Should You Buy Biotech IPOs?

Biotech is arguably the most exciting sector to invest in. This year, the NYSE Arca Biotechnology Index has more than doubled the S&P 500’s 14.6% total return with a 32.5% gain.

That being said, the swings can be large.

For example, on January 8, Pain Therapeutics (Nasdaq: PTIE) closed at $4.45. The next day it spiked on clinical trial data, tagging an intraday high of $12.80. Less than six months later, the stock lost 81% in a single day after the FDA rejected its pain management drug. Today, Pain Therapeutic trades for less than $1.

Meanwhile, the share price of cancer fighter Endocyte (Nasdaq: ECYT) has more than quadrupled year to date.

Thirty percent, 40%, 50% or more single-day gains in biotech stocks seem to happen on a regular basis, due to an acquisition, strong clinical trial data or an FDA approval.

So it might be tempting to buy an IPO of a biotech company – you know, get in early before everyone else does.

A Coin Flip

This year, 42 biotech companies went public. Twenty-two of them are currently trading above their IPO price.

Some of them have been monster winners…

Armo Biosciences IPO’d at $17 in January and was acquired in May by Eli Lilly and Company (NYSE: LLY) for $50.

Solid Biosciences (Nasdaq: SLDB), which is focused on Duchenne muscular dystrophy, had its IPO at $16. In March, the stock dropped from around $26 to below $10 after the FDA put its clinical trial on hold. Today, it trades north of $50.

Scholar Rock (Nasdaq: SRRK) (which sounds more like a garage band made up of English professors than a company aiming to treat spinal muscular atrophy) has more than doubled from its $14 IPO price.

On the other hand, there have been some serious losers too.

Surface Oncology (Nasdaq: SURF), a cancer immunotherapy company, is down by a third from its IPO price.

Neon Therapeutics (Nasdaq: NTGN), another immuno-oncology company, sold shares to investors at $16. Today, it’s below $10.

Vaccinex (Nasdaq: VCNX) is already down 22% just a month after its IPO.