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Moderna, Allogene Have Disappointed Investors

Students of Thoroughbred racing know horses that look unbeatable in the racing form often fail to cross the finish line first.

In many cases, the same can be said for biotech initial public offerings.

Too much emphasis seems to be placed on those newbies that look like sure things before they start trading. It's been shown that many of these favorites are quickly exposed as pretenders rather than contenders, often by bettors judging them on potential rather than past performance.


Evaluating the success of an IPO seems pretty straightforward. Did everything go smoothly? How much money did the company raise? And how much over the offering price were investors willing to pay?

In a Sept. 10 article in FierceBiotech, Sam Zucker, a partner at the law firm Goodwin, acknowledged an IPO that starts quickly certainly indicates investors have confidence in the company's capabilities. But Zucker knows first-hand this faith is not always rewarded.

His firm represented Moderna (NASDAQ:MRNA) in its more than $600 million IPO, the largest in biotech history.

That IPO proved that bigger is not always better, he explained, pointing to the performance of the company's shares, as well as those of Allogene (NASDAQ:ALLO)--which set the previous high water mark by raising nearly $325 million in its coming out party. The latter's shares climbed 30% above its offering price on the first day of trading about a year ago. Since then, the stock has been stagnant.

Moderna has fared much worse. On its debut in early December 2018, the company turned in one of the worst performances for any company that went public during the year, dropping nearly 20% below its offering price of $23. Since then, its shares have receded another 20% to just under $15.

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"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," Zucker 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 million or $80 million could be more successful than a much larger one."

A successful IPO isn't the end of the story. Rather, it's just the beginning.

"Success is developing drugs that make it across the finish line and get approved by the FDA," Brad Loncar, an independent biotech investor and CEO of Loncar Investments, said. He added that investors shouldn't look at how much the company's stock price has appreciated, but how fast they can translate an idea into a marketed drug. "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," he added. "There's only a handful of companies where that is actually true."

One success story was Tesaro. After raising more than $80 million in its 2012 IPO, the company got two drugs approved within five years. Those investors who got in on the ground floor at $14 made a wise decision; GlaxoSmithKline (NYSE:GSK) bought Tesaro last December for $75 a share, a more than 60% premium.

Spark Therapeutics investors did even better. It raked in $161 million in its 2015 IPO and then got its gene therapy drug for an inherited form of blindness approved. Roche (RHHBF) won a bidding war for the company earlier this year, paying $114.50 per share -- about a 120% premium.

Biotechs that plan to go public might want to wait until proving its drug works before doing so. Then, said Locar, sophisticated science investors can evaluate the company properly

"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," Locar added. "One thing that companies sometimes don't appreciate is that it's important to be valued appropriately."

Disclosure: The author has no positions in any of the stocks in this article.

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This article first appeared on GuruFocus.