By LYNN COWAN

Wall Street Journal, April 24, 2006; Page C3

For every Chipotle Mexican Grill Inc. lighting up the IPO skies this year, there are a half-dozen drug and medical-device companies cowering under a black cloud.

Although drug and medical-device developers are the most prolific source of initial public offerings this year, they are underperforming the overall IPO market, which had its high point in the January offering of Chipotle, the burrito chain of McDonald's Corp.

First-day returns for these health-care-related companies average 3%; all IPOs returned an average first-day pop of 11%, according to research firm Renaissance Capital's IPOhome.com Web site.

These stocks tend to price below the expected range set by underwriters, and even after reducing their prices, about half this year have fallen below their IPO prices, or "broken."

Of the three drug developers that have come public this month -- Omrix Biopharmaceuticals Inc., Targacept Inc., and Vanda Pharmaceuticals Inc. -- all cut their prices $2 or more below their lowest range, and all ended their first day of trading either flat with or below their IPO prices. "Most of them really don't have a product yet. Hope, faith and charity is why you are buying these things," says John Fitzgibbon, an analyst with IPODesktop.com. "And they either have to raise the capital, or it's curtains for them."

In some cases, new investors in such companies actually pay less for their shares than the prior owners did. People who bought SGX Pharmaceuticals Inc. stock in its February IPO paid $6 a share; prior private investors had paid an average of $11.20 a share for stakes in the San Diego biotech. That's a situation that is nearly unheard of in other industries, where the norm is for new investors to pay a premium.

For young companies of developing drugs or medical devices, there are strong market forces working against their offerings. There is a steady stream of newcomers hoping to make their debuts each month, as well as existing biotech stocks seeking secondary funding from the public markets. Conversely, there's a finite supply of investors willing to take a chance on these deals.

"Almost by definition, if a deal is being priced below its expected range, it's one of two things: The market is disagreeing with the price that bankers and companies agree on, or the market is indifferent and uninterested in yet another early-stage company in which it is being asked to invest," says Jay Markowitz, a biotech analyst at fund manager T. Rowe Price.

The majority of new biotechs, pharmaceutical concerns and medical-device companies have no earnings, and many may not even have Food and Drug Administration approval for their products. The ones that are on the cusp of FDA approval face years of marketing costs, and there's no guarantee those drugs or devices will be adopted by doctors or won't be overtaken by competitors' products.

"I think it's a much more selective market," among investors than during the boom period of the late 1990s, says Stephan Patten, a portfolio manager at Sectoral Asset Management in Montreal, which subadvises the Quaker Biotech Pharma-Healthcare Fund. "The valuation of early-stage companies has probably come in, and investors are demanding more proof of concept for what's essentially still unproven and risky drug prospects."

Write to Lynn Cowan at lynn.cowan@dowjones.com