Merck & Co., Inc. (MRK): Don’t Invest in Biotech IPOs Until You Read This

Page 1 of 2

A spate of 10 biotechs went public this year, raising over $725 million. As one banker put it, this is a sector “where investors take binary risks, and investor willingness to take on additional risk is picking up.” However, IPO investment is risky business, and one needs to consider who makes the most money – the company, the investor or some third party who buys up a struggling IPO.

A changing scene

A classic example is that of the 2011 acquisition of Inspire by Merck & Co., Inc. (NYSE:MRK)$430 million was considered a great offer – at $5 a share, it represented a 26% premium to Inspire’s share price at that time. However, it did not cover the amount spent by Inspire to develop its pipeline.

Merck & Co., Inc.Credit: Merck & Co., Inc. (NYSE:MRK)

In 2010 and 2011, the biotech IPO market was almost dead. Plexxikon, a drug discovery company, was forced to sell itself to Japan’s Daiichi Sankyo after the former’s IPO did not evince any investor interest, although it had an impressive candidate for treatment of melanoma and a strong management team.

But there is renewed investor interest in small biotech companies now. One reason is that last year, the FDA approved the highest number of drugs (39) in over a decade. Another possible reason could be that year to date, the NASDAQ Biotechnology index has outperformed the sluggish S&P 500.

The most recent IPO announcement comes from Agios Pharmaceuticals, going up for $86 million. Earlier there were Epizyme Inc (NASDAQ:EPZM), Tetraphase Pharmaceuticals Inc (NASDAQ:TTPH), and Enanta Pharmaceuticals Inc (NASDAQ:ENTA), which all went public and started trading earlier this year.

A risky gamble

Five of the ten IPOs this year are trading above their offer prices. In June first week, Epizyme Inc (NASDAQ:EPZM), with two candidates in clinical trials, went public at $15 a share. The stock touched $30.86 in a single day, and now trades at $23.82.

However, regardless of the decent returns from biotech IPOs in 2013, generally IPOs are not good for your portfolio — at least not for the first year of their trading. BusinessWeek studied 25 of the biggest IPOs of 2010 and 2011 with the biggest opening trading pops. It found (at that time) that 20 of them had fallen since then and were trading below their opening price – many had fallen 50%.

Biotech is no exception to the rule. Only about 50% of the biotech IPOs of 2011 are up since their debuts, which is not exactly an optimistic investing scenario.

Some lesser-known facts

Small biotech companies excel at discovering and developing new drugs, while Big Pharma tries to acquire them as those drugs progress towards FDA approvals. However, these small biotech companies spend far too much money on drugs that seldom get to the market. When a big biotech acquires such a smaller one, you need to see whether the premium price it’s offered covers the smaller company’s cost of product development.

Consider Adolor’s takeover in 2011 by Cubist Pharmaceuticals Inc (NASDAQ:CBST). At a premium of 143%, it appeared good; however, it was actually a bad deal for investors, because Adolor was getting only $221 million against the $530 million it had spent developing its product portfolio.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!