CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM Hoana Medical Chief Executive Patrick Sullivan says the company is at least three years away from an IPO.

Isle firms shun
public offerings

Companies build their track records
while waiting for the market

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By Dave Segal
dsegal@starbulletin.com

The last time a Hawaii company went public through normal channels it soared 108 percent on its first day of trading, in a gain symbolic of the stock market environment four years ago.

Growing their business Public offerings, mergers, acquisitions, expansion, internal growth and private placements are all vehicles that companies use to grow their earnings. These five Hawaii companies are considered to be in good position for an initial public offering of stock. None are planning to do so in the near future. Hawaii Biotech Inc. -- Researching and developing drugs for cardiovascular disease and hepatitis C infection, working on vaccines for West Nile virus and dengue fever, and studying anthrax bacteria as a federal project. Hoana Medical Inc. -- Testing a sensory pad that can measure vital signs without any equipment being hooked up to the patient. Hoku Scientific Inc. -- Developing a membrane for use in fuel cells with lower costs and higher efficiencies than traditional membranes. Territorial Savings Bank -- Converted from a state-chartered savings and loan association to a federally chartered savings bank last year and opened its 18th branch last month. Pomare Ltd. (Hilo Hattie) -- Hawaiian clothing retailer and manufacturer with 14 stores is named after Clarissa Haili, a popular Hawaii entertainer during the 1950s and 1960s whose stage name was Hilo Hattie.

But the initial public offering market is no longer the money-making machine it used to be.

Cheap Tickets Inc., which was in the right place at the right time for its March 1999 IPO, ended up making millions for founders Michael and Sandra Hartley. The Hartleys cashed in a second time by selling the business to Cendant Corp. in October 2001.

Nowadays, mergers and acquisitions appear to be a more applicable strategy than IPOs for private companies seeking to grow. And privately held Hawaii companies who still have their eyes fixed on the IPO market have put off any temptation to go public.

"This isn't any indictment of Hawaii's potential, but no one is going public," said Rob Robinson, executive director of the Pacific Asian Center for Entrepreneurship and E-Business at University of Hawaii. "It's an absolute wasteland out there. There are certainly (Hawaii) companies that, if this was 1998, 1999, would have been on a fast track going public. That's not necessarily a good thing, as we discovered."

While there doesn't appear to be any imminent IPOs, two Hawaii companies still developing their products could go public within the next few years. Among the most promising IPO candidates are Hawaii Biotech Inc., a biopharmaceutical company that is researching and developing drugs for cardiovascular disease and hepatitis C infection, exploring vaccines for West Nile virus and dengue fever, and undertaking an anthrax project; and Hoana Medical Inc., a medical device company whose sensory technology can measure vital signs without being hooked up to the patient.

A third company without any current commercial product, Hoku Scientific Inc., considers itself to be more of an acquisition target. Hoku is developing fuel cell technology that is more efficient and less expensive than what is in use today.

"There's a higher standard of proof that's required by companies before the IPO market will take a look at you," Robinson said. "A lot of the companies that went public in the late '90s had no profits and you just cannot even conceivably consider going public today without a proven financial track record."

At least two established Hawaii-based companies, Territorial Savings Bank and Hilo Hattie parent Pomare Ltd. would seem to be in a position to successfully raise additional capital by going public. But both companies have opted to grow in other ways and said they don't have any IPO plans.

Randy Havre, chief executive officer of Hawaii Venture Group LLC, said a company that is considering an IPO needs to have two things going for it -- tremendous growth and the ability to raise at least $50 million to $100 million in a public offering.

"That amount will accelerate your growth rate," Havre said. "To be a public company, you have to continue to grow. People want appreciation in their stock investment in that company."

Companies weighing the prospects of going public also should be large enough and have strong enough earnings to attract both analyst coverage and an investment firm that will be a market maker in the stock, said Richard Dole, CEO of Dole Capital LLC, a Honolulu-based private equity investment banking firm.

"If an investor invests in a private company, he may never see dividends from it," Dole said. "It may be wasted money, particularly if the minority stockholder has no control over the direction of the company. If a company is going to grow, it has to raise capital. Companies that go public will give liquidity to the private equity stockholders who probably wouldn't have gotten into it in the first place unless there was some plan of getting the money back."

Territorial Savings Bank

Territorial Savings Bank, for one, has been the topic of IPO speculation since it converted from a state-chartered savings and loan association to a federally chartered savings bank in September.

The company, which is structured as a mutual holding company, is permitted to issue 49 percent of its stock to the public.

Territorial Chief Executive Officer Allan Kitagawa said the bank has received numerous IPO questions from depositors, who would have the first rights to purchase shares before they became available to outside buyers.

But Kitagawa, while not ruling out an IPO down the road, said the bank is happy with its current situation.

"Certainly, if you look at our numbers, we would be a very likely candidate," Kitagawa said. "But there's really no reason to do so at this point in time. We obtained additional capital to grow the company in a manner that didn't involve offering stock. I can't say, though, that there may never be an opportunity on a merger or acquisition that would require us to have additional capital. If that happened, then we may sit back and think about whether we want to do it or not."

The fast-growing bank saw its net income jump 144 percent last year to $8.8 million and its assets grow 34 percent to $741.4 million.

In the first two months of this year, Territorial's assets grew an additional 7.4 percent to $796 million. The bank opened its 18th branch last month in Kapahulu and plans to open branches in Kapolei and Mililani and, possibly, Kahala this year.

