Sienna's IPO: Partner And Product Concerns

Summary

• Sienna Biopharmaceuticals Inc., a company that develops treatments for acne and skin diseases, filed for an IPO with plans to raise about $75 million.
• Sienna is only developing a few products, which will not be ready for years.
• Sienna has partners willing to invest, but the lack of interest from bigger pharmaceutical companies is concerning.
• Investors should become more interested in a recovering biotech market, but ignore Sienna.

Biotech firm Sienna Biopharmaceuticals Inc. (SNNA) filed Monday for an IPO that will raise almost $75 million. A Reuters brief notes that Sienna will go public on the NASDAQ under the symbol SNAA, and that its underwriters include J.P. Morgan, Cowen, and BMO Capital Markets.

The biotech IPO market has improved in 2017 after a dismal 2016, with companies like Myovant Sciences (NYSE:MYOV) and Intellia Therapeutics (NASDAQ:NTLA) raising hundreds of millions of dollars. A rising but not overly hyped market is a good time for investors to take a look at certain biotech companies and get in early on a potentially valuable company.

But that does not mean Sienna is that potentially valuable company. Its partners are concerning, the market for its product currently under clinical development is unclear, and like any other biotech company with bad credit loans, it is going to take years until investors reap rewards. While now is a good time for investors to start evaluating the biotech market, Sienna is not the right product or company.

The Importance of Skin Care

Sienna’s website declares that it aims to discover, develop, and commercialize “topical products in medical dermatology and aesthetics.” This biotech company does not promise some wonder drug to battle a deadly disease like cancer. Instead, its therapies focus on skin care, with an emphasis on treating acne and the autoimmune disease psoriasis.

Like most biotech companies, Sienna does not currently have any treatments on the market. But what is concerning is that Sienna only has three therapies in development. SNA-120, an inhibitor that fights psoriasis, is in Phase 2 development; Sienna plans to initiate a Phase 2b study by the end of 2017. SNA-125 is even farther behind, with additional studies being planned in 2018, and Sienna is merely examining SNA-001’s potential to either fight acne or remove unwanted light-pigmented hair, as opposed to actual testing.

Sienna thus does not have a product that will be readily marketable for some time, and it is betting a great deal on only a few therapies. Even if these therapies are successful, it raises the question of whether these drugs will be easily marketable. While no cure exists for psoriasis, there are treatments to relieve its symptoms. The same is obviously for drugs designed to treat acne.

Sienna could thus end up a situation where, even if everything goes right in the testing process (and that is not a small “if”), it may not be able to effectively market its drugs.

A Lack of Strong Partners

Sienna’s problems go beyond product timelines and a questionable market. Like practically every biotech IPO, Sienna has zero revenue and faces increasing losses as it gets deeper into the development process. In its SEC filing, Sienna reports it lost $21 million in 2016 and $10 million in the first three months of 2017. On March 31, 2017, Sienna had just $6.8 million cash on hand.

Sienna’s fortunes improved by undergoing a round of funding in April where it raised an additional $40 million. The raised funds, along with the IPO funding, do mean Sienna should be able to keep running for some time, thus solving a problem plaguing many emerging biotech companies.

But where the funding comes from touches on another concern. The funding leader was ARCH Venture Partners. ARCH currently owns 23.4 percent of Sienna, along with Partner Fund Management and Fidelity Investment which each own less than 10 percent.

The concern is that all of these partners are venture capitalists as opposed to major pharmaceutical players. ARCH does have a significant biotech footprint with investments in over 50 biotech firms. But the lack of general interest from other pharma firms is concerning, especially so given the earlier concerns about whether there is a sufficient market for Sienna’s products.

Questions must be answered

Some of Sienna’s problems, such as spiraling losses, are inherent to biotech companies. But a lack of interest from major pharmaceutical companies, as well as the few drugs it has under development, should be concerning to potential investors.

The biotech market is recovering, with more firms IPO'ing, and patient investors interested in getting a massive haul should take a serious look at other companies going public, such as Zealand or Mersana. But until Sienna shows it can successfully develop its drugs and gain pharmaceutical partners, investors should hold off on this IPO.

Analyst’s 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.