It’s been said that biotechs are among the riskiest of initial public offerings due to the dualistic nature of their meds: they either succeed or they flop. There’s usually no gray area.
In the past, most biotechs delayed public offerings until they at least showed clinical evidence of their safety or efficacy. Heck, who needs that anymore in this era of evidence-free medicine? And that’s exactly the kind of story that’s been floating dozens of new biotechs over the past 18 months.
But in 2018, biotechs are increasingly going public with little or no clinical data. Instead, IPO investors are asked to rely on theories, “cartoons of molecules” and mouse models, says Renaissance Capital. Two early-stage biotechs had planned to price IPOs last week, bringing the number of preclinical 2018 biotech IPOs up to four, compared to just one during all of 2017 (Denali Therapeutics in December).
The first preclinical, Abpro Inc.–a biotech developing novel antibodies for various cancers–postponed its IPO on Friday (May 11, 2018). It had filed to raise $60 million by offering 4 million shares at a price range of $14 to $16. The Woburn, MA-based company was founded in 2004 and booked $2 million in revenue for the 12 months ended December 31, 2017. It had planned to list on the Nasdaq under the symbol “ABP.”
The week’s other preclinical, Evelo Biosciences Inc., an early-stage biotech developing microbial gut therapies for inflammatory diseases, raised $85 million by offering 5.3 million shares at $16–within the range of $15 to $17. The stock lists under the ticker “EVLO.” The science at Evelo focuses on the intersection of the gut and body; specifically, how the gut operates in directing the immune system. Shares closed on Monday up 10 cents at $16.10.
And another preclinical biotech–Scholar Rock Inc.–is on track for an IPO later this month.
Early-stage biotechs have more opportunities for failure. Without Phase 1 data, a drug candidate can quite easily fail in efficacy (human proof of concept), let alone prove unsafe.
While last year’s biotechs average a 70% return, this year’s biotechs average a gain of just 6%, with only 38% trading above their issue price. The three preclinical biotechs from 2018 average a return of 13%. However, the stocks are often highly volatile for the years leading up to their approval or rejection. Solid Biosciences Inc. is illustrative of this volatility: in the four months since the IPO, its return has ranged from +107% to -55%.
Unity, Homology and Solid are among the year’s five largest biotechs by market cap. Last year, Denali Therapeutics was the largest biotech IPO with a $1.7 billion valuation. Preclinical biotech IPOs often target markets so large that an approval would make the current valuation irrelevant. However, IPO investors quite clearly should be cautious about paying more for companies that have proven less, or nothing at all.
The wave of preclinical biotechs in 2018 may have been spurred by a number of early-stage biotech IPOs during 2014-2017 that became highly successful. AnaptysBio, a developer of antibodies for inflammatory conditions, is the best-performing biotech of 2017, up 495% from its IPO (though it had been up 750% as recently as March). AveXis, an early-stage gene therapy biotech targeting spinal muscular atrophy, was recently acquired at a 987% premium to its 2016 IPO price. Cancer biotech Loxo Oncology is up 850% from its 2014 IPO.
Then there’s the China IPO scene:
One day after Hong Kong’s stock exchange scored its first pre-revenue IPO application, the Shanghai Stock Exchange got its moment in the spotlight as global CRO WuXi AppTec garnered $354 million (RMB2.3 billion) by going public, Endpoints reports.
While the final amount fell short of the $900 million cited in its filing, WuXi’s shares shot up immediately after they became available, surging 44% to $4.89 (RMB31.1) from the IPO price of RMB21.6.
WuXi got the green light for the IPO in a matter of weeks, underscoring both the blistering hot biopharma market and what analysts describe as a sign of intense rivalry building up between the exchanges in Shanghai and Hong Kong. Hong Kong recently rewrote its rules to allow biotechs that haven’t booked any profits to list in the market in an effort to woo China’s fledgling biotechs, Endpoints reports.
And primed to be the first pre-revenue biotech to list in Hong Kong, Hangzhou-based Ascletis BioScience Co. Ltd., whose in-house hepatitis C drug is on the brink of approval, has just registered its IPO, says Endpoints. If it pops, the bulk of the cash will go toward four core products, which are in NDA, Phase 3, Phase 2, and Phase 1 stages, respectively.
Founded by ex-GlaxoSmithKline PLC officer Wu Jinzi in 2011, Ascletis has a reputation in China for being the first domestic company to develop a hep C cure. The drug, Ganovo, is expected to be approved in Q3 of 2018. The team plans to follow that up with another HCV treatment, ravidasvir (in-licensed from Roche), along with HIV drug ASC09, and liver cancer therapy HASC06.
The frenzy for cancer cures and meds that restore sight and reverse heretofore untreatable inherited, often fatal diseases has, as I’ve noted previously, turned international biotech IPO markets sizzling hot like never before.
Trump’s tax cuts for corporations have put billions (if not trillions) of dollars into stock buy-backs, which increase shareholder value. And let’s not forget that such corporate decisions are made by the C-suite group who stand to gain the most, with their stock bonus and options deals.Steve's Take: Investing in these preclinical #startups is becoming more like a pure crap shoot. Is that kind of #gamble for you? Click To Tweet
There’s unquestionably a heck of a lot of cash parked on the sidelines waiting to gush into the equities of biotech startups, some of whose products, like Swiss giant Novartis’s Kymriah, are promising “personalized medicine.” Although such treatments are preposterously expensive, some have shown signs of the previously illusive “cure.”
But investing in these startups is becoming more like a pure crap shoot, à la Las Vegas. Especially the preclinical ones. The odds definitely aren’t in your favor. But if the dice tumble your way, you can hit the jackpot. Is that kind of gamble for you?
If you’re a rational gamester, probably no. But a true speculator? There’s never been a better market for that kind of adventure. And I’ll keep an eye on China for you.