Many Biotechs Need Inside IPO Help, But Selecta Is An Extreme Case

Xconomy Boston — 

Because public investors have had a more discerning attitude toward biotech IPOs this year, insiders have had to step up to help their companies go public. One extreme example is Selecta Biosciences, which just priced its offering late Tuesday with its pre-IPO investors likely buying around 60 percent of the shares.

Selecta, of Watertown, MA, raised about $70 million by selling 5 million shares at $14 apiece. Those figures come in at the low end of Selecta’s projections; the firm aimed to sell 4.3 million shares at $14 to $16 apiece. It’ll begin trading on the Nasdaq Wednesday under the symbol “SELB.”

As Selecta noted in its regulatory filings, certain shareholders who weren’t named expressed an interest in buying about $40 million of the shares offered during its IPO. These agreements aren’t binding, but they usually end up being accurate. A Selecta spokesperson declined to specify whether these shareholders had followed through and bought $40 million in stock. (The final details come out later in a form called the 424b.)

Assuming the Selecta deal goes as planned, it will continue a notable trend. In March, IPO research firm Renaissance Capital reported that biotech insiders had bought more than 40 percent of IPO shares during the first quarter of 2016, nearly double the 22 percent figure during the same period in 2015. BeiGene (NASDAQ: BGEN), Proteostasis Therapeutics (NASDAQ: PTI), and Corvus Pharmaceuticals (NASDAQ: CRVS) each had more than 40 percent of their offerings purchased by insiders, according to the report.

That trend has continued into the second quarter. Biotechs like Intellia Therapeutics (NASDAQ: NTLA), Spring Bank Pharmaceuticals (NASDAQ: SBPH), and Oncobiologics (NASDAQ: ONCS) all outlined insider deals in their IPO documents. Insiders in Merus (NASDAQ: MRUS) and PhaseRx (NASDAQ: PZRX) were expected to buy more than 42 percent of each IPO, filings show. Private investors, including Celgene and CEO Patrick Soon-Shiong, offered to buy about $70 million of NantHealth’s (NASDAQ: NH) $91 million IPO.

More inside deals could come soon from Gemphire Therapeutics, expected to price tomorrow, with possible 22 percent insider buying; and Syros Pharmaceuticals, which could debut next week with more than half its IPO shares snapped up by insiders.

Many biotechs have leaned on insiders in their IPOs over the years, but deals of recent vintage with more than 50 percent insider participation are less common. Insiders bought into at least half of the IPO shares of Cempra (2012), AcelRx Pharmaceuticals (2011), and Dicerna Therapeutics (2014).

It’s hard to draw conclusions about any particular biotech that leans on its friends come IPO time. Sometimes investors may just want to double down on a company they believe in.  “I view this as a responsible action,” says Jonathan Gertler, the CEO of life sciences consulting firm Back Bay Life Science Advisors. “It’s a vote of confidence in the company so that you’re not just perceived as transferring risk to a public investor, but willing to put your money where your mouth is.”

Yet a spike in insider buying could indicate problems, at times. RA Capital Management managing director Rajeev Shah (who isn’t involved with the Selecta IPO) says that the increase is a reflection of “more challenging times” for biotech of late. Demand from new investors has slipped, which puts more of the onus on insiders. And sometimes the company’s valuations in these IPOs are lower than they were in the last private rounds before going public.

“If these companies want to go public, then the insider support needs to be tremendous,” Shah says.

More details about Selecta’s insider deal will come to light when the company files follow-up documents after the IPO. In the meantime, here’s more on Selecta’s IPO, its backstory, and some of the other big biotech offerings this year.