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US IPO Pricing Recap: Arista kicks off a heating IPO market in June

June 9, 2014

Arista Networks (ANET) and Radius Health (RDUS) began trading on Friday as the first two initial public offerings of an increasingly packed June IPO calendar. While May was not a slow month for IPOs, initial valuations and subsequent performance had a chilling effect as eligible initial filers sat on the sidelines waiting for a more receptive IPO market. Now that market may have arrived. Recent tech performance, including Arista's premium pricing and 28% first-day pop, continues to build momentum for future IPOs, particularly in the enterprise software space. After hitting a low for the year in mid-May, the Renaissance IPO ETF has jumped +7%, compared to 3% for the S&P 500. Driven by tech, the 13 IPOs in the past 30 days have traded up 29% on average, including +15% aftermarket return available to retail investors. With the market picking up, 12 companies set terms for upcoming IPOs in the past week, including Markit (MRKT).

Owned and operated by former Cisco management, Arista Networks challenges market incumbent Cisco (>70% share) in selling its software-packaged data center switches to customers like Facebook (FB), Microsoft (MSFT), Netflix (NFLX) and Morgan Stanley (MS). Tech IPOs in the pipeline like Box (BOX), TubeMogul (TUBE) and Imprivata (IMPR) are no doubt encouraged by the breakout performance of the eight tech IPOs since May. Each has traded up following its IPO and the group together averages a +48% return, with the worst performer up 28%. Five are Chinese, and the group's strong returns bode well for the highly-anticipated Alibaba IPO (ALIBA.RC), now rumored by the media to be coming on August 8th.

Technology IPOs outperform since May 1, 2014
Company (Ticker)                                     Offer Date Deal Size ($mm) Price vs. Midpoint First-Day Return Aftermarket Return Return as of 06/06
Arista Networks (ANET) 06/05 $226 13% 28% n/a 28%
JD.com (JD) 05/21 $1,780 12% 10% 27% 40%
SunEdison Semiconductor (SEMI) 05/21 $94 -7% 15% 11% 28%
Jumei International (JMEI) 05/15 $245 7% 10% 23% 35%
TrueCar (TRUE) 05/15 $70 -31% 12% 45% 62%
Zendesk (ZEN) 05/14 $100 0% 49% 15% 71%
Tuniu (TOUR) 05/08 $72 -10% 12% 62% 81%
Cheetah Mobile (CMCM) 05/07 $168 4% 1% 40% 41%
Tech IPOs (8) 05/01 - 06/06 Total: $2,750 -2% 17% 32% 48%
Non-tech IPOs (15) 05/01 - 06/06
Total: $2,410
-16% 4% 10% 14%
Source: IPO investment advisory firm Renaissance Capital

Radius Health filed for an IPO in 2012 but withdrew later that year, filed again this past February but postponed in May, and last week went public after slashing its price by 47%. The company, whose treatment (in Phase 3 trials) restores bone density in osteoporosis patients, joins a high number of biotechs this year that have been forced to significantly drop their IPO price. The ten most heavily discounted biotechs of the year now average 3% in the aftermarket as Alder Biopharmaceuticals (ALDR) and Vital Therapies (ALDR) traded up 46% and 47%, respectively, last week. The 23 other biotechs in 2014 have averaged 26% in first-day trading, but have since fallen 7%, suggesting that ordinary investors may have better odds with these "bargain" biotech IPOs.

10 most heavily discounted biotech IPOs of 2014
Company (Ticker)                                                    Offer Date  IPO Price vs. Midpoint First-Day Return Aftermarket return Return as of 6/6
Radius Health (RDUS)1 2
06/05 -47% 0% n/a 0%
Agile Therapeutics (AGRX) 05/22 -54% -8% 6% -2%
Alder BioPharmaceuticals (ALDR)
05/07 -29%
0% 57% 57%
Vital Therapies (VTL)1 04/16 -29% 0% 53% 53%
Cerulean (CERU) 04/09 -42% -2% -21% -22%
Argos Therapeutics (ARGS)2
02/06 -43% 0% -19% -19%
Eleven Biotherapeutics (EBIO) 02/05 -29% 9% -1% 7%
Trevena (TRVN)1
01/30 -46% -7% -32% -37%
Celladon Corporation (CLDN) 01/29 -47% 2% 11% 13%
GlycoMimetics (GLYC)1 01/09 -47% 13% -26% -16%
Group Average (10) 01/01 - 06/06  -41% 1% 3% 3%
Other Biotechs (23) 01/01 - 06/06 1% 26% -7% 13%
Postponed IPO
2 Withdrew IPO and refiled

IPO market snapshot
So far this year, 117 IPOs have raised $23.7 billion and produced an average first day return of 14%. The Renaissance IPO ETF (symbol: IPO), a cap-weighted basket of newly public companies and indicator of post-IPO performance, has climbed to its beginning-of-year price compared to +6% for the S&P 500. Over the last 30 days, the IPO ETF has risen 6% compared with 4% for the S&P 500, suggesting that the IPO market has become more receptive to new issuance. The active IPO pipeline includes 126 companies looking to raise a total of $48.4 billion, led by the health care (35 IPOs, $3 billion) and technology (18 IPOs, $24 billion)  industries.