Jounce IPO: Is Celgene Partnership Enough?

| About: Jounce Therapeutics (JNCE)
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Jounce Therapeutics, a biotech firm which is developing immunotherapy products to fight cancer, filed for a $75 million IPO last week.

The company is developing drugs in the promising field of immuno-oncology, but it faces heavy competition, and its drug are in a very early stage of development.

Jounce has received substantial backing from Celgene, which shows that a major biotech company thinks well of its prospects.

JNCE is a long-term investment which may not pan out in the end, and investors will be probably better off waiting instead of trying to get in on the ground.

As investors try to figure out what the 2017 IPO market will look like, biotech company Jounce (NASDAQ:JNCE) could set an early signal for a biotech market that has yet to fully recover from falling off in 2015. Jounce filed with the SEC for a $75 million IPO, though this number is likely preliminary.

Biotech companies can be problematic given how their prospects often depend on a few drugs which will not be ready for years, and Jounce epitomizes that problem given the extremely early stage at which its products are currently at. And while Jounce's main products are in the growing and popular field immuno-oncology, it faces growing competition from other developers.

But there are some things to like about this biotech company, most notably its affiliation with Celgene (NASDAQ:CELG). Investors should understand that if they choose to trust in Celgene and invest in Jounce, this is an investment for the very long term and should not be viewed as good or bad for a certainty after the IPO's first few months.

Early Development

When most of us think about fighting cancer, we think about chemotherapy. But biotech companies like Jounce are researching and developing drugs which would use our immune system to destroy cancer cells. This field, known as immuno-oncology, could see massive growth and expand from $14 billion in 2019 to $34 billion by 2024 as cancer patients look for less intrusive treatments.

But while Jounce could benefit from this growing interest in immuno-oncology, the company admits in its SEC filing that "we are early in our development efforts." Jounce's lead product is an immuno-oncology drug called JTX-2011 that is still only in the first phases of clinical development. It will take years for the development to be complete, never mind marketing and passing FDA approval. And while Jounce is working on other drugs such as JTX-4014, those are in an even earlier stage.

The company is hoping to create immuno-oncology drugs which work on anyone, as the current drugs out on the market only seem to work with select patients for unknown reasons. But while Jounce is working on one drug, other developers like GlaxoSmithKline (NYSE:GSK) are also working in this field as well. Given the extremely long time frame in which it will take for Jounce to make an effective product, there is no doubt that it would be an investment with an eye for the long term.

The Celgene Partnership

Investors may decide to just pass on Jounce and consider silver investments instead because of concerns about its long development time and the competition in the immuno-oncology field. But despite these concerns, Jounce has managed to secure a substantial backing from major biotech company Celgene. In July 2016, Celgene and Jounce signed a deal worth up to $2.6 billion. In this deal, Celgene gave Jounce an upfront payment of $225 million and an equity investment of $36 million, giving it an 11 percent stake in Jounce.

The fact that a major drug company like Celgene would give Jounce so much so early on is surprising, but this could serve as an indication that Celgene is highly confident in Jounce's ability to develop effective anti-cancer drugs. Furthermore, Jounce has also secured funding from groups such as Fidelity Investments and its IPO is underwritten by JPMorgan, Wells Fargo, and Cowen and Company.

Confidence for Jounce and the Biotech IPO market

While we do not know exactly how much Jounce intends to raise in this IPO, it likely will not be very large. But the company's decision to go public in early 2017 after waiting out 2016 indicates that it believes that this year will offer better prospects.

Jounce's confidence is another piece of evidence of how companies are finally looking to go public this year after a dismal 2016. But while the trust from Celgene is a sign that there are good reasons to invest in Jounce, investors are probably better off waiting for it to go public and get a better picture of its prospects after a few months instead of going with the IPO. If investors do decide to get in from the start, they have to understand that this will be a long-term investment, and the initial waves should not be anything to either celebrate or panic about.

Disclosure: I/we 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.