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March 13, 2012
Last fall, when Verastem announced their initial public offering, I wondered about how such an early-stage company (in such a speculative area) could plausibly offer stock. Now Nate Sadeghi-Nejad at TheStreet.com wonders the same thing:
Biotech companies with drugs in much later stages of clinical development find it difficult to go public today, yet here was Verastem, with nary a single patient exposed to any of its drugs, selling 5.5 million shares to the public at $10 per share.
Forty days later, the minimum time period allowed by law, sell-side analysts from all five of the investment banks which took Verastem public issued glowing reports with buy ratings and price targets 50% to 100% above the current share price.
Well, this sort of thing does happen. I mean, just because an investment bank makes money off an IPO doesn't mean that it isn't just a terrific place to put your money. Right? That's because they do lots of research on these things. Right? Well, as Sadeghi shows, that research assigned a Probability of Success of 30% to Verastem's plan of finding cancer-stem-cell specific therapeutics. This in an environment where the clinical failure rate is worse than 90%, and these guys haven't even been to the clinic yet. Their lead compound is salinomycin, an ionophore antibiotic which has been shown in vitro to target tumor stem cells.
Now, that's a perfectly respectable high-risk project to take on, because it has a lot of potential to go along with the risk. But a thirty per cent chance of success? There is no preclinical oncology program in the world with a thirty per cent chance of success. That figure is laughable.
I don't wish bad fortune to Verastem - I hope that their compound works. And I don't wish bad things for their investors, although I hope that they're braced for some. We need new modes of action in cancer drugs; we need for things to work. But we also need to be honest with ourselves and with investors. Investment banks are not going to do that for you, though.
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