OncoMed: High Opening Day Returns For This Biotech Public Offering

OncoMed Pharmaceuticals (NASDAQ:OMED) made its public debut on Thursday, July 18th. Shares of the clinical development-stage biopharmaceutical ended their first day with spectacular gains of 59.9% at $27.18 per share. Shares saw a very modest correction on Friday, marking a very successful public offering.

Investing in any biotechnology firm goes along with a larger degree of risk. Yet OncoMed has quite some potential, driven by a solid balance sheet, strong partners and a diversified pipeline.

The Public Offering

OncoMed is a clinical development-stage biopharmaceutical company, which is focused on the discovery and development of antibody therapeutics targeting cancer stem cells.

OncoMed's product candidates target the blocking of self-renewal of cancer stem cells, making it distinctly different from common cancer drugs.

OncoMed sold 4.8 million shares for $17 apiece, thereby raising $82 million. No shares were sold by selling shareholders.

The public offering values the equity of the firm at $447 million. The offering took place above the preliminary $14-$16 offer range. Some 18% of the total shares outstanding were offered in the public offering. At Friday's closing price of $26.70 per share, the firm is valued around $702 million.

The major banks that brought the company public were Jefferies, Leerink Swann, Piper Jaffray and BMO Capital Markets.

Valuation

OncoMed uses its proprietary technologies to identify, isolate and evaluate cancer stem cells. It develops targeted antibody and therapeutics to inhibit the growth of cancer stem cells. The company has five anti cancer stem cells product candidates, having treated some 235 patients in clinical trials.

The firm has two antibodies in the preclinical development stage with a filing planned as early as 2014. The company entered into a strategic alliance with GlaxoSmithKline (NYSE:GSK) back in 2007 to develop its Notch signaling pathway. OncoMed received a $35 million investment from the pharmaceutical giant. GSK can exercise an option for the drugs in exchange for approximately $344 million and royalty payments.

OncoMed has also partnered with Bayer (OTCPK:BAYRY) to develop and commercialize anti-CSC therapeutics. The company received a $40 million cash payment. In this agreement, OncoMed can receive payments of up to $387.5 million on top of which it will receive royalties.

For the year of 2012, OncoMed generated annual revenues of $24.7 million. Total revenues, largely driven by collaboration revenues, fell by 21% compared to the year before. At the same time, net losses widened by almost 50% to $22.2 million. Losses were largely driven by research and development spending, totaling $40 million per annum.

OncoMed ended the quarter of March 2013 with $60.2 million in cash, equivalents and short-term investments. The company operates without the assumption of debt. Including the proceeds from the public offering, OncoMed operates with a net cash position of roughly $130 million.

As such operating assets of the firm are valued around $570 million, a whopping 23 times annual revenues over the past year. Note that OncoMed's revenues are only based on collaboration revenues and not on a working product yet.

Investment Thesis

As noted above, the offering of OncoMed has been a huge success. Shares were offered 13.3% above the midpoint of the preliminary offering range and saw big opening day gains. At Friday's closing price of $26.70, shares are trading a whopping 78% above the midpoint of the preliminary offering range.

Besides seeing very strong price action, OncoMed furthermore raised its planned offer size by 20% to 4.8 million shares.

Obviously investing in a biopharmaceutical company with no working product results in very high risk. While OncoMed is reporting losses and has no working product yet, there are some positive signs as well. The public offering has given the company enough funds to finance the Phase II clinical trial of its OMP-21M18 candidate, requiring an estimated $18-$25 million investment. The company has two respectable partners as well and quite a diversified pipeline.

While there are clear risks to investing in biotechnology firms, OncoMed offers some comfort. The solid balance sheet, strong partnerships and range of potential products make it quite interesting. While it is very difficult to attach a valuation, even if one of OncoMed's products make it to the market, the market is really enthusiastic about the prospects.

Yet it will be a tough ride as clinical trials will result in larger losses before things will get better. I will await outcomes of clinical trials and better estimates about the true market potential before considering making an investment in the firm.

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.