How a small drug maker enters market to soaring stock prices
It’s become a common occurrence: A biotechnology company that a few years ago was just a handful of people with an interesting idea goes public. The stock soars as investors scramble to get a piece of the action.
But how does that actually work?
In the case of last month’s widely popular initial public offering by Seres Therapeutics Inc., of Cambridge, it was the culmination of hard work, successful clinical tests, and good timing.
The company raised $138 million by selling shares at $18 apiece. On June 26, the first day of trading, they closed at $51.40, giving the company a market capitalization of almost $2 billion.
Little more than a year earlier, Seres was a company of nine people worth about $10 million, according to chief executive Roger Pomerantz.
The company, which was nurtured by Flagship VentureLabs, the startup unit at Flagship Ventures in Cambridge, was working on a new drug in a medical field focused on the human microbiome — rebalancing bacteria in the body to help it fight off illness. It had developed a pill to treat recurrent Clostridium difficile infections, an especially nasty bug known as C. diff that kills as many as 29,000 people in the United States each year.
Early clinical tests were small but compelling. The treatment cured 29 of 30 patients and the Food and Drug administration gave it breakthrough experimental drug status — which helps speed a drug to market — about two weeks before the company’s IPO.
Just as important, the company had been expanding its roster of blue-chip private investors with a series of venture finance rounds. Even mutual fund companies known for their interest in technology companies before they go public — Fidelity Investments and T. Rowe Price — were both venture investors in Seres.
In a series of “test the waters” presentations to existing investors, executives sought to make sure they found the IPO pitch compelling.
“There is no elevator speech for this,” said Pomerantz. “It takes time, you have to wrap your head around it.” Seres didn’t simply have a drug. It was trying to become a leader in a field that embraced bacteria — the thing medicine usually tried to kill — as a way to treat sick patients.
Seres investors told Pomerantz the story was still compelling. “When that lit up we said yes, and then you’re off,” he said.
But even good stories don’t sell themselves. The coast-to-coast roadshow — a familiar, exhausting blur to every management team that takes a company public — is the way the story and the stock are sold.
Seres managers started their tour on Tuesday, June 16, in New York by making presentations to analysts and sales executives at their investment banks. They made video presentations at Bank of America’s offices overlooking Bryant Park and later at Goldman Sachs headquarters, with its view of the Statute of Liberty.
Then their trip really got busy. They took the Acela train to Baltimore, home to T. Rowe Price and another firm that had previously invested with Seres. “That was somewhat of a victory lap, but it got our feet wet,” Pomerantz said.
Seres executives returned to New York for a faster pace of meetings the next day. They made the same pitch, 45 minutes to an hour at a time, over and over. There were four or five meetings by lunch and about the same number through the afternoon and evening before getting back on the train to return to Boston. Once again on Friday, they met privately with investment firms but also hosted a lunch for a bigger audience at the Boston Harbor Hotel.
No doubt Seres managers knew by then that their plan to sell shares for $15 to $17 each was going well. Pomerantz said portfolio managers who sat expressionless through presentations often approached him after the meeting and said they would invest. Some had already made that decision based on the video shot by the investment bankers and distributed to clients.
But there was another week to go. Seres executives returned to New York for a new series of rapid-fire investor meetings before boarding a private jet for San Francisco. Next they hit Denver and Kansas City in one day and ran into a hail storm so powerful Pomerantz struggled to be heard over the sound of ice striking the windows.
The last stop was Chicago. Seres managers again spent the day meeting investors and their car eventually took them to Chicago Midway International Airport. But rather than boarding the jet, they moved into a reserved conference room for the call that mattered most. They sat around a table with a speaker phone in the middle, connected with investment bankers and members of a special Seres board subcommittee organized to oversee the pricing of the stock.
The news was what Pomerantz and other Seres executives had hoped. The stock offering had been wildly oversubscribed — though they won’t say by how much — and a decision was made to sell the stock for $18 per share, a dollar more than the top of the company’s original estimate. But the show wasn