It’s been an unusual year in biotech. I’m sure you’ve seen numerous articles about the sheer number of biotech IPOs. That’s interesting for those of us focused on the sector, but I submit that wasn’t the real IPO story in 2013. The real
story was the ability to buy these IPOs and, in nearly every instance, make money.
I’ve been focused on the biotech space for more than 12 years. The rule with biotech IPOs, in hot or cold markets, was that one generally avoided them because one could always buy them cheaper two or three quarters later. That wasn’t the case in 2013.
On my list of 39 biotech IPOs, 26 were trading above their IPO price on the last trading day in November, and 36 have 52-week highs at least 10% above their IPO price. Thirty have 52-week highs at least 50% above their IPO price. Think about that last stat for a moment. Anyone participating in biotech IPOs had a three-in-four chance of making at least 50%. No wonder allocations got really, really tough as the year went by.
But 2014 is a new year, and all of us on the buy side get our annual reset at the end of the month. I thought it might be interesting to take a quick peek at some of the performance standouts from the 2013 Class of Biotech IPOs before the calendar turns over.
The table below shows the top four stocks measured from their IPO price to the close on the last trading day of November.
(NASDAQ:INSY) isn’t really a new IPO. It took advantage of the IPO craze to rebrand and recapitalize. This particular company (formerly known as NeoPharm) doesn’t have the best track record
, but investors have put it atop the leaderboard anyway.
Insys has three drugs. Subsys is a sublingual (under the tongue) spray of the generic pain medication fentanyl. It’s a “Tier 3” drug, meaning insurers reimburse it at a worse copay than other non-branded fentanyl versions (or not at all until after generics are tried). Subsys had Q3-2013 revenues of $28.4 million and has seen impressive sales growth, enough to make this small company profitable.
Subsys bulls, who believe “this time will be different” with NeoPharm/Insys, see Subsys as driving company valuations even higher than the current $950 million market cap. There is no doubt Subsys sales growth is good (for now), but the rest of the story isn’t particularly attractive.
In 2011, the company launched a generic version of another pain reliever. This gel-cap contains dronabinol, a synthetic cannabinoid (i.e. compound related to marijuana/THC). Barely a year after launch, Insys had trouble manufacturing the drug. Despite working on the problem for over a year now, the product has never recovered from this botched launch.
The company’s third product is an oral, liquid reformulation of dronabinol. Insys was supposed to file for FDA approval of this compound at the end of 2014, but management withdrew that guidance on their last conference call. Because it is a cannabinoid product, the DEA must be involved. Apparently, Insys management didn’t coordinate with the DEA well enough before providing guidance. Insys bulls think this is a short delay, but Eisai
(OTCMKTS:ESALY) executives will tell a different story
. I’d be surprised to see this drug on the market before late 2015. After all, what issues could the DEA have with a drinkable synthetic cannabinoid?
Insys has a billion dollar market cap based on one “branded generic” drug with $30 million in quarterly sales, a botched launch of a second drug, and an indefinitely delayed NDA filing for their third drug. They also announced on their last call they will be ramping up their R&D spending to refill their empty pipeline, so bottom-line margins will narrow going forward. I think there is a good argument to be made that this one is really overvalued.
(NASDAQ:GWPH) is also not a brand new company. Traded in the UK for 15 years, they did an IPO of American Depository Receipts (ADRs). These ADRs have done really well, up over 300% since they came out. Coincidentally, GW Pharma also works with cannabinoids. GW Pharma seeks to treat central nervous system (CNS) conditions like multiple sclerosis and pain related to cancer.
Its lead drug, Sativex, is approved in 21 countries, and they have two other compounds in Phase II trials, and another compound in Phase I trials. It’s a broad pipeline
, though I have to say the sheer unpredictability of drugs for CNS conditions has always made me nervous as an investor. The company will also have DEA issues when it gets to the point of marketing approval in the US.
(NASDAQ:PETX) is the third-best performer on the list, and I have to admit I have a soft spot for the company. Aratana specializes in taking oncology and other drugs designed for humans and redeveloping them for the treatment of animals – primarily canine and feline members of our family. As someone who recently lost two cats to cancer, it’s hard for me to be objective about this company (hence, why I have no position).
In its favor is the fact that pet owners spend ermahgerd
amounts of money on veterinary care for their pets. The purchase of pet insurance is on the rise, making it easier for pet owners to afford more expensive treatments. All the financial and pet demographic trends are clearly going Aratana’s way, hence why investors have run the company up over 200% from the IPO price.
Running against it is a completely underdeveloped clinical trial system where case studies – anecdotal stories of efficacy in a handful of animals – are what pass for clinical evidence in veterinary cancer care. I think Aratana management has a good handle on this, but it will be a challenge for them. Also worth noting is the lockup for Aratana expires on Christmas Eve.
(NASDAQ:ADHD) does what its ticker suggests – develop drugs for CNS conditions like ADHD. Up over 200% from its IPO price, this Israeli company has just one drug in development – MG01CI for the treatment of ADHD in kids. Designed to be a better solution for kids with ADHD, with a reduced chance for abuse compared to current options, the drug is headed towards Phase III trials.
The drawback here is Alcobra’s drug isn’t novel. It’s actually a timed-release formulation of metadoxine, a drug around since the 1980s for the treatment of alcohol intoxication. The company claims reformulation patents through 2028. Alcobra also faces the daunting task of running a clinical trial program for ADHD kids without a large marketing partner to help foot the bill.
Editor's note: The aforementioned stocks trade on what Minyanville would consider low average market volume and may be subject to intraday price distortions.