- Heart Test Labs had a horrible first day on IPO
- HSCS stock is recovering today
- Is this fundamental, or just the underwriters?
Heart Test Laboratories (NASDAQ: HSCS) stock had a disaster of a first IPO day. The stock was launched at $3.75 and closed down 60% at $1.70. Given that they actually launched at 3.20pm ET and close is pretty soon after that no, not a great performance. Further, this is after the IPO itself was downsized to raise $6.4 million. The original intention was to try to collect $8.75 million with an offering in the $4.50 to $5.50 range.
A 60% fall in day one dealings is really not what a company is looking for, but it's the performance that Heart Test Labs stock got. The 68% bounce premarket (it has been 90% – this is a constantly moving situation) is a nice reversal of course, raising the price back up to $2.82 at pixel time for this sentence but that's still not a good IPO performance.
We should be careful about pricing this close to an IPO of course. The underwriters are there for a reason, try try to bring some order to these first few days of a stock's life. So their activities continue and we're not seeing a wholly free and uncontrolled price as yet. We can even look at that premarket volume and while there are quite a lot of trades there are few of any size. Little beyond a few hundred pieces of HSCS stock.
As to what the company actually does, as the name suggests Heart Test Labs provides cardiac diagnostic devices. Which is where the corporate problem comes in because the Food and Drug Administration claims authority over diagnostic equipment as well as actual drugs themselves. This means that such devices need to receive FDA authorization to go on sale fully commercially. As with those drugs themselves, this is an expensive and costly – and more worryingly, uncertain – process.
HSCS has IPO'd in order to fund that process of gaining FDA authorisation. MyoVista is an AI enhanced ECG device intended to provide the sort of cardiac diagnostic information that would more traditionally be collected through cardiac imaging. Which all sounds great, obviously, but the intention is to use this IPO revenue to at least in part shepherd this through the FDA clearance process. That process which can be long, expensive and is definitely uncertain.
Sure, it has to be done because there's no ability to address the marketplace without that FDA approval. But it's a risky thing to be spending IPO proceeds upon. Which could well be why the minimal success of the IPO so far. For a more traditional financing process here is for private investment to carry this risk. A private investor from within the industry that is, one able to calculate the risks. That the IPO route was chosen could be simply confidence on the part of the management but it could also be that no such industry investor wanted to take that risk – that's not a good sign.
The long term HSCS valuation will clearly depend upon the status of FDA approval. In the interim we'll know more as the underwriter's influence on the immediate post-IPO price fades.