Editas' IPO Challenge: Edit Investor Expectations as Well as Diseased Genes

Editas Medicine is most definitely the hottest biotech initial public offering of a very young 2016.

But the challenge for the gene-editing startup will be to find public investors willing to wait the two years estimated before its therapies are ready to start human clinical trials.

The Cambridge, Mass.-based company filed papers Monday night for an IPO of $100 million, although the amount to be raised will most certainly change. Editas' proposed ticker symbol is EDIT -- a near-perfect encapsulation of the company's underlying technology, which aims to treat genetic diseases with a type of molecular scissors capable of cutting out defective, disease-causing genes in patients.

This gene-editing technology, known as Crispr, has shown enormous potential in the laboratory and in limited studies in mice, but has not yet been tested in humans.

Editas' most advanced product is a gene-editing therapy to treat leber congenital amaurosis, a genetic disease which causes progressive blindness. But Editas is still conducting pre-clinical work and doesn't expect to begin human studies until 2017.

The scientific buzz around the Crispr gene-editing technology will almost certainly generate a tremendous amount of interest from institutional investors for the Editas IPO. The challenge for the company will be to find investors with the patience and risk tolerance necessary to wait out the long clinical development timelines.

Editas "was incredibly selective in terms of their current investors and I think that will continue to be the case with the IPO," a health care investment fund portfolio manager (and early Editas investor) told me via email Monday night.

"I have no idea what percent of the deal will be oversubscribed, but I hope the company doesn't make the same mistake that others have made and allocate broadly to a bunch of flippers, but rather focus on tightly allocating to long-term oriented folks," he added.

The big but botched Axovant Sciences' (AXON) IPO is what Editas needs to avoid. Axovant leveraged a speculative frenzy for Alzheimer's drugs last June when it priced its initial offering at $15 per share. The stock doubled in value on the first day of trading but the excitement faded fast. By the end of summer, Axovant was trading at $11. Today, the stock is barely above the original IPO offering price.

Editas should benefit from the star power and long-term outlook of some of its early backers. Last year, the company raised $163 million in a preferred stock offering bought by Google Ventures, Bill Gates, Fidelity Investments and venture capital firms Flagship Ventures and Polaris Partners. Editas also has an ongoing cancer therapy partnership with Juno Therapeutics (JUNO) .

"The existing syndicate can buy all of the [Editas] IPO and then some, so they will set the price," a venture capitalist not involved with Editas told me. "If there's lots of demand above that, great. If not, the deal will still price well."

But Editas is also coming public at a time when biotech investing has lost some of its luster. The NYSE ARCA Biotechnology Index (BTK) closed 2015 up 10% but down 15% from the July high. A net outflow of investment dollars leaving biotech stocks contributed to the sector's weakness in the second half of last year, as did concerns about valuations and drug pricing.

"It's not clear to me that Editas will see the same demand as IPOs like Juno Therapeutics or Kite Pharma (KITE) . I would be surprised," said a health care fund manager to me, referring to two of the hottest biotech IPOs of 2015. "I have seen some pretty dramatic changes occurring in the crossover market which could be seen as a leading indicator. Valuations and demand have come in a lot. Fidelity and one or two others are still doing a lot but must have scaled back."

If turning novel, groundbreaking science like Crispr into an effective and safe human medicine isn't challenging enough, Editas must also defend its intellectual property claims on the technology against competitors trying to do the same. "Gnarly" may not be a legal term, but it best sums up the confusing, complex and ongoing legal fight over who owns -- and can benefit financially from -- the Crispr gene-editing technology.

Crispr Therapeutics and Intellia Therapeutics are also working on therapies which utilize Crispr and have made their own claims to important patents. Crispr Therapeutics is expected to also file paperwork for an IPO this year.

"Patent" is mentioned 597 times in Editas' S-1 filing with the Securities and Exchange Commission. The risk factor section of the filing is 56 pages long, with much of that taken up by intellectual property and patent disclosures.

 

  Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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