Pomare Ltd.

Pomare's Hilo Hattie, a Hawaiian clothing retailer and manufacturer, will open its 14th store next month and appears content to grow through expansion.

The new Orlando store will be the chain's sixth outside the islands, joining outlets in Orange, Calif.; Nashville, Tenn.; Tempe, Ariz.; Las Vegas; and Miami.

"We're open to all possibilities," said Paul deVille, president and CEO of Pomare. "But our feeling is that we're not focused on that (IPO) scenario because we don't feel the current environment is healthy, nor do we feel that we're at a stage where that would be a strong consideration. We don't view growth necessarily as going public because all going public does is provide capital through the sale of the initial public offering. We can grow through internal cash flow or a private placement, and currently our path is to grow ourselves internally."

Among the up-and-coming Hawaii high-techs, Aiea-based Hawaii Biotech; Hoana Medical, which has offices in Honolulu and Redwood Shores, Calif.; and Kalihi-based Hoku Scientific appear well-positioned.

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GEORGE F. LEE / GLEE@STARBULLETIN.COM Hawaii Biotech Chief Executive Officer David Watumull says the company will wait until there is a suitable window for biotech IPOs rather than trying to go it alone.

Hawaii Biotech

Hawaii Biotech, which over the past 12 months has received $3.8 million in private investor financing, also has been awarded more than $30 million of federal and state research grants and contracts in its nearly 20 years of operation.

David Watumull, Hawaii Biotech's president and CEO, said the 40-employee company gets enough capital to allow it to be self-sufficient but said investor funding has helped accelerate its projects.

Hawaii Biotech currently is using mice and rats to test its drugs. "If we have positive data from these studies, which in turn generate venture capital investments, we will move these projects into human testing," Watumull said.

Among those projects are Cardax, which is designed to reduce the amount of tissue damage for people who have had heart attacks or those with cardiovascular disease who have not yet had a heart attack; Heptax, which is designed to reduce or prevent damage from hepatitis C infection; a West Nile vaccine; and an anthrax project.

With the anthrax project, the company is looking for inhibitors of the toxin produced by the anthrax bacteria.

Hawaii Biotech was granted $3 million in Department of Defense funding for that project as well as $295,000 from the National Institutes of Health. Hawaii Biotech also is working on a dengue fever vaccine.

Watumull said it's likely that Hawaii Biotech will wait for a biotech IPO window to open rather than to go it alone.

"The biotech IPO market has always been difficult to predict and the types of biotech companies able to go public differ at different times," Watumull said. "I think what would make a biotech IPO for Hawaii Biotech more likely is success with our programs, with success being defined as positive data from human clinical trials. And that positive data could drive a licensing opportunity either with a major pharmaceutical company or an IPO or, if we're fortunate, both."

Watumull said Hawaii Biotech doesn't need to wait for its products to go on the commercial market before going public.

"Going to market and commercialization can be two different things in the biotech industry," Watumull said. "A biotech company can commercialize its technology by licensing its product to pharma- ceuticals or big biotech companies years before FDA approval allows them to market that same product.

Those revenues could make a smaller biotech company profitable and could allow that same company to do an IPO prior to market approval in biotech."

Hoana Medical

Hoana Medical's Passive Sensory Array is a pad with sensors built into it that goes under a bed sheet and can measure vital signs without any equipment attached to a patient.

The technology can be set up to allow a doctor to use the Internet to monitor a patient on the other side of the world. Hoana Medical has built 25 units that are being used in six clinical research sites around the country.

"The question of an IPO for Hoana Medical certainly looks promising and is something we're considering," said Patrick Sullivan, Hoana's president and CEO. "Certainly, the market has to make sense and the company needs to be in the right position. My guess is that it's really several years away, more like 2006."

Sullivan said fund-raising will play a key role in how soon the 13-employee company can get its product to market. The company raised $2.6 million last year.

"A medical device has to deal with clinical issues and demonstrating improved patient outcomes," Sullivan said. "I think Hoana is on a path to be a good candidate for that. It's a function of how well we execute. We've identified a pretty solid market and the product looks like it's addressing a solid market need."

Hoku Scientific

Kalihi-based Hoku Scientific is hoping to interest another company in its fuel-cell technology after it conducts field tests later this year or early next year.

"There have been a couple of inquiries, but we're not at the stage yet where we're actively looking at being acquired," Shindo said. "We're still in the early stages and we won't be ready to seek an exit for two or three years."

Hoku Scientific focuses on the membrane, which is one component in a proton exchange membrane fuel cell.

The membrane is like a microprocessor in a computer where it's critical to performance and determines the overall performance and speed of the system.

The 10-employee company, which raised $1.5 million last year, is backed by Hawaiian Electric Industries Inc. and other investors.

"The benefits of our membranes are lower costs and higher efficiencies," Hoku Scientific CEO Dustin Shindo said. "Our membranes are much more environmentally friendly than traditional fuel cell membranes and, in the end, our membrane has a much lower cost."

HiBEAM, a nonprofit organization that helps fledgling Hawaii high-tech companies raise capital, has seen its six clients raise more than $17 million since 2000.

Those clients include Hawaii Biotech, Hoana Medical and Hoku Scientific.

"The IPO market is essentially closed right now for technology companies," said Leigh-Ann Miyasato, HiBEAM's executive director. "An exit like that for a Hawaii company would be very far down the road."