Failed NovoCure IPO Might Highlight Bigger Change In Investors' Mindset

  • After a long period without an active IPO market, NovoCure went public in a disappointing IPO.
  • NovoCure closed its first day of trading at 21% below its latest private funding round share price.
  • This might signal the beginning of a correction in private market valuations.

Medical equipment company NOVOCURE LTD (NASDAQ:NVCR) went public last week in a very disappointing IPO, triggered by the current market instability and search for value. The Israeli healthcare company initially priced its shares at $29-$26 and later cut the price range to $23-$24 to keep its IPO price just above the $23.3 share price of its recent private funding round. However, trading begun at $20 per share and ended 9% lower at $18.28, reflecting a 21% loss for investors who participated in the company’s latest funding round in June.

Also read: Amigobulls IPO Section covering the latest and upcoming IPO's.

Novocure develops oncology solutions for the treatment of brain cancers with electric fields using a unique headset, which was initially approved for treatment use, by the FDA, in 2011. Earlier this year, the FDA granted priority review status to use the company’s proprietary device in additional new applications. NovoCure IPO was initially expected to raise $300M for clinical trials, further research and development, and for commercialization efforts; however, the company only succeeded in raising $165M by selling 7.5 million shares at $22 per share.

Besides the specific disappointment that NovoCure’s executives and investors feel, the failure of the IPO might reflect a change in mindset of public and private investors. In June 2015, the company raised $95M from leading investment firms T. Rowe Price and Fidelity Investments at $23.33 per share in the private market; however, four months later, the company’s shares are trading on the public market substantially below that price as shown in chart 1 below.

NVCR_chart 1_100615

Even though NovoCure is a microcap stock, with a market cap of only $230M, operating in a small niche market, it might indicate a change in the investors’ mindset. In the recent years, public market investors were used to a known pattern: a private company holds a pre-IPO private funding a few months before the IPO, and that is supposed to set the tone for the IPO that will follow in a few months. Usually, IPO price is dozens of percentage points higher than the pre-IPO share price, reflecting a reduced risk for investors when transferring from private to public markets and increased liquidity coupled with the transfer. However, NovoCure’s IPO failure suggests that either the private market overpaid for the company’s stocks, or the public market doesn’t value increased liquidity-reduced risk as it did before.

In my opinion, the IPO market is still feeling the heat of the recent market sell-off; however, the fact that investors are now paying 20% lesser for shares compared to four months ago, without any drastic news or corporate events, means that investors now value the company 20% lower than previously valued. In other words, private market investors overpaid for shares a few months ago. If this is true for the tiny NovoCure, it could also be true for bigger and more mainstream companies. This might mean that we are seeing the beginning of a large correction cycle in the private markets that will cool the current of amazing valuations many companies are receiving. Private markets do not operate independently from the public equity market, and they feed each other with prices and valuations. This means that a valuation correction in the private markets might impact publicly-traded technology companies also. I believe it is only reasonable that the correction of publicly-traded companies experience will be transferred to the private placements also. As the IPO market revives after a long quiet period, investors should be very cautious when investing in exciting tech IPOs of companies that received enormous valuations in recent private funding rounds.

Lior Ronen Lior Ronen   on Amigobulls :
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Comments on this article and NVCR stock

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I do not know finance. I cure people. NEVER there has been an improvement in cancer therapy devoid of side effects. Novocure provided it.Novocure therapy works for ALL solid tumors, when applied on cell lines.Glioblastoma patients are 170.000 in the USA alone, 12,500 more each year. Patients with solid cancer are millions, an millions more each year. Non small cell lung cancer therapy did not improve survival from 1971 through 2011 for stage IV (a majority of lung patients). Market is a totally different thing. Big pharma can manipulate public to believe whatever suits them.
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