companies that fight neuro-degenerative diseases?
Finally, there's a big one, chronic liver disease specialist Intercept Pharma (ICPT) that's up 80% for the year despite five years of losses. This company, armed with some good studies, managed to pocket $338 million at a huge 200-point gain from where it was 15 months ago before its promising drug formulation was announced for non-alcohol cirrhosis of the liver.
All of these are on top of the 1.25 million secondary recently by Esperion (ESPR) at $100, after it released positive results for its anti-cholesterol pill. No one seemed to mind the four years of losses.
Taken one at a time, we shouldn't be concerned about these deals. But let's face it, the plethora makes it a flood, and a flood of supply isn't exactly what this uncertain market needs at this very precarious time.
