Someone forgot to tell Editas Medicine (EDIT) about the hostile environment for biotech initial public offerings.
Defying all conventional wisdom, the gene editing startup's first month as a publicly traded company has been spectacular. With Monday's $41.87 close, Editas shares have risen 162% from the IPO price of $16.
On Monday alone, Editas shares rose more than 7% while the Nasdaq Biotechnology Index fell 3.5%.
Only five IPOs have hit the market so far this year, a number that's down more than 80% from last year, according to Renaissance Capital. Of this small IPO class of 2016, Editas has been the most successful by far, measured by stock performance.
And Editas has managed to outperform expectations even though it is still two years away from advancing a gene-editing therapy into human clinical trials. The company is also in the middle of a legal battle with competitors over intellectual property claims to the gene-editing technology known as Crispr.
Why, then, is Editas' stock price rising while many biotech stocks stagnate? Credit the company's investment bankers for managing the financing process so well.
"While Editas may have an exciting technology platform, the IPO was done with the help from insider purchases. The low tradable float should make investors cautious," said Kathleen Smith, manager of IPO ETFs at Renaissance Capital.
It's nice to have friends willing to buy and support your stock. For Editas, this started before the IPO when 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.
Since the Editas IPO priced on Feb. 2, two other early hedge-fund investors in the company, Viking Global Investors and Deerfield Management, have bought more stock and now own 7.5% and 5% of the company, respectively, according to Securities and Exchange Commission filings.
With most of Editas' outstanding shares controlled by insiders who can't sell, the available supply of stock that is available to trade is relatively small, which in turn, supports the price.
"You can't get a borrow, so there's no real way for the stock to go down," said another hedge fund investor, who asked not to be identified by name. Borrow refers to company shares available for short-selling. When Editas' shares become more freely tradable, he expects the stock price to fall.If or until that happens, the Editas IPO honeymoon will continue. The company carries an enterprise value today on par with gene therapy developer Bluebird Bio.