The Problems With The Synthorx IPO

About: Synthorx (THOR)
by: David Evans

California biotech company Synthorx has filed for an IPO, though we do not know what valuation they are seeking.

Synthorx is proposing a new kind of potentially valuable treatment, but its drugs have not even begun serious testing by the FDA and it does not have major partners.

The company is spending seriously on research, but faces question about whether it can raise enough cash in a few years.

While it is too soon to affirmatively state one way or the other, there are already many red flags which should probably causes investors to look elsewhere.

Biotech startup Synthorx (NASDAQ:THOR) has initially filed for an IPO. The San Diego Union Tribune reported that the IPO was for $100 million, but this is almost certainly a placeholder figure used to calculate filing fees. We do not currently know how many shares Synthorx intends to sell at what price, but we do know that the company has raised $79 million overall, including a $63 million Series C funding in April.

Biotech IPOs, like online payday advances, are tricky affairs under the best of circumstances, and the Synthorx IPO is filled with red flags such as the early stage of its few drugs as well as other financial concerns. While investors cannot firmly tell whether Synthorx will be a good investment like AWS storage, until we know its share price and how much it plans to raise, I would be extremely surprised to see Synthorx price at a reasonable point. Investors will almost certainly be better off looking elsewhere.

Early, uncertain development

Synthorx states in its S-1 report that its focus is on “prolonging and improving the lives of people with cancer and autoimmune disorders.” Synthorx proposes to do this by developing natural proteins called Synthorins, which receive novel amino acids and increase the production of various cells.

Synthorx plans to use these proteins to fight various cancers. Its lead product candidate, named THOR-707, causes production of immune cells which attack cancer cells and solid tumors. Another product called IL-2 is designed to fight autoimmune diseases by dampening immune cell activation.

The market is there for these drugs, and Synthorx’s ideas are based on a 2014 paper published in Natureby the Scripps Research Institute in San Diego. But while this is not quack science, there are concerns when it comes to investment and the drug pipeline.

First, none of Synthorx’s drugs have even begun Phase 1 testing. Synthorx states that Phase 1/2 proof of concept data for THOR-707 will happen in either the final quarter of 2019 or the first quarter of 2020, and Synthorx’s other drugs are even further behind. Biotech startups often take years to develop their drugs, but Synthorx’s pipeline is shallow even by these standards. The much larger Moderna Therapeutics, which also filed for an IPO recently, has multiple treatments in Phase 1 and one in Phase 2.

Moderna is poised to upend how drugs are made by actually using a patient’s body to make its own medicine. It does this by using strands of genetic instructions called messenger RNA, or mRNA. Moderna says it can take over a cell’s protein making mechanism to produce a drug within the body. This has wide application to fighting infectious diseases, cardiovascular disorders and rare diseases. But this approach is still in early phase trials and unproven in clinical conditions.

Synthorx's technology is based on single-cell organisms capable of replicating and maintaining a novel synthetic DNA. DNA uses four bases – A, T, G and C – to turn 20 natural amino acids into proteins that carry out the functions of life. Synthorx's expanded genetic alphabet technology produces proteins with many different synthetic amino acids in a scalable and cost-efficient manner.

But again, its drugs, including THOR-707, are still in pre-clinical trials and data on these has only recently been shared with the scientific community.

The second concern relates to this shallow drug pool. Synthorx has a lack of partnerships from major pharmaceutical players but has no shortage of investors. Life science venture capital firms Avalon Ventures, RA Capital, and OrbiMed each control more than 20% of this company, which is perfectly fine. But Synthorx needs a partnership or marketing agreement from a major pharmaceutical company such as Merck to bolster its credibility. Further success in its drug trials would help, and the company notes that “Selectively entering into strategic partnerships while retaining key rights to our programs and platform technology in major pharmaceutical markets," will be a key part of its strategy. However, for the time being, there is no indication a partnership will happen anytime soon.

Financial concerns

With most biotech companies, the financial concern is whether Synthorx has the cash on hand to continue operating for the years needed to undergo the rounds of drug testing. Synthorx states that as of September 30, 2018, the company has $20.6 million in cash and $23.2 in total assets. By comparison, the company reported a net loss of $28 million in the first nine months of 2018.

These numbers are not as disastrous as it seems. The $28 million figure is not quite accurate, as $16 million comes from what Synthorx terms a one-time “Change in fair value of preferred stock purchase right liability.” This change came from a second closing in its April Series C funding, and will not be an issue in the future.

A loss of $12 million is still somewhat concerning, but a key here is that it is happening because Synthorx’s research expenses grew from $2.4 million in the first nine months of 2017 to $9.8 million in the same time period in 2018. This is a good thing, as it shows that Synthorx is taking its research and development efforts seriously as it begins to go down the FDA pipeline.

Nevertheless, it is unclear whether Synthorx has enough cash for the multiple years it will need to keep running in the face of such increased expenditures, especially given the early stages of its drug development pipeline. And while it may be point to the incoming funds it will receive from the IPO, investors should remember that the majority of the funds will likely be going to its aforementioned investors and not the company itself.

Too much risk

Synthorx could be a good investment at a low valuation, though that does mean it will raise less cash and thus exacerbate concerns about its cash reserves. And if its drugs do get through testing, it would be a valuable long-term investment.

But there are simply too many flags for investors to feel confident in this stock. Biotech companies need a lot to go right to succeed, and there are many ways in which Synthorx could fail. Hold your money, look elsewhere, and ignore this IPO.

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.