Is the Axovant IPO a Biotech Red Flag?


Shortly before markets closed in Europe yesterday evening, we got news that an analyst at Evercore ISI named Mark Schoenebaum was bullish on Axovant Sciences (NYSE:AXON). His proclamation, based pretty much entirely on the pending success or failure of an Alzheimer’s candidate, has done little to boost Axovant stock so far, but – in combination with a buy initiation reported out of RBC Capital Markets yesterday, we could see some upside momentum injected into the company’s market capitalization as we head into the middle of this week. There is, however, one fundamental problem with both this buy recommendation and the Schoenebaum bullishness; namely, that the candidate in question has already been rejected by GlaxoSmithKline plc (NYSE:GSK) – having failed to reach any statistically significant end points in a number of mid-range combination studies conducted during the first couple of years of this decade. Axovant, of course, has its reasons for picking up a retrial in the treatment, but in light of its current valuation, the question has to be, is there really potential here, or will we look back on this day as the peak of a biotech bubble – one in which investors are willing to value a development stage company at multiple billions of dollars based on the potential of an already failed treatment candidate? To try and figure this out, let’s have a quick look at the treatment in question, the companies involved, and how this might play out.

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So, first, let’s take a look at the treatment. The discarded treatment is what’s called a 5-HT6 antagonist, and Axovant purchased it from GlaxoSmithKline for just $5 million earlier this year. Known as RVT-101, the drug is an orally administered, potent antagonist of the 5-HT6 serotonin receptor. Basically, the treatment works as a type of inhibitor, antagonizing against the release of serotonin. In doing this, it promotes the release of primarily acetylcholine, glutamate, but also a number of other neurotransmitters that scientists believe improve cognitive behavior in a range of dementia sufferers, including those suffering from Alzheimer’s. GlaxoSmithKline trialed the treatment in more than 1250 patients, and – despite proving safety and tolerability – were unable to demonstrate any real significant benefit when compared to placebo. This said, in a combination study in patients that have previously been treated with donepezil therapy, markets did see some slightly delayed decline when compared to placebo in mild to moderate Alzheimer patients. It is this latter fact that Axovant is basing its claim on, and was primary driver behind the company’s IPO at the beginning of June 2015.

As a result of its IPO, the company raised about $315 million based on around 21 million shares sold. The shares sold at IPO at an average price of $15 per share, but before 24 hours were out, were trading just shy of $30. At last close, the company is posting at $19 a share. The company looks to have had a strong IPO, so what are we concerned about? Well, there is so much risk here that a successful IPO seems counterintuitive – and in turn – representative of a wider biotechnology bubble either peaking or at least approaching its end. It goes without saying that Axovant has to-date generated no revenues, and as with any development stage biotechnology company with a limited pipeline, it expects to absorb a large amount of further losses before (and if) it achieves profitability. In addition, even if RVT-101 gains approval, Axovant is obliged to make royalty and milestone payments to GlaxoSmithKline – reportedly in the millions of dollars. All this combined with a 29-year-old CEO who, not to discredit the guy, has very little experience as far as a successful track record in the development stage biotech space goes (Harvard biology, Yale Law and a serving chairman of Tekmira Pharmaceuticals (NASDAQ:TKMR) – see link for our opinions on Tekmira) suggests the buyers of 21 million IPO shares either know something we don’t or have a very very high tolerance for risk. Either that, or they have made a mistake.

Of course, only time will tell. Even with milestone payments, if Axovant can hit the market with a blockbuster Alzheimer’s treatment it could quickly validate its current valuation. However, we’ve got a number of years to go before it does, and in the meantime all this stock has is the potential for event driven volatility. The takeaway? Not one for us, but a potentially rewarding highly speculative punt for those who like a gamble.

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