Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Foundation Medicine (NASDAQ:FMI) made its public debut on Wednesday 25. Shares of the commercial-stage company focused on cancer treatment ended their first day with gains of 96.4% at $35.35 per share.

Investors go mad about biopharmaceutical companies which focus on personalized treatments for cancer these days. After shares have more than doubled since the initial pricing process, investors have already attached an almost $1 billion valuation to the firm.

The Public Offering

Foundation Medicine sells products, which are enabled through its molecular information platform, to physicians and biopharmaceutical companies.

Its platform includes proprietary methods to analyze tumor tissue samples across all kinds of cancer. The firm also aggregates information for its clients. The genomic information provided about each individual cancer case, enables physicians to optimize treatments and develop targeted oncology therapies.

Foundation Medicine sold 5.9 million shares for $18 apiece, thereby raising $106 million in gross proceeds. All shares were being sold by the company with no shares being offered by selling shareholders.

Bankers and the firm set an initial price range of $14 to $16 per share. Shares were eventually sold above the high end of the range. Besides raising the price, Foundation also boosted the offer size from 5.0 to 5.9 million shares.

Some 22% of the total shares were offered in the public offering. At Wednesday's closing price of $35.35 per share, the firm is valued at $926 million.

The major banks that brought the company public were Goldman Sachs (NYSE:GS), Leerink Swann, Sanford C. Bernstein and J.P. Morgan (NYSE:JPM).

Valuation

Foundation Medicine claims that its FoundationOne clinical product is the first commercially available molecular information product, designed for cancer care.

The commercial launch of FoundationOne commenced in June of 2012, while the commercial launch for blood-based cancers is planned by early 2014.

FoundationOne has been rapidly adopted by some 1,500 physicians from large academic centers and community-based practices in over 25 countries. To further accelerate growth the company is expanding its sales force, foster relationships and develop new products.

The increased usage among the 10,000 oncologists in the US should furthermore facility the decision to reimburse the service. Foundation Medicine partners with large biopharmaceutical companies including Agios Pharmaceuticals (NASDAQ:AGIO), Array Biopharma (NASDAQ:ARRY), AstraZeneca (NYSE:AZN), Celgene (NASDAQ:CELG), Johnson & Johnson (NYSE:JNJ) and Novartis (NYSE:NVS), among others.

For the full year of 2012, Foundation Medicine generated revenues of $10.6 million, up from merely $2.1 million in 2011. The company reported a net loss of $22.4 million for the year.

Revenues for the first six months of 2013, rose sharply to $11.1 million, greater than full year revenues for 2012. At the same time, net losses widened from $11.3 million to $17.4 million. Extrapolating revenue growth trends, full year revenues of $25 million should be attainable.

Foundation Medicine operates with $36.0 million in cash and equivalents. The company operates with merely $0.6 million in debt. Factoring in gross proceeds of $106 million, the company will operate with a net cash position of around $125 million.

As such, Foundation Medicine's operating assets are valued around $800 million, the equivalent of around 32 times this year's annual revenues of estimated around $25 million.

Investment Thesis

As noted above, the offering of Foundation Medicine is a great success story. Shares were offered some 20% above the midpoint of the preliminary offering range. Add to that 96.4% opening day returns, and shares are trading with gains of 135.7% compared to the midpoint of the preliminary offering range.

Crucial in Foundation Medicine's prospects is the adoption of the FoundationOne tests, and key in that adoption is the approval of reimbursements, and the launch of the FoundationOne for hematologic malignancies. Foundation executes roughly 30% of its test for patients covered by Medicare, while its solutions are not approved yet for reimbursement coverage.

The proceeds from the offering are used to bolster the sales force, expand laboratory operations and fund clinical trials to demonstrate the utility of the products and make the case for reimbursement. Note that the company performed 1,750 and 2,766 tests for the year of 2012, and the first half of 2013, respectively. Average revenues per test for 2012 came in around $3,700 per test.

While Foundation Medicine claims its FoundationOne clinical product is the first commercially available molecular product, competitors are on the rise as well. Well known laboratory companies such as Abbott Laboratories (NYSE:ABT) and Laboratory Corporation of America (NYSE:LH), among others, are focusing on the multi-billion market opportunity as well.

Despite the losses and fierce competition investors are enthusiastic. Key investors include Bill Gates and even Google Ventures, understanding the potential of genomics in cancer treatment. Personalized medicine treatments are the hottest thing in the industry, targeting the type of cancer instead of the organ.

While the public offering has been a success, the valuation reflects this already as well. It seems that Foundation Medicine has some promising technologies, addressing a huge market opportunity.

I remain on the sidelines, finding it hard to evaluate the prospects of this biopharmaceutical company, as the market already attaches an almost $1 billion valuation to the firm.

Source: Foundation Medicine - Personalized Cancer Pharmaceutical IPO Fetches $1 Billion Valuation