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

Another recent example: In September 2012, shareholders of Allos Therapeutics readily agreed to a $206 million takeover offer from Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI), disregarding its $565 million in shareholder equity.

This tells us that in general, the acquiring company always wins – often at the cost of the investor.

The bottom line

Biotechnology is today a pick-me-up sector; companies without a single approved drug are having a dream start this year.

Investors are betting on “encouraging” early and late stage results, talking about sure cures for till-now incurable diseases like cancer and hepatitis C infection, and disregarding the reality that  almost 80% to 90% of drugs fail. They fail to realize that they are betting on the one out of five drugs that will probably make it to the market. Whether or not it turns out to be a blockbuster drug is an entirely different matter altogether.

Agios Pharmaceuticals, for example, is now trying to raise cash through the IPO route after having received funding from venture capital funds and Celgene Corporation (NASDAQ:CELG), but for a drug platform that has still to undergo testing in a clinic.

Another kind of trouble for early biotech IPOs is timing. Prosensa has an interesting drug candidate for Duchenne muscular dystrophy that is in Phase III trial right now. Based on that candidate, it recently made an IPO offer worth $60 million.  However, Sarepta Therapeutics Inc (NASDAQ:SRPT) has a rival drug for DMD that it is trying to get accelerated approval for from the FDA. If that happens, Prosensa’s IPO will suffer.

Conclusion

The odds are against early investors. Even in the eventual situation of a takeover, the price paid is in reference to the stock price and not always commensurate with the amount spent for developing a drug/pipeline. In my opinion, the very fact that a biotech company needs to raise money from the public instead of getting private funding should be reason enough to raise doubts in your mind.

Dr. Kanak Kanti De has no position in any stocks mentioned. The Motley Fool recommends Cubist Pharmaceuticals Inc (NASDAQ:CBST). Kanak is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Don’t Invest in Biotech IPOs Until You Read This originally appeared on Fool.com and is written by Dr. Kanak Kanti De.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.