Billionaire Patrick Soon-Shiong, whose health care IT firm NantHealth filed for a $92 million initial public offering earlier this month after a brief delay, has chosen a volatile time to look to the markets for funding.
Soon-Shiong, 63, shared plans for taking the firm public last year after snaring a $200 million investment from Chicago electronic medical records firm Allscripts Healthcare Solutions Inc. that valued NantHealth at $2 billion.
But the NantHealth IPO was delayed when public markets turned rocky in the fall.
The Nasdaq Biotechnology Index was trading as high as 4,166 when Soon-Shiong said he planned on taking NantHealth public last summer. It was off by more than 25 percent in the fall when he delayed the IPO, and it has fallen farther since then.
Soon-Shiong has not been immune to the pain felt in the industry. His Culver City immunotherapy maker NantKwest Inc., which debuted at $25 last summer and peaked at $35 a share, now trades at around $6.75.
What’s more, NantHealth plans to make its bow after posting big losses over the last couple of years. So why court the hassle of taking a company public when the markets are still volatile, especially when it means having to lay bare all that red ink?
“A big reason for them going public can be to raise enough cash if they know they need some runway before they really scale,” said Aarin Yu, founder of Culver City capital markets advisory and consultancy Heritage Financial Partners. “It’s not uncommon for companies in their space to go public when they are still reporting net losses. I would not consider that a black mark.”
Part of Soon-Shiong’s Culver City-based NantWorks health care group, NantHealth seeks to enable better medical treatment by integrating information on a patient’s molecular profile with other data in a clinical setting. The idea is to leverage big evidence-based data to tailor treatments to patients in real time while giving providers, payers, and patients a clearer view of care.
Though NantHealth said in its preliminary registration statement with the Securities and Exchange Commission that the potential global market for its products and services exceeds $50 billion, it saw a loss last year of $72 million on $58.3 million in revenue. That was an improvement from a 2014 loss of $84 million on $34 million in revenue.
Raghuram Selvaraju, a senior health care research analyst at H.C. Wainwright & Co. in New York, suggested Soon-Shiong had several reasons for pulling the trigger now.
“He thinks people are becoming more receptive to the concept of big data and wants to show he’s got more stuff in his arsenal other than NantKwest,” said Selvaraju, who covers Sorrento Therapeutics, a San Diego biopharmaceutical firm that counts Soon-Shiong as its largest shareholder and has conducted business with NantWorks companies.
At the same time, Soon-Shiong earned almost $150 million last year as chief executive of NantKwest, making him the highest-paid chief executive in biotech, even though its stock has performed terribly.
“He’s got to take attention away from the running joke NantKwest has become,” Selvaraju said.
Bank of America’s Merrill Lynch division and Citigroup Inc. led underwriting of the NantKwest IPO, but Soon-Shiong has turned to the smaller Jefferies and Cowen and Co. to spearhead efforts this time.
Soon-Shiong founded NantHealth in 2010 and started building out NantWorks the following year. NantHealth was largely kept under wraps, with Soon-Shiong occasionally dropping hints about the companies under the NantWorks umbrella through acquisition, funding, or partnership announcements.
For example, NantHealth announced $250 million in funding from sovereign wealth fund Kuwait Investment Authority in 2014 as well as an investment from Blackberry Corp. that came with a collaboration agreement with the Toronto-based maker of mobile phones. And NantHealth’s latest pickup before the IPO filing was Boston-based NaviNet Inc., which makes a platform linking payers and providers.
Products and services such as those offered by NantHealth are part of a greater trend toward ensuring each dollar spent on health care yields the greatest value possible, said said Bob Wadsworth, a vice president at Kensington health care consultancy Freed Associates Inc.
“It provides the information to clinicians so they can better render the right care at the right time to patient populations,” he said.
Soon-Shiong made a $48 million investment in NantKwest, then known as Conkwest and based in San Diego, in late 2014. He became chief executive of the firm early last year, steering NantKwest to a $207 million July public offering and moving the headquarters to his Culver City compound.
“It deserves to be a major biotech center,” Soon-Shiong said of Los Angeles after the move, pointing to peers such as Kite Pharma Inc. of Santa Monica and Westwood’s Puma Biotechnology Inc.
But as NantKwest went public, the market appeared to top out, analyst Selvaraju said.
Biotech stocks’ subsequent decline was hastened by a public furor stoked when Turing Pharmaceuticals bought a 62-year-old drug and Chief Executive Martin Shkreli jacked up the pill price overnight from $13.50 to $750.
While NantHealth is more of a cancer analytics play rather than a traditional biotech firm, health care stocks have also taken a tumble.
“It’s not the best time for this IPO,” Selveraju said. “Health care is under a cloud with the presidential election and there’s the Shkreli blowback.”
NantHealth might have decided to go ahead with it anyway after coming under pressure from investors wary of pouring more money into a “sinkhole,” he added.
Heritage Financial’s Yu, however, struck a more positive tone, noting NantHealth’s 40 percent gross margin, the percent of sales revenue a company keeps after subtracting direct costs related to making the goods or services it sells, last year was in line with those of other health care software firms. While NantHealth was in the red in its first two years, a young company can have a healthy gross margin and be operating at a loss because it hasn’t yet ramped up sales.
In addition, despite his misgivings about the IPO’s timing, Selvaraju said he is optimistic the health care sector pendulum will eventually swing back the other way.
“Patrick Soon-Shiong always finds a way to win,” he said. “If he doesn’t feel he’ll ultimately win and win big, he just doesn’t play.”
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