In a market that's been tough on initial public offerings (IPOs) by companies that aren't making profits, one industry stands out as having some successes recently: biotechnology. Revolution Medicines (RVMD 0.51%), a clinical-stage biotech that's working on treatments for difficult-to-treat cancer indications, raised its offering price above its initial target range, and shares still soared on their first day of trading on Feb. 13.
Revolution offered 14 million shares at $17 per share, raising $238 million before expenses after originally announcing its intention to raise only $100 million. Investors snapped up the shares, bidding the price up a whopping 70% on the first day of trading. Assuming the underwriters exercise their option to buy more shares at $17, the company now sports a market capitalization of $1.7 billion.
Attacking tough but potentially very lucrative targets
Underpinning investor enthusiasm for Revolution is its focus on oncology drugs that target signaling pathways that play important roles in several kinds of cancer with large patient populations -- but have been notoriously difficult to attack. Revolution's lead molecule and only drug in clinical testing is RMC-4630, which is an inhibitor of SHP2, a central node of the RAS signaling pathway. The RAS family of genes are the most commonly mutated genes in human cancer and are present in 22% of all cancers. Mutations of genes in this family are found in 35% of lung cancers, 45% of colon cancers, and 95% of pancreatic cancers.
RMC-4630 is in two early clinical trials with patients who have a variety of solid tumors but haven't responded to standard treatments or were ineligible for them. They also had certain genetic mutations in the RAS pathway. Although the studies won't be completed until 2021 and 2022, Revolution presented early data at a conference last month that showed reasonable tolerability and encouraging signs of clinical activity, including in patients with non-small cell lung cancer (NSCLC), the most common form of lung cancer.
Two important partnerships
Revolution Medicines is partnering with Sanofi (SNY 1.00%) in the development of RMC-4630. The French pharmaceutical giant is paying for almost all research and development costs for the drug in return for 50% of the profit from sales in the U.S. and royalties for sales outside the U.S.
The RAS pathway had at one time been considered "undruggable," but several other companies are now working on it. Most notable is Amgen (AMGN -0.45%), which made news last year when it reported positive results from its experimental drug AMG 510 in a proof-of-concept trial. In November, Revolution announced that it's partnering to test RMC-4630 in combination with AMG 510, with Amgen conducting a phase 1b trial of the drugs together in patients with advanced solid tumors.
Revolution believes it has the know-how and tools to develop other drugs to target the RAS pathway, as well as other "frontier" targets -- proteins that play an important role in cancer but for which there are no approved drugs for inhibiting them. The company intends to spend $150 million to $175 million of the proceeds from the offering to develop a portfolio of RAS drugs, and $25 million to $30 million to launch a phase 1 trial of RMC-5552, which targets the mTOR pathway.
A speculative bet
It'll be years, if ever, before any of Revolution's drugs make it through the approval process to commercialization. But the big pharmaceutical companies have been willing to shell out huge sums for businesses that can bolster their oncology pipelines. That's put a generous price tag on the smaller companies that are judged to have the science that could lead to new approaches to treating cancer, even if profits are far down the road. Less than a month ago, shares of cancer biotech Black Diamond Therapeutics more than doubled from their offering price on the first day of trading, and earlier this month, Beam Therapeutics, which is taking a gene-editing approach to fighting cancer, also had a very successful IPO.
Revolution Medicines is a risky bet, and conservative investors should stay away from the shares. More adventurous investors who want to spread out some investments in emerging oncology companies could consider buying shares, but might be better off waiting for more solid evidence that the company's drugs actually work against these tough targets that scientists have been trying to attack for decades.