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Small-Cap Biotechs Pursue IPOs Fastest in Decade

New Biotech Names to Watch

This renewed interest in biotech companies has grown from a broad rise in risk-seeking behavior and central bank stimulus on a global level. This type of environment is highly supportive for biotechs looking to come into the market at strong valuations.

In many cases, these companies are still in the earliest stages of the drug development process (with some companies yet to complete even one clinical trial). It is now clear that the bar for progress has been lowered for biotechs looking to enter the market.

At this stage, most of the interest from institutional investors and hedge funds has centered on small-cap specialist companies with a clearly defined medical niche.

Some examples of names to watch can be seen with Enanta Pharmaceuticals (ENTA - Get Report) and Tetraphase Pharmaceuticals (TTPH - Get Report), which completed IPOs in March.

Enanta made a name for itself with its development of hepatitis C drugs, collaborating with AbbVie (ABBV - Get Report) and Novartis (NVS) in the process. The company reported second quarter revenue of $1.2 million, well below the $36.6 million seen during the same period last year. These declines resulted from the company's upfront payment of $34 million from Novartis in early 2012.

Tetraphase was a larger disappointment in the first quarterly earnings report after its IPO. The company is focusing its efforts on Eravacycline, which is a pill meant to treat multi-drug resistant infections (such as those seen in the urinary tract).

Tetraphase reported first quarter net losses of $2.8 million (30 cents per share). While this was an improvement on the net loss of $4.7 million (52 cents per share) seen during the first quarter of 2012, these figures were lower than the 27-cent loss per share that was expected by analysts.

To be sure, we are still in the very early phases of development in both companies but with the widespread enthusiasm that marked recent biotech IPOs, the early signs suggest initial valuations were on the high side and that continued weakness is likely into the latter parts of the year.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Cox is a university teacher in international trade and finance. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies and commodities). Trade ideas are generally based on time horizons of one to six months.
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