A lot of people invest in initial public offerings the wrong way: They get caught up in the hype and buy on the day companies go public, only to see their positions fall as the buzz fades.
As the old adage tells us, companies decide when to go to the stock market, not you. So they’re going to choose the best time for them, such as when investor enthusiasm for their sector is high.
The better way to invest in IPOs is to wait for them to turn into “busted IPOs.” This means they trade below their offering price, or below where they traded in their opening days (which is typically above the offering price).
It happens more often than you might think, and even happens to quality companies like Facebook
So it’s not necessarily a sign of terminal issues. I suggested Facebook as a busted IPO when it traded in the low $20s with help from analysis by Tom Vandeventer, manager of the Tocqueville Opportunity Fund
The stock is now up over 1,200%.
Given the recent selloff in biotech, there are plenty of busted biotech IPOs to choose from. While the S&P 500 index
and the Dow Jones Industrial Average
continued to hit new highs this year, biotech got crushed. The SPDR S&P Biotech exchange-traded fund
was recently in a bear market (down over 25%), and the iShares Nasdaq Biotechnology
was in a correction (down more than 10%).
By my count, over 40% of the roughly 160 biotech IPOs in the past year were busted IPOs as of April 23, in the sense that they traded below their offering prices. Many more are busted IPOs in that they trade below where they traded in their opening days (a level above the offering price in the deal).
Why busted biotech IPOs may come back
In my view this is a good time to consider picking up some busted biotech IPOs because the biotech nuclear winter seems to be ending. Here’s why.
1. In Washington, D.C., it is beginning to look increasingly unlikely that drug price regulation will be part of the “American Families Plan” or other legislation, says Brian Skorney, the biotech analyst at Baird.
One reason may be stepped-up lobbying by biopharma. Another is that Democrats have only a narrow edge in Congress. Besides, the circulation of more contagious COVID-19 variants could serve as a reminder to politicians that they need to be friendly with biopharma.
2. The groupthink biotech crowd went into a tizzy following recent media coverage positing that the Federal Trade Commission will take a more aggressive stance on biotech M&A. This never made much sense to me. This theory overlooked that fact that courts play a role, and there are clear M&A guidelines which biopharma companies know very well how to follow. Then last Friday, the FTC approved AstraZeneca’s
3. Earlier this month, the XBI was down nearly 28% from its February high. That’s a lot of pain, and it is close to the typical biotech pullback in the last five sell offs, points out Jefferies biotech analyst Michael Yee. The XBI never hit theoretical support at $120 and $110, but there is no law that says it has to. It still might, for all we know. But the factors above suggest bearishness is in the process of easing.
4. The XBI fell back to levels from late November. That is the moment generalists started panic-buying in biotech because they were underweight and it was hurting the return vs. their benchmarks, which had more biotech than they did.
A skeptic might conclude that generalists didn’t really understand what they were buying, so they got out when positions began moving against them. If that’s the case, they may be mostly out, given the return of the XBI to levels it posted before the generalists piled in.
The stocks to buy
These five busted biotech IPOs meet many of the ownership criteria that are part of the system I use to select biotech names for my stock letter Brush Up on Stocks (link in bio below).
If you consider adding them based on your own thinking and research, it makes sense to buy them as a basket so that winners might offset losers and the ones that go nowhere. These are all small-cap companies, which makes them riskier than giants like Pfizer
or Johnson & Johnson
with lots of therapies in development.
was a busted IPO when it traded below its $15 offering price for much of April. The stock has been strong over the past few days on bullish news about one of its early-stage cancer therapies. At $17 a share it is not technically a busted IPO, but it is still close enough. And it is down nearly 50% from where it traded in January.
Codiak thinks it knows how to use exosomes to deliver therapies to cells. Exosomes are tiny particles that play a role in signaling between cells by moving proteins, lipids, carbs and genetic information among them. Exosome therapeutics may be used to treat cancer, neurological illnesses infections, and other ailments.
All of Codiak’s therapies are in either preclinical studies, or very early-stage Phase I trials. That’s probably one reason why it was recently a busted IPO, despite its promise.
Trading at $11, Cabaletta Bio
shares are right at the $11 offering price of its October 2019 IPO. The stock is down around 30% from highs reached in December, and 40% below highs of around $18 hit shortly after it came public.
Cabaletta Bio is developing T-cell therapies to treat autoimmune diseases. Its treatments may spare normal B cells, while eliminating defective B cells that cause problems by attacking healthy tissue. B cells are white blood cells that help fight bacteria and viruses, but sometimes they go haywire and attack healthy tissue.
The company has one therapy in early Phase I testing to treat an autoimmune disease called mucosal pemphigus vulgaris, which causes painful blisters and sores. Cabaletta Bio says it will release some trial results in the first half of 2021, a possible catalyst.
It also has several ongoing preclinical studies. In the second half of this year, the company may submit a new drug application to the Food and Drug Administration for its lead preclinical therapy for the autoimmune disease myasthenia gravis. This is another potential catalyst.
Trading in the low $14 range, Acutus Medica
is a busted IPO because it is well below its $18 offering price from last summer. The stock is also down over 60% from its post IPO highs in the mid-$30 range.
Acutus Medical thinks it has a unique ultrasound-based mapping system and tools that are better than conventional techniques at performing cardiac ablation to treat cardiac arrhythmias, or abnormal heart rhythms.
In cardiac ablation, high-energy radio frequency or extreme cold are used to deaden heart tissue responsible for abnormal heart rhythms. If left untreated, cardiac arrhythmias can cause heart failure, stroke and sudden cardiac death. Atrial fibrillation is the most common arrhythmia, characterized by a rapid and irregular heartbeat.
The offering price for Akouos
was $17 when it went public last June. The stock now trades for around $15. It’s also down over 60% from post-IPO highs in the upper $20 range last September.
The company is developing gene therapies that it thinks can help people with hearing loss. These therapies are all in very early-stage preclinical testing. That’s one reason this is a busted IPO. But it doesn’t mean the therapies don’t hold promise.
At the current price of around $10.80, Lyra Therapeutics
trades over 30% below its $16 offering price last June. It’s also down around 50% from where it traded in the early days right after its IPO.
This company develops systems that help deliver drugs to treat people for ear, nose, and throat diseases like chronic rhinosinusitis. Inserted into the nasal passages with surgery, they may deliver therapies for up to six months.
One trial failed in early December last year. But the company blamed it on patients dropping out because of Covid-19, and it will continue with research to try to prove effectiveness.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned PFE. Brush has suggested PFE and JNJ in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.