After I analyzed a series of biotech IPOs’ first-year performance…

Figure 1, Source: author
  • First two month — mostly perform pretty well; this can also be referred to as an “IPO bump”;
  • Then they are likely to enter a period of sell off — quick money will take their profits, combined with an general expectation of depression of stock price as lock-up period expires (Lock-up period is 180 days which is around 120–130 trading days);
  • Remember, biotech is a long-term play in most cases. Usually there is no “clear win” (e.g. a clinical trial meets its endpoints) a biotech company can offer to support the stock price within a year, but it will have some other milestones for investors (e.g. entering into a new clinical trial, first patient dosed, collaboration with a big pharma, etc.). These will attract some interest and support the stock price to some extent.
  • By the end of one-year, the overall performance is around +50%, although a bigger divergence among the companies is observed.
Figure 2, Source: Understanding Gartner’s Hype Cycles
Figure 3, Source: Understanding Gartner’s Hype Cycles, edited by author
  • Background of CEO, BD, VC investors, board members- useful to speculate the company’s possible big pharma collaboration, which will support the stock price
  • Cash reserve should be monitored. Cash flow from operation is the key to determine the cash burn and that number will be increased after the company goes IPO. Relatively low war-chest is not good, the company will like be squeezed and offered non-favorable terms, financially and strategically. Cash reserve, cash burn, and current stock price are key indicators for future equity offering — usually dilutive and thus can pressure the stock price.
  • Some intermediary milestones - need to be careful. Sometimes only the expectation of getting there is supportive and will be priced in; when the company actually get there, a little sell-off might follow; some companies will also use these milestones to begin a follow-on offering (dilutive, see above). So called “buy the rumor, sell the news
  • need to be aware of other players in the similar field - how other companies are doing will have a big impact. If another company announces a big success in clinical trail and moves much faster… not a good news
  • In Figure 1, percentages are calculated based on IPO price; in some cases, first day trading will capture most of the upside; if we calculate returns against first-day closing price… average return is trimmed by more than half in this data set
Figure 4, Source: author
  • 14 biotech IPOs listed on Third Rock Ventures’s website with over one year of stock history (Agios, bluebird, Blueprint, Cytomx, editas, GBT, Jounce, Kala, Myokardia, Sage, Sesen, Voyager, Zafgen); historical prices pulled from Yahoo Finance and Nasdaq
  • A percentage is calculated for each stock each day using its closing price that day and its IPO price
  • An average return of for 13 sub-periods (0–20, 21–40, 41–60, 61–80, 81–100, 101–120, 121–130, 131–150, 151–170, 171–190, 191–210, 211–230, 231–250 days) of 14 stocks are calculated and plotted in excel
  • why chose Third Rock Ventures (TRV) ? — TRV is a well-recognized venture capital firm in life sciences with consistent strategy (actively building a company from scratch with founders/management team), which I think is representing the future of biotech startups and biotech early investing



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Shikey S.

Shikey S.

Learn the past, understand the present, see the future