On February 12, biotech company Gossamer Bio Inc (NASDAQ:GOSS) will launch an IPO which will value the company at nearly $1 billion. It is likely that it will be the first company to go public since December 22, a nearly two-month gap created by the U.S. government shutdown.
Gossamer is in many ways a typical clinical-stage biotech company and is developing drugs to fight rarer, more dangerous variants of asthma and other well-known conditions. But this is not a typical IPO, as it has made a bold decision to move forward without SEC approval. While this decision does carry risk and clinical-stage biotech IPOs are risky affairs on a good day, there is solid logic behind Gossamer’s decision. Investors have nearly three weeks to reach a decision, and here are the key facts behind this IPO.
An Unusual IPO
Due to the U.S. government shutdown, the SEC has been stripped to its bare bones and is unable to process S-1 statements. Senate measures which proposed to reopen the government failed on Thursday, and there remains no indication that the shutdown will end soon and the SEC can resume business. Even if it does, the SEC will face a massive backlog of companies filing to go public, with Reuters reporting that 80 companies have filed with the SEC for an IPO excluding special purpose acquisition vehicles.
However, companies can go public without SEC approval, and Gossamer has indicated that it will do so. Companies generally do not do so for several reasons. In order to go public without SEC approval, Gossamer must announce a share price, wait for 20 days, and then go public at the same share price. Changing market conditions means that a price 20 days ago can be too high or too low at the present. Furthermore, the SEC acts as a fact-checker to make sure that there are no omissions or legal issues with Gossamer’s S-1 report. This means that by moving without SEC support, Gossamer faces higher legal risk.
But the higher legal risk is diminished by the fact that as a biotech company, Gossamer’s finances are pretty simple. And while changing market conditions represent a downside, there are some upsides for this move. First, Gossamer will be able to raise capital faster, which is important for a biotech company which needs to raise money in order to develop treatments. Second, Gossamer will be the only IPO on the market in February, potentially attracting investors who might otherwise stay away.
Examining The Company
If we set Gossamer’s decision to go public aside, what do we know about the company itself? As noted above, Gossamer is a fairly typical clinical-stage biotech IPO. In its SEC report, it states that it has six treatment programs, three of which are in the clinical stage and going through the FDA pipeline.
The fact that Gossamer has a wide range of treatments is a good thing. The catch is that the most advanced drug, a treatment called GB001 which treats severe varieties of asthma, commenced a Phase 2b clinical trial in October 2018. None of the drugs are in Phase 3 testing, which indicates that it will be some time, possibly years, before Gossamer develops a marketable drug. And that assumes that Gossamer’s drugs pass FDA approval which is no certain thing.
There are also concerns about the marketability of its treatments. While GB002, a treatment for a type of hypertension, has received orphan drug status from the FDA, the others have not. Gossamer faces severe competition from other developers and has not received interest from larger companies willing to serve as a partner.
Fortunately, Gossamer has the cash reserves to indicate with an email parser that it can keep running for years. Gossamer states that as of September 30, 2018, it had over $256 million cash on hand. The company raised $230 million in a Series B funding round last July and $100 million six months earlier. By comparison, Gossamer reported operational losses of $109 million in the first nine months of 2018. While operating losses will almost certainly increase in 2019, Gossamer likely has enough cash for at least two years especially when the added funds from this IPO are taken into account.
Final Analysis
Some analysts may wonder whether Gossamer could set a precedent for other IPOs to move forward without SEC approval, but I doubt this will happen. Most businesses do not need the cash right away, and will likely prefer to wait for the SEC to reopen to help make sure their affairs are in order.
Gossamer’s circumstances mean that moving forward without SEC approval is a valid option, but it is likely that it is hoping to attract interest just from being the only IPO in town as opposed to its own merits. Given the early stage of development of its treatments as well as intense competition, I would recommend that investors wait for the shutdown to be over. There will be plenty of companies to choose from when that happens.