Next week's IPOs: Just what the doctor ordered?

By Lilla Zuill

NEW YORK, Sept 14 (Reuters) - Venture capital firms bringing two health care-related initial public offerings to market next week are hoping investors will give their companies a shot in the arm.

An IPO from Athenahealth Inc, a Watertown, Massachusetts, provider of Internet-based services to physicians, is set to raise up to $100 million.

The IPO is generating buzz among investors, according to analysts. Although the company has not yet posted a profit -- usually a red flag -- its losses narrowed from 2005 to 2006; it has a strong track record of revenue growth and it boasts a solid rate of client renewals.

"The big one next week is Athenahealth. The roadshows have been going well. I'm hearing there is a groundswell of support for this stock," said Sal Morreale, who tracks IPOs for Cantor Fitzgerald. "The deal is multiple times oversubscribed and it is getting a lot of early buzz."

Also next week, Zars Pharma Inc, a Salt Lake City pharmaceutical company developing topically-administered drugs, primarily to manage pain, is expected to raise up to $80 million in an IPO.

The companies plan to trade their shares on Nasdaq. Both have been funded by venture capitalists, including Draper Fisher Jurvetson, a Menlo Park, California venture capital firm that has stakes in both.

Zars Pharma, also unprofitable, says it will use proceeds of its offering largely for development and possibly for acquisitions.

The company already has products it can sell, or is in the latter stages of bringing to market, with at least one product that is FDA approved. Another is a candidate for a phase 3, or late stage, clinical trial.

Under a licensing agreement it has received a $30 million payment and stands to make another $10 million milestone payment, as well as royalties.

"That's a definite plus," said Francis Gaskins, president of IPO research firm IPOdesktop.com, of Zars Pharma.

SUPERHERO BUSH?

Athenahealth's chief executive also has helped draw attention. Jonathan Bush, 38 -- who once donned a superhero costume for a cover story on the company -- co-founded the firm in 1997.

More recently, his famous first cousin, President George W. Bush, spoke in favor of helping doctors get a handle on paperwork by using technology, which is Athenahealth's business.

"We will make wider use of electronic records and other health information technology to help control costs," President Bush said last year in a speech on federal health care policy.

The company said Jonathan Bush chats with the President at family gatherings, but has had only one, informal, discussion about the business.

Athenahealth claims that, in the United States, the average physician generates 70 to 100 pages of paperwork per day. Doctors offices employ, on average, about three full-time office staff per doctor to handle the pile of insurance claims and other paperwork, according to a 2006 survey from the Medical Group Management Association.

Athenahealth, as of June 30, worked with more than 10,500 medical providers using its services, according to its filing with the U.S. Securities and Exchange Commission.

"On a macro basis, this area (of Internet-based physician services) is growing," says IPOdesktop's Gaskins.

Athenahealth also is winning fans among IPO investors because of its 97 percent renewal rate with physician clients, according to Gaskins.

"People are hungry for predictable revenue," he said.

The company is also close to becoming profitable.

"If you look at the operating profit trend here for the six months ended June 30, it is pretty clear this one is going to break-even," Gaskins said.

In the three months ended June 30, Athenahealth had revenue of $46 million, compared with $35 million in the same period a year earlier.

Gaskins said it was difficult to value the company versus other firms as it is "a pure play in its sector." That said, Athenahealth's price-to-book ratio of 8.7 compares with a ratio of 4.2 at Allscripts Healthcare (MDRX.O: Quote, Profile, Research), a provider of Internet-based clinical services to physicians.

Athenahealth, at the high end of its IPO price forecast of $14 to $16 per share, would have an initial market capitalization of about $500 million.