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Acceleron Pharma (XLRN) made its public debut on Thursday, September the 19th. Shares of clinical stage biopharmaceutical company ended their first day with gains of 33.3% at $19.99 per share.

Shares advanced even further on Friday as investors are enthusiastic about the prospects for the key partnership with Celgene, in Acceleron's attempt to develop cancer drugs. As shares are valued around half a billion, and there is not rally a Plan B, I remain on the sidelines as I cannot accurately judge the probabilities of success.

The Public Offering

Acceleron Pharma is a clinical stage biopharmaceutical company which focuses on the discovery and development of novel protein therapeutics for cancer and rare diseases.

Acceleron sold 5.58 million shares for $15 apiece, thereby raising $84 million in gross proceeds. All shares were sold by the company, with no shares being offered by selling shareholders.

Initially the bankers and the firm set an initial price range of $13 to $15 per share. Given the strong demand, the price was set at the high end of the range while the offer size was upped by 20%, from an originally planned 4.65 million shares. The public offering values the equity of the firm at $385 million.

Some 22% of the total shares were offered in the public offering. At Friday's closing price of $20.99 per share, the firm is valued at $539 million.

The major banks that brought the company public were Citigroup (C), Leerink Swann, Piper Jaffray and JMP securities.

Valuation

Acceleron Pharma's research is focused on the biology of the Transforming Growth Factor-Beta (TGF) protein super family, which are molecules which regulate growth and repair of tissues through the human body. Acceleron has developed three protein therapeutic candidates, being studied in 12 Phase 2 clinical trials which focus on cancer and rare diseases.

For the year of 2012, Acceleron generated annual revenues of $15.3 million, down 81% on the year before. This was driven by lower license and milestone payments. As a result, a $36.3 million profit in 2011 turned into a $32.6 million loss in 2012.

Revenues for the first six months of 2013 rose sharply again. Revenues came in at $41.4 million, up from merely $7.4 million the comparable period last year. As a result, the $15.0 million reported loss in 2012 turned into a $14.7 million profit. Given that the partnership with Shire has ended, full year revenues could come in around $60 million. Earnings might stagnate around the level achieved in the first half of the year.

Acceleron operates with $28.5 million in cash and equivalents before the public offering. The company has $19.2 million in notes payable and warrants outstanding on preferred stock. Factoring in the gross proceeds of $84 million from the public offering, and Acceleron Pharma will operate with a net cash position of around $85 million.

As such, Acceleron Pharma's operating assets are valued around $460 million, the equivalent of 7.6 times annual revenues and 30 times projected earnings.

The Pipeline

Acceleron has partnered with Celgene (CELG) to develop sotatercept and ACE-536, which are protein therapeutic candidates to treat anemia and other complications for patients with b-thalassemia and MDS. The project is currently in Phase II, while clinical trials for the third phase are expected to start by the end of 2014, or the beginning of 2015.

Some 300,000 patients across the world are estimated to suffer from b-thalassemia, among which 20,000 live in the US or in Europe, being dependent on frequent blood transfusions. As of the first of January of this year, Celgene will pay 100% of development expenses of both programs. Acceleron is eligible to receive upto $567 million in various kind of milestone payments, as well as royalties of 20 to 25% on sales.

Acceleron's last candidate is dalantercept, which aims to inhibit blood vessel formation in tumors. The method is different from, but could potentially have synergies with common VEGF inhibitors, which are the current dominant class of cancer drugs targeting these diseases. Acceleron has not signed any partnerships for dalantercept, giving it the full worldwide rights to the program.

Investment Thesis

As noted above, the offering of Acceleron Pharma has been a great success, after shares have seen solid first day returns.

Shares were already offered some 7.1% above the midpoint of the preliminary offering range. After witnessing opening day returns of over 33%, shares are trading with gains of 50.0% above the midpoint of the guided range at the moment.

While results for the first half of the year look good, they were mostly driven by collaboration revenues from a partnership with Shire (SHPG), which has ended in June of this year. The collaboration generated about $25 million in revenues for the first half of the year, roughly 60% of total revenues.

As such, results will look worse for the remainder of the year, as Acceleron is totally dependent on Celgene and/or capital markets for the financing going forwards. In a positive sign, Celgene has bought 666,667 shares in the offering, resulting in another $10 million cash boost for the company, much needed to fund further developments.

Current cash balances, including Celgene's contribution from a private placement, the proceeds from the public offering, and anticipated royalty payments will only last Acceleron till the first half of 2015. This is according to the company's own estimates.

Obviously these cash flow projections and a reliance on Celgene are key risks, notably as Celgene is also researching similar candidates, outside of the Acceleron partnership.

In the light of all these negative cash flow projections, total compensation of almost $2.0 million for CEO John Knopf seems a bit rich, however he is probably vital for the company for the company's future.

So an investment in Acceleron is basically a bet on the collaboration with Celgene ending in a good way, as there is not really a viable Plan B. If a successful drug might be developed, and will be approved by the FDA, the collaboration terms seem reasonable.

Yet the eventual outcome, and the success of Acceleron's public offering, entirely depends on the success probabilities of the development of the program. As I have no real technical expertise in this area, and cannot judge those probabilities, I remain on the sidelines.

Source: Acceleron Pharma - Successful Cancer Research IPO