So far this year there have been double the number of diagnostics companies with initial public offerings (IPOs) as there were in all of 2012, bringing the total in the past 12 months to a paltry three IPOs. Experts say that they don’t expect to see any significant uptick in IPO activity in the industry both because of the broader financial market environment and because companies in the space must adapt to changing investor expectations. “The broader perspective is that it is a tough time for any IPO, forget about for diagnostics companies,” says Keith Batchelder, M.D., founder and CEO of the advisory firm Genomic Healthcare Strategies. “I am bullish on diagnostics; however, unless companies can present their case in the context of why there is clinical utility and economic utility it is going to be very tough times in the marketplace.” The three diagnostics companies that have successfully entered the public markets over the past 12 months all did so with markedly scaled back offerings. Cancer Genetics (Rutherford, N.J.) closed its initial public offering of 690,000 shares of common stock at a price to the public of $10 per share with gross proceeds of $6.9 million in the beginning of April. Since filing its initial IPO registration with the Securities and Exchange Commission (SEC) in May 2012, the firm three times scaled back its IPO plans from $41.9 million (4 million shares at about $12 per share). As of May 1 its stock price was being traded above its initial list price. The company will reportedly use $2 million of its proceeds toward its diagnostics joint venture with the Mayo Clinic and will use the rest to pay down debt and fund operations. Given the significant reduction in capital raised, the company is said to have scrapped plans to invest further in research and development. In January, LipoScience (Raleigh, N.C.) raised $45 million (from 5 million shares at $9 per share plus 750,000 shares exercised by the underwriters). Earlier plans calculated $75 million in proceeds based on a share price of $13 to $15. The company said the capital raised will be used to ramp up sales and marketing efforts for its cholesterol tests. The company’s U.S. Food and Drug Administration (FDA)-cleared automated clinical analyzer, the Vantera system, uses nuclear magnetic resonance to identify and quantify concentrations of multiple subclasses of lipoproteins and, potentially, small molecule metabolites. The company says it currently has 9 million orders for its tests but has large growth plans given that 75 million traditional cholesterol tests are performed annually. The company also plans to expand its personalized diagnostic test menu for metabolic and other diseases. Breast cancer diagnostics company Atossa (Seattle) also completed a scaled down IPO of 800,000 shares at $5 per share, raising a total of $4 million, Nasdaq’s qualifying minimum for the small-capitalization market tier, in November 2012. Initial SEC filings earlier in 2012 showed that the company anticipated selling 1 million shares in the range of $5 to $7. The company will use its proceeds to fund a national rollout of its two existing tests and bring new tests to market. The company’s tests are based on its core FDA-approved MASCT technology (Mammary Aspirate Specimen Cytology Test System). The prospects for near-term IPOs do not look very promising for early-stage diagnostics companies. This is due in part to evolving expectations on the part of investors. Given the increased focus on clinical utility and cost-effectiveness, diagnostics companies need a more compelling story than just that they have discovered a new panel of biomarkers or have a novel test technology to lure investors. They must provide compelling evidence of how their product provides value to the broader health care system. “There needs to be a reset in how people think about diagnostics companies. No longer are there quick exits. You must have the money to be more patient for a liquidity event, and diagnostics companies have to be more cognizant of the complete story, the value proposition,” explains Batchelder. “There has been overinvestment in diagnostics by venture capitalists and that has not yet cleared out. There is an appetite for diagnostics, but the winners will have good stories and there is still a glut of diagnostics companies based on technology without the full value proposition that, unfortunately, will go away.”

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