13 September 2019
What’s in an IPO? How does a company win (or lose) in its public debut? On the surface, it’s easy. Did it raise a lot of money? Did investors pay a higher price per share than expected? Did it go off without a hitch?
“I think the perception that the IPO moves briskly and doesn’t languish after flipping publicly is important. That’s not always possible for a variety of reasons, but an IPO that moves pretty fast from start to finish sends a message about the capabilities of the company and the willingness of investors to back it. That’s one factor of a successful IPO,” said Sam Zucker, a partner at Goodwin, the law firm that represented Moderna in its $604 million IPO—the biggest in biotech history.
By that measure, companies like Moderna and Allogene—which set the previous record with its $324 million debut—would be on top.
But of course, it’s more complicated than that. For one, Zucker said, bigger isn’t necessarily better.
“For many companies, raising $80 million is entirely appropriate for what they need. They’ve got a development plan and they need to fund it,” he said. “Raising too much money before they’ve achieved various clinical milestones is a lot more dilution than if they raise, say, $80 million instead of $200 million. An IPO at $70 or $80 million could be more successful than a much larger one.”
Closing a solid IPO, pricing it at the top of the range and raking in millions isn’t the end of the story. With more biotech companies going to Wall Street at earlier and earlier stages of development, a public debut is often just the beginning. And that’s why you won’t read another word about Moderna in this piece: The mRNA biotech may have made biotech history, but there isn’t enough evidence about how it used that cash to properly judge its performance.
The same can be said for a number of other companies that have gone public in recent years. So, which ones can we judge? Those that have translated pipeline promise to actual products—or those that have failed miserably.
“Success is developing drugs that make it across the finish line and get approved by the FDA,” said Brad Loncar, an independent biotech investor and CEO of Loncar Investments. “Investors always measure things by how much the stock price has appreciated, but I think companies that went from an idea to an approved drug on the market are the ultimate signs of success in our business. There’s only a handful of companies where that is actually true.”
Take Tesaro, which raised $81 million in its 2012 Wall Street debut and then pushed two drugs through approval within five years. Or Spark Therapeutics, which raised $161 million in its 2015 IPO before getting Luxturna, its gene therapy for an inherited form of blindness, past the FDA. Both companies found themselves in the crosshairs of Big Pharma acquirers, with GlaxoSmithKline buying Tesaro in December 2018 and Roche winning a bidding war to get its hands on Spark.
Kite Pharma, on the other hand, did it the other way around. After raising $128 million in its IPO in June 2014, the company was snapped up by Gilead in August 2017, months before its CAR-T therapy, Yescarta, got the FDA nod.
“[A biotech getting bought] shows in most cases—but not always—that it created true value. Without a doubt, in most cases, that is a sign of something done right,” Loncar said.
As for IPOs done wrong, Loncar says going too early can be risky.
“I think it’s important for companies to make it through proof of concept before going public,” he said. “When you trade on the stock market, literally anybody can buy your stock.”
Although biotech IPOs are trending earlier, companies in the sector would traditionally wait until a major study that showed proof of concept.
“At that point, sophisticated science investors can appropriately value your company,” Loncar said. “If you go public earlier than that, you are liable to be at the mercy of investors who don’t know how to truly value some of these companies, and that’s another thing that can go both ways. One thing that companies sometimes don’t appreciate is that it’s important to be valued appropriately.”
Take Axovant, which in 2015 raised $315 million in the biggest biotech IPO to that point. With a valuation close to $3 billion and a GlaxoSmithKline castoff, the company set out to do what no one else had done before: create a treatment for Alzheimer’s disease.
What came next was a series of failures that could have spelled the end for Axovant if it hadn’t made an 11th-hour pivot to gene therapy. The jury is still out on whether Axovant’s IPO is a winner or loser. But other companies weren’t so lucky.Print
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