Preclinical IPOs: Is the window starting to close?

A record-breaking year is on the cards, as biotechnology companies continue the trend of pre-clinical initial public offerings (IPOs). As of July, six young firms had raised almost $800million through their IPOs, despite none having permission from regulators to start clinical trials in humans.[1]

These companies are now generating significant returns. For example, the most recent preclinical IPO by Gritstone Oncology Inc was initially valued at $100 million, and as of 12 December 2018 has a market value of $731 million.¹

Pre-clinical valuations

Traditionally, there are two good times for biotech companies to go public: right after proof or concept in humans or upon the publication of promising, pivotal data.  But these pre-clinical valuations are being driven by excitement in an industry which has (almost) never seen it so good.

Ground-breaking treatments, such as gene and cell therapies, have been met with headlines heralding cancer care revolutions – and the markets have responded accordingly.  Stocks are at or near all-time highs and investors are feeling less risk adverse. The appetite for pre-clinical IPOs is the result.

This is the first time we have seen such early stage activity since 2015/16, when the model was given a trio of examples in the shape of CRISPR firms Editas Medicines, Intellia Therapeutics and CRISPR Therapeutics. All three went public with no clinical data in patients, and investors who took the leap reaped the rewards.

Editas, which went public at $16 in February of 2016, was trading at $30 on 12 December 2018, whereas CRISPR was issued at $14 and traded at the $36 on 12 December 2018¹. Yet human trials have still not yet started. SEC guidelines block purveyors of snake oil breaking into the market, of course, but this new trend leaves investors making decisions based on little more than sketches of molecules and animal studies.

Pre-clinical pitfalls 

Rubius’ valuation is roughly the same as Zogenix, which just posted positive Phase III data for a central nervous system drug that is widely expected to sail through the approval process.[2]

By contrast, the next milestone for Rubius’ gene engineering system, Red Platform, is investigational new drug (IND) approval.  Applications are usually a formality, but there is a risk in the platform being unchartered territory and blocked from clinical trials while kinks in the plan are ironed out.

In December 2017, Translate Bio, a leading messenger RNA therapeutics company, was asked to provide additional chemistry, manufacturing and controls (CMC) information after applying for an IND.[3] The licence was granted in April this year, and two months later the company raised $122 million through an IPO[4]. The costly delay, however, showed how disruptive innovation can get caught in the system.

Solid Biosciences suffered a similar set back, after it emerged that a critical early-stage clinical trial of a gene-therapy treatment had been blocked by the Food and Drug Administration (FDA).[5] Despite this revelation, Solid Biosciences successfully went public the following day, selling 7.812million shares at $16 each – valuing the company at $500million.[6] 

The valuation is based on the potentially lucrative Duchenne muscular dystrophy (DMD) market. If it works, Solid’s gene therapy would be one of just two treatments in the therapy area. The only indicators investors had of success, however, was animal testing data and the promise of an in-humans clinical trial.  

Denali Therapeutics carried out the largest IPO in 2017, in what is perhaps testament to the market’s current high-risk tolerance.  Its potential Parkinson’s treatment brought in $248 million when it sold 13.9 million shares at $18 each[7]. Despite publishing positive data in December, stock was down to $16 a share at the start of August this year.[8]

Market correction

Some industry insiders have seen the trend for pre-clinical IPOs as a sign of an overheated market and have predicted a correction.

According to an anonymous executive interviewed by STAT+, some deals have been fuelled by a “fervent and anxious desire” to get out before the IPO window closes, thanks to an attitude of “if the company down the road can raise X number of millions, why can’t we?”¹

Not all attempts have succeeded. Bispecific antibody builder Abpro postponed its $69.0 million IPO in May[9], and many believe lack of data was the reason. Abpro had previously submitted a public offering prospectus that focused on results from mouse models. It also explained it had not yet received approval from the FDA to test its immuno-oncology and ophthalmology agents on humans.

However, even comparatively mature companies, such as Mereo, Nicox, Themis, among others, have had to either abort their plans to IPO or have seen their initial valuations revised significantly lower.

Data is king

The success of early-stage IPOs has been driven by insider participation[10], but this doesn’t guard against price drops. The swing towards IPOs (and perhaps licensing deals as well) could change the market, as huge valuations so early on might preclude any deals down the road. It could also mean fewer trade sales. Whilst there have been some notable buyouts in the sector this year, such as Tesaro by GlaxoSmithKline and Juno by Celgene, the volume of mergers and acquisitions hasn’t increased as might be expected with lower valuations and the extra cash resulting from changes to US pharmaceutical policy.  

Even with recent market contractions and decreases in valuations, the pharma market isn’t necessarily grasping the fact that an IPO doesn’t ensure price growth or returns. Without data, the price of stock will fluctuate widely based on nothing but headlines, as has been shown by the CRISPR companies. Investors need to know that products have a reasonable chance of not only working, but also overcoming all the regulatory barriers of the development pathway. And that is very difficult without data.

[1] Preclinical biotech companies are having an IPO bonanza. What’s the draw for investors? Published July 24, 2018. Available at: https://www.statnews.com/2018/07/24/preclinical-biotech-companies-are-having-an-ipo-bonanza-whats-the-draw-for-investors/

[2] As Zogenix Develops Its Seizure Treatment Pipeline, Analyst Predicts More Upside. Published November 27, 2017. Available at: https://www.benzinga.com/analyst-ratings/analyst-color/17/11/10834028/as-zogenix-develops-its-seizure-treatment-pipeline-anal

[3] Translate Bio Announces FDA Clearance to Proceed with Phase 1/2 Clinical Trial in Patients with Cystic Fibrosis (CF). Published April 12, 2018. Available at: https://www.businesswire.com/news/home/20180412005402/en/Translate-Bio-Announces-FDA-Clearance-Proceed-Phase

[4] Translate Bio prices upsized IPO at $13 midpoint. Published June 27, 2018. Available at: https://www.nasdaq.com/article/translate-bio-prices-upsized-ipo-at-13-midpoint-cm984551

[5] Solid Biosciences’ IPO Hits Potential Snag. Published January 25, 2018. Available at: https://www.barrons.com/articles/solid-biosciences-ipo-hits-potential-snag-1516901566#

[6] Solid Biosciences Completes IPO. Published January 26. Available at: https://www.barrons.com/articles/solid-biosciences-completes-ipo-1516976620

[7] The 2017 Biotech IPO Winners and Losers. Published December 21, 2017. Available at https://www.biospace.com/article/unique-the-biggest-biotech-ipo-winners-and-losers-in-2017/

[8] Denali Therapeutics Inc. Published September 7, 2018. Available at https://www.marketwatch.com/investing/stock/dnli

[9] Bispecific antibody builder Abpro postpones $69M IPO. Published May 11, 2018. Available at https://www.fiercebiotech.com/biotech/bispecific-antibody-builder-abpro-postpones-69m-ipo

[10] MTS Health Partners 2017 US Biotech IPO Monitor