Initial public offerings offer public market investors the earliest chance to own a piece of a promising company. Capital-intensive fields like drug development have continued to witness a stream of IPOs -- some more successful than others.
Besides raising cash for company operations, a public listing provides an opportunity for early investors to sell some or all their shares. Keep in mind, these investors may have had a stake in the company for many years.
A typical feature of an IPO requires early investors and insiders to "lock-up" their stock, meaning they cannot sell, for at least 180 days. Following the expiration of the lock-up period, early investors may sell some of their stock, putting downward pressure on the stock price.
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Here we review four recent biotech IPOs that began trading publicly in October. The lock-up periods expire between the end of March and early April. As the table below highlights, the majority of stock in these companies is about to become available for sale.
| Company |
Shares Outstanding |
IPO Lock-Up Shares (In Millions) |
% of Shares Outstanding Locked Up |
Lock-Up Expiration |
|---|---|---|---|---|
| Frequency Therapeutics | 30.78 | 22.08 | 72% |
March 30 |
| Viela Bio | 50.96 | 41.67 | 82% | March 30 (Oct. 2 + 180 days) |
| Aprea Therapeutics | 20.99 | 14.2 | 68% | April 4 (Oct. 7 + 180 days) |
| Vir Biotechnology | 109.68 | 102.54 | 94% | April 8 (Oct. 10 + 181 days) |
Table source: Company SEC filings
1. Frequency Therapeutics
Frequency Therapeutics (FREQ 0.80%) develops small-molecule drugs to repair or reverse damage associated with degenerative diseases. Its lead programs target hearing loss and multiple sclerosis. Frequency's IPO was priced at $14 per share, raising net proceeds of $79.2 million. Today the stock trades above $23.
Investors in Series C, the last private financing round before the IPO, have seen their investment increase roughly 140%. Those who invested even earlier have gained multiples of their initial investment on paper. This leads me to believe that some will want to lock in those gains as soon as the lock-up period expires.
2. Viela Bio
Viela Bio (VIE) tripled in value over the past six months following its IPO. The Goldman Sachs-led IPO initially priced the stock at $19 per share. Since then, Viela's stock price swelled to its current price of approximately $65 per share. Targeting inflammation and severe autoimmune diseases -- ones where the body mistakenly attacks itself -- Viela commenced a phase 2b clinical trial in December of a treatment for Sjogren's Syndrome. The chronic, systemic condition involves the inflammation and destruction of certain glands resulting in severe dryness and chronic pain.
In the final days of March, Viela's IPO lock-up will expire, making 82% of the company's stock eligible for sale. Expect to see selling and potential downward stress on the stock, especially if it maintains its current levels.
3. Aprea Therapeutics
Aprea Therapeutics (APRE) shares more than doubled from its $15 IPO price to $35 today. That's great news for investors in this cancer drug developer. Of roughly 21 million shares outstanding, 14.2 million shares, or 68%, are locked up until April 4.
Aprea expects to announce pivotal phase 3 clinical trial with its blood cancer drug APR-246 in the third quarter of 2020. In a January presentation, the company noted 102 of the 154 patients in the trial had been enrolled. Positive results could rocket the stock higher, whereas a negative outcome could drop the company's valuation significantly. That gives insiders and early investors one quarter to unload appreciated shares and take some chips off the table for the trial outcome.
4. Vir Biotechnology
Vir Biotechnology (VIR 7.41%), which fights infectious diseases, recently attracted significant attention for teaming up with leading China-based biotech WuXi Biologics to develop drugs against the coronavirus. Vir took investors on a wild ride, with its valuation bouncing up and down to the tune of billions of dollars, all within hours on Feb. 28. At its height, the stock hit $71.96, only to bottom that same day at $38.30. It finally closed at $46.50 and has continued to trade near that price.
Another Goldman Sachs IPO from the fall, Vir will unlock 94% of its outstanding shares come early April. If the stock continues its euphoric run, I believe those investors will sell (amid the coronavirus frenzy) to lock in gains. The IPO priced at $20 and then dropped to a $12 to $14 range for months. The stock really took off in mid-February following the company's entree into the race to develop a COVID-19 therapy. The stock now trades around $44 per share.
Be advised that the lock-up expiration does not mean the stock will free-fall. In fact, there are selling limitations that come into play. Most of the investors in these companies with locked-up stock can demand the company register all or some of the previously locked-up shares. Savvy investors should keep an eye out for SEC filings from the companies seeking to register large blocks of stock, typically greater than $10 million worth, for sale. The companies may also release news and updates following the expiration to help offset selling pressure.
Biotech investing can be challenging at the best of times. Witnessing your investment dwindle because a large fund or group of funds is trying to unload the stock can be frustrating, even infuriating. If you like Frequency, Viela, Aprea, or Vir, then a pullback may be welcome for investors looking to own more shares.
