Verastem Inc., Ironwood Pharmaceuticals Inc. and Clovis Oncology Inc. could not have less in common, fundamentally speaking.
The first is pursuing a high-risk, high-reward preclinical cancer stem cell program; the second is awaiting an FDA decision on an irritable bowel drug it developed in-house; and the third is forgoing traditional drug discovery in favor of acquiring an oncology pipeline.
Three very different companies – the emerging biotech, the mature biotech, and the specialty pharma firm – yet each ranks among the most successful biotech initial public offerings (IPO) in the current window, and a closer look reveals several surprising similarities in the way the three companies approached the IPO process.
To be clear, whether or not an investor chooses to participate in an IPO is driven by fundamentals. No amount of adhering to best practices can compensate for a bad product. Hence most of the biotechs to go public in the current window – BioWorld Insight counts 23 since the beginning of 2010 – boast late-stage products with lucrative partnerships targeting large markets.
Yet Oleg Nodelman, portfolio manager and analyst at Biotechnology Value Fund LP, said there are several things a company can do to improve its IPO prospects.
First, and perhaps not surprisingly, Nodelman looks for a great team. It may be true that a great team can't save a bad product, but it's also true that a bad team can ruin a great product.
Second, Nodelman advises private companies to get to know public investors years ahead of the IPO. Quiet period restrictions during the IPO process prevent the level of due diligence a truly committed long-term shareholder would need, he explained. (See BioWorld Insight, Dec. 6, 2010.)
Third, go public from a position of strength, not as a last resort. "Please don't come to me when you've failed to sell yourself," Nodelman said. "Come to me and say, 'I've got a few buy-out offers at $300 million, but I think this company could stay independent and grow to $3 billion and who's ready to ride it up with me?'"
Fourth, raise enough money to get well beyond your critical inflection points. Since almost every biotech to go public over the last two years has been forced to significantly lower its IPO price, many have not been able to raise nearly as much money as they had originally intended, and it has become even more important to pad the coffers ahead of the IPO so investors don't have the immediate threat of further dilution hanging over their heads.
Fifth, "control your shares and put them in the hands of investors who are really long-term holders," Nodelman advised. In most IPOs, banks use shares to reward their best customers and most active traders, which can mean that each IPO investor gets only a few thousand shares. That's not enough of a position for a serious long-term investor to bother with, and those active traders can cause a lot of selling that tanks the stock soon after the pricing. There's a big difference between giving small chunks of stock to many impassive investors and giving large chunks of stock to a handful of passionate investors, Nodelman said, and it "takes a special, sophisticated management team to think through that."
Sixth, put some skin in the game.
Then There Were Three
The one thing emerging biotech Verastem, mature biotech Ironwood and specialty pharma firm Clovis have in common? They can check each of those best-practice boxes. And, fundamentals aside, that might have contributed, at least in part, to the success of each of their IPOs.
Verastem's IPO was noteworthy because the preclinical start-up managed to get public at a time when even late-stage biotechs are struggling to do so. And Verastem did not merely squeak out the window, it priced smack-dab in the middle of its range and is now trading up 15 percent. (See BioWorld Today, Jan. 30, 2012.)
Ironwood's IPO, meanwhile, deserves special mention because it was among the first to crack open the window in 2010, and it remains the top grossing biotech IPO of the current window, at $216 million. (See BioWorld Today, Feb. 4, 2010.)
Clovis is the only biotech IPO in 2011 to price within its initial target range, and at $139 million, it was second only to Ironwood in terms of total take. Clovis is also currently the best performing of all 23 biotech IPO stocks: its shares (NASDAQ:CLVS) are up about 90 percent over its IPO price. (See BioWorld Today, Nov. 17, 2011.)
All three firms have highly recognizable management teams. Clovis was founded by CEO Patrick Mahaffy and his former management team from Pharmion Corp., which was acquired by Celgene Corp. for $2.9 billion. Ironwood's founding CEO Peter Hecht is consistently named among the most visionary and respected biotech leaders. And Verastem founding CEO Christoph Westphal previously founded Sirtris Pharmaceuticals Inc., among other well-known biotechs.
All three CEOs also had strong relationships with Wall Street. Mahaffy and Westphal both made money for buy-side investors by negotiating the acquisitions of previous firms, so it was no surprise the investors were eager to follow these leaders again. Abingworth Bioventures and MPM Capital, which invest in both private and public companies, took stakes in Clovis and Verastem, respectively, even before their IPOs. Ironwood, meanwhile, started attending banking conferences and meeting with public investors about four years before actually going public, and it had private-public crossover investors in its last three private rounds.
All three firms also went public from a position of strength, rather than after failed attempts at an acquisition, at least according to the rumor mills. They also boasted strong cash balances: Verastem closed a $32 million Series B round – enough to carry the company for three years – just before filing for its IPO. Ironwood had nearly $100 million in cash when it filed, not to mention a steady stream of partnering milestones. And Clovis was founded with a massive $145 million Series A round, about $22 million of which was left when it filed.
In addition to starting with some cash on the books, all three firms raised a lot of money in their IPOs. Ironwood's $216 million, added to its existing cash and partnering revenues, was enough to cover the launch of bowel drug linaclotide and possibly reach profitability, some investors hypothesized. The biotech recently raised $79 million in a follow-on offering only to prepare for upside surprises in the launch, it said. (See BioWorld Today, Feb. 13, 2012.)
Clovis, meanwhile, said its $139 million IPO would give it more than a year of cash. And it could be a lot more: Adding the IPO take to existing cash would give the firm some six-times its 2010 operating expenses, exclusive of acquired in-process research and development.
Verastem may only have raised $55 million in its IPO, but it bears remembering that the firm is only in preclinical development. The firm's SEC filing showed a net loss of just $8.5 million from its Aug. 4, 2010, inception.
The word on the street is also that Verastem, Ironwood and Clovis each controlled the distribution of their IPO shares, and that Westphal, Hecht and Mahaffy each own hefty chunks of their companies – sending a message to investors that their interests are aligned with the companies' fates.
That's a lot of similarities for three companies that are so far apart in their business models, their indications, the mechanisms of action of their drugs, their stage of development, and even their reputations. Such fundamentals are the bottom line, at the end of the day. Yet as Nodelman said, "we can debate valuation, but if every great private company did this, independent of stage, there would be more great public companies."