Should You Buy Biotech IPOs?

Original post

Biotech is arguably the most exciting sector to invest in. This year, the NYSE Arca Biotechnology Index has more than doubled the S&P 500’s 14.6% total return with a 32.5% gain.

That being said, the swings can be large.

For example, on January 8, Pain Therapeutics (Nasdaq: PTIE) closed at $4.45. The next day it spiked on clinical trial data, tagging an intraday high of $12.80. Less than six months later, the stock lost 81% in a single day after the FDA rejected its pain management drug. Today, Pain Therapeutic trades for less than $1.

Meanwhile, the share price of cancer fighter Endocyte (Nasdaq: ECYT) has more than quadrupled year to date.

Thirty percent, 40%, 50% or more single-day gains in biotech stocks seem to happen on a regular basis, due to an acquisition, strong clinical trial data or an FDA approval.

So it might be tempting to buy an IPO of a biotech company – you know, get in early before everyone else does.

A Coin Flip

This year, 42 biotech companies went public. Twenty-two of them are currently trading above their IPO price.

Some of them have been monster winners…

  • Armo Biosciences IPO’d at $17 in January and was acquired in May by Eli Lilly and Company (NYSE: LLY) for $50.
  • Solid Biosciences (Nasdaq: SLDB), which is focused on Duchenne muscular dystrophy, had its IPO at $16. In March, the stock dropped from around $26 to below $10 after the FDA put its clinical trial on hold. Today, it trades north of $50.
  • Scholar Rock (Nasdaq: SRRK) (which sounds more like a garage band made up of English professors than a company aiming to treat spinal muscular atrophy) has more than doubled from its $14 IPO price.

On the other hand, there have been some serious losers too.

  • Surface Oncology (Nasdaq: SURF), a cancer immunotherapy company, is down by a third from its IPO price.
  • Neon Therapeutics (Nasdaq: NTGN), another immuno-oncology company, sold shares to investors at $16. Today, it’s below $10.
  • Vaccinex (Nasdaq: VCNX) is already down 22% just a month after its IPO.

Upcoming IPOs

There are a few upcoming IPOs in the biotech sector, with one in particular that will garner a lot of attention.

Moderna Therapeutics, which is already valued at more than $7.5 billion, is expected to start trading as early as the end of 2018. Its underwriters are heavy hitters – Goldman Sachs, Morgan Stanley and JPMorgan.

Moderna uses messenger RNA to treat a variety of conditions, including cancer and cardiovascular and infectious diseases.

Should Moderna go public, it will generate lots of hype and headlines.

Immunotherapy company Y-mAbs Therapeutics is expected to start trading on Friday. The indicated price is between $9 and $11. This is a much smaller deal than Moderna. Y-mAbs will raise about $100 million.

Should you buy them?

Generally speaking, I don’t recommend buying biotech IPOs.

I want to see a little more operating and trading history. Many biotech IPOs are early-stage companies that will need to raise a lot more money over the coming years. I’d like to see a track record of achieving goals, reaching milestones and acting as a responsible publicly traded company – even if the track record is short.

Additionally, many employees of newly public companies sell shares as soon as their lockup expires – usually six months after the IPO. This is the chance for employees to cash out and get a big payday from their stock or option awards that they have been accumulating since the early days of the company.

That’s a lot of extra supply of shares that hit the market, and it can put pressure on the stock price.

You can still buy development-stage biotech companies. These are companies that do not yet have an approved product on the market. They are speculative but can move very sharply when clinical trial data is positive.

Companies like Intellia Therapeutics (Nasdaq: NTLA) are still in early stages and are speculative, but they have been around for a little longer and have more history to look back on.

You can also invest in more established biotech companies like Regeneron (Nasdaq: REGN), a $42 billion market cap company that has drugs for cancer, eczema, diabetic retinopathy and many more. Regeneron generates more than $6 billion a year in sales, and it is profitable.

Biotech can be a fun and lucrative space to speculate. But leave the newbies to someone else. Stick with companies that have a bit more history to analyze and invest in more established companies to increase your chances of success.

Good investing,

Marc