Seeking Alpha
Value, small-cap, micro-cap, long/short equity
Profile| Send Message|
( followers)  

Summary

  • A collapse of biotech IPOs will not only hurt recent IPO prices, but will severely limit the ability for established biotech companies to raise capital through secondary offerings.
  • Companies without a revenue stream or approved product are impossible to place a value on.
  • Spreads will grow in companies without revenue streams and eventually bids will disappear.

iShares Nasdaq Biotechnology (NASDAQ:IBB) looks ready to reverse the downtrend it has been in since its price peaked on February 25, 2014. Since then shares have slid over 20%. IBB is currently sitting right above its 200 day moving average at $220. This area should offer significant support because the price has now traded back to its highs of 2013. IBB had a three and a half month rally where its price increased more than 38% between November 7, 2013 and February 25, 2013.

(click to enlarge)

Don't be surprised if the rally just leads to more selling of research stage biotech companies, particularly recent IPOs. 2014 kicked off the year with the most active first quarter IPO market since the 2000 tech bubble. There was more than double the number of IPOs in the first quarter of 2014 than there were in the first quarter of 2013. Biotechs accounted for more than 40% of the IPO deal flow in the first quarter of 2014. A quarterly record was set for new offerings in the first quarter of 2014 and the entire year looks be a record setting year for biotech IPOs.

(click to enlarge)

Seven of the top ten performing IPOs were biotech companies. None of the top performing companies have product revenue. Seven of the worst performing IPOs were also biotech companies. In fact, half of the biotech IPOs from 2014 are trading below their offering price and the others are trading well below their peak prices.

Date of IPOIPO pricePeak PriceCurrent Price% lower than peak price% below IPO price
AGTC3/27/2014$12.00$18.39$13.6525.77%
AKBA3/20/2014$17.00$28.50$24.7013.33%
AQXP3/7/2014$11.00$14.35$8.8538.33%19.55%
ARGS2/7/2014$8.00$13.74$9.3631.88%
BIOC2/5/2014$10.00$10.02$5.2148.00%47.90%
CARA1/31/2014$11.00$23.25$13.6441.33%
CERU4/10/2014$7.00$8.06$6.8315.26%2.43%
CLDN1/30/2014$8.00$17.18$11.5033.06%
CLTX1/13/2014$6.00$11.90$5.7451.76%4.33%
CNCE2/13/2014$14.00$16.26$10.4435.79%25.43%
DPRX3/13/2014$12.00$15.86$9.1542.31%23.75%
DRNA1/30/2014$15.00$46.00$16.0065.22%
EBIO2/6/2014$10.00$19.33$13.6629.33%
EGLT2/6/2014$12.00$19.95$10.1649.07%15.33%
FLXN2/12/2014$13.00$20.72$14.6629.25%
GLMD3/13/2014$13.50$18.73$8.8952.54%
GNCA2/4/2014$12.00$23.99$17.8825.47%
MDWD3/20/2014$14.00$19.31$12.5934.80%10.07%
NRX2/11/2014$12.00$13.00$6.8647.23%42.83%
QURE2/5/2014$17.00$19.29$9.1052.83%46.47%
RARE1/21/2014$21.00$69.77$45.2235.19%
REPH3/6/2014$8.00$9.88$5.5244.13%31.00%
RVNC2/6/2014$16.00$39.69$26.8932.25%
TRVN1/31/2014$7.00$9.95$5.1048.74%27.14%

Two biotech companies that are set to price soon have been forced to lower their price ranges. Quotient Limited (NASDAQ:QTNT) had been hoping to raise over $80 million; however, its price has been cut by $5 a share and it may now have trouble raising $50 million. Vital Therapies, Inc. (NASDAQ:VTL) was also looking to raise over $80 million, but have since cut its price range for the 4.5 million shares it will offer from $16-$18 down to $13-$15.

Cash strapped biotech companies have been able to stay afloat by doing secondary offerings to raise cash. Expect that trend to come to a halt as well. Companies that need further funding for future research in hopes of bringing a product to market are going be required to bring some concrete evidence and data to the table if they hope to raise additional funds. Investors will not simply buy up shares of biotech companies simply because the entire sector is moving up in price.

The spreads of companies without revenue streams as well as recent IPOs have been getting larger and larger. This means nobody wants to buy the stocks. In fact bids are all together disappearing. Don't be caught holding a stock you do not want to own when the rally stops and the selling in the biotech sector resumes.

A few of the companies from the first quarter 2014 Biotech IPO class will end up being home run investments, however the majority of them will run out of money and be unable to raise additional funding to support further clinical trials due to weak market conditions. If you own a biotech stock, it is important to understand why you own it and the catalysts it offers that could lead to future price appreciation. The momentum and speculation has moved on from this sector and do not expect it to come back anytime soon.

Source: Expect Biotech Rally To Lead To Further Selling Of Research Stage Companies