Precision BioSciences: A Potentially Premature Preclinical IPO?

About: Precision BioSciences (DTIL)
by: Euan Jones

Biotech firm Precision BioSciences Inc. filed for a $100 million IPO last week.

Precision BioSciences is a very ambitious company.

Precision BioSciences will file under the NASDAQ.

Biotech firm Precision BioSciences Inc. (DTIL) filed for a $100 million IPO last week, though that figure is often a placeholder used to calculate filing fees. Precision BioSciences will file under the NASDAQ, which reported that it will use the symbol DTIL and is underwritten by J.P. Morgan, Goldman Sachs, Jefferies, and Barclays.

A look at Precision BioSciences' SEC report shows that this is a peculiar IPO, which has filed unusually early for a preclinical biotech IPO. While that is usually a death flag for a biotech IPO, there are other positive indicators for this company. Here are some of the most important factors for investors to consider.

Early-Stage Financing

Precision BioSciences is a very ambitious company. While most biotech IPOs aim to treat a few conditions, Precision believes that it can treat human diseases and create healthy and sustainable food and agricultural solutions. It would do this with its genetic editing platform called ARCUS, which uses enzymes to edit cell genomes. Genetic editing could be used to make white blood cells react to cancer cells or other hazards and improve crop cells so that crops become more nutritious and flavorful among other scenarios.

Biotech companies have been interested in genetic editing for some time, with companies like CRISPR Therapeutics (CRSP) and Sangamo Therapeutics (SGMO) proposing to use genetic editing to handle difficult diseases. Precision BioSciences argues that ARCUS is smaller and more efficient, which makes it more versatile and able to edit a larger variety of cells. This is why Precision is promising that it can do more than its competitors.

But while Precision may have major ambitions, the biggest strike against this company is how early it is in the development process. Precision's most advanced product is called PBCAR0191, which is a cell therapy that "is being developed for acute lymphoblastic leukemia, or ALL, and non-Hodgkin lymphoma, or NHL." It is expected to commence a Phase 1/2a clinical trial in the first half of 2019.

In summation, Precision has not even begun Phase 1 of FDA testing for its most advanced clinical product. There is a high chance that this clinical product will fail as many products do. Even if it does not, it will take years for a successful product to be marketed and commercialized. The fact that Precision is launching an IPO at this early stage may raise doubts about whether this company can continue to stay operational for such a long period.

Cooperation with Other Companies

Investors may have reason to doubt whether Precision's product will be successful, but a major point in this company's favor is that other pharmaceutical companies have exhibited interest in ARCUS. WRAL TechWire, a local news station in the same Raleigh region as Precision, reported that Precision signed collaboration agreements with pharmaceutical companies Gilead Sciences (NASDAQ:GILD) and Servier. Both companies provided upfront payments along with the promise of future funds upon reaching milestones. Precision has also entered other agreements with Duke University and Cellectis S.A. (NASDAQ:CLLS).

A major pharmaceutical firm like Servier investing into Precision is a sign that Precision's prospects are stronger than might be indicated by the early stage of development. However, there is no current indication that Servier or other current backers intend to purchase additional Precision shares during this IPO.

Precision's Finances

As a result of this cooperation, Precision's financial profile is slightly different compared to other preclinical biotech firms. Most preclinical biotech firms have no revenue to speak of, but Precision reported a revenue of $10.8 million in 2018 and $6.4 million in 2017. This revenue came not from sales, but "from collaboration agreements, including amounts related to upfront payments, annual fees for licenses of our intellectual property and research and development funding." In addition, Precision also recorded that it has raised $300 million through various financings.

Precision is unprofitable as is expected from a preclinical biotech business, with a net loss of $46 million in 2018. This is up from $21 million in 2017, but higher losses can be a good sign as it is an indication that Precision is making progress with its genetic developments.

The more important question is whether Precision has enough cash on hand to keep running for years to come. Precision states that as of December 31, 2018, it had $103 million cash on hand compared to $98 million in total liabilities and an accumulated deficit of $85 million. Precision does not list in the SEC report how long it expects it could keep running with the net proceeds as well as cash on hand, though that should change in later amendments. With a net loss of $46 million, it is reasonable to expect that Precision should be able to function for at least two years, with more funds coming in from milestone payments.

Final Thoughts

There is still plenty of time to reach a decision, especially as Precision has not yet announced how much it plans to raise nor its planned valuation. But while ARCUS's early stage should concern investors, Precision is probably a better investment than most biotech IPOs. Its high levels of cash on hand, as well as support from major backers, should trump concerns about its early stage of development.

Wait for further details of its planned valuation, as well as further financial details which Precision may reveal in an upcoming roadshow. And remember that biotech IPOs carry higher risk than usual.

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.