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The Offering

Audeo Oncology (AURX) is offering 3.3 million shares of its common stock and hopes to raise nearly $50 million from the deal. If the shares start trading publicly at the midpoint of the range, it would give the company a market cap north of $162 million. The shares are expected to price the week of 12/10/12 at between $14 and $16 per share.

Audeo Oncology's Primary Business

Audeo Oncology is a late state biopharmaceutical company specializing in drugs targeting tumors and cancer stem cells. Its primary product uses Hyaluronic Acid Chemotransport Technology or HyACT to improve the targeting and efficacy of cancer drugs. Its main HyACT product candidate called HA-Irinotecan is in Phase III clinical trials to determine its effectiveness in the treatment of metastatic colon cancer. It is also in Phase II trials for the treatment of small cell lung cancer. In addition, the company has two other product candidates still in Phase I trials.

Despite many advances in cancer research, chemotherapeutics are typically administered at the maximum tolerated dose, instead of the optimal amount. Audeo Oncology is hoping that its products will help to guide existing drugs to attack cancer cells more efficiently, lessening the dose required and boosting drug efficacy without increasing side effects. Because of this approach the company plans to use a regulatory pathway that makes FDA approval easier than it would be with a brand new cancer drug.

Audeo Oncology's Main Competitors

According to the company it has extensive research and preclinical expertise in cancer metabolism, cancer stem cells and other aspects of its drugs primary functions. However, bringing drugs through clinical trials and the regulatory process costs an extraordinary amount of capital, meaning AURX is always in competition with other pharmaceutical companies for venture capital, angel investments and money from public markets to continue to fund operations until its products can get on the market. Audeo Oncology operates in a highly competitive space, which it shares with many small start up companies try to get their drugs approved.

In addition, there are a few companies, some with significantly more resources, who are developing cancer cell targeting drugs very similar to Audeo Oncology's Irinotecan. Bayer-Shering has a drug called regorafenib and Sanofi (NYSE:SNY) / Regeneron's (NASDAQ:REGN) drug is called aflibercept. Both of which have been approved by the FDA. Another company called Light Sciences Oncology is putting its drug, talaporfin sodium through Phase III trials and Nektar Therapeutics' (NASDAQ:NKTR) product candidate is a version of irinotecan which is still in Phase II trials.

Similar Offering

Earlier this year a Cambridge, MA based company called Verastem took its company public. Its business plan was to make drugs to combat cancer stem cells, which Verastem believes are the parts of tumors that are treatment resistant and play a key role in the cancer spreading. Verastem managed to raise $55 million from pricing 5.5 million shares at $10 per share, the midpoint of the range. The company had originally planned to sell only 4.5 million shares, but increased investor interest raised the offering. All this was despite the fact that Verastem did not have any product candidates in clinical testing at the time. Since the IPO the stock has steadily declined and was down to about $6 per share in December.

Audeo Oncology's Financials

Like many start-up pharmaceutical companies Audeo has yet to receive income from drug sales and its research and development costs have been steadily increasing. The cash from this IPO should be enough to finish Phase III trials on Irinotecan and move the drug on to the beginning of the regulatory approval phase. Up until this point all of the companies funding has come from its parent company Alchemia Limited in the form of loans. At the time of filing its prospectus the company had accumulated a deficit of $47,124,258. Typically the game is to get as much financing as possible to advance the drug to a point where it becomes attractive for a large pharmaceutical company to either take over the business or ink a partnership deal.

Recommendation

The cash from the IPO is going to be used to get the company's product candidates as far through the regulatory process as possible. Until then the stock price will fluctuate with every little bit of news that may be a help or hindrance to that cause. If Audeo Oncology manages to get a drug approved then the stock price is undervalued. If it fails in the approval process then the stock is practically worthless. I would wait until the company is closer either to final approval or to a partnership/takeover deal with another drug company and I would not participate in this IPO.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Audeo Oncology IPO - Will Its New Cancer Drug Grow Profits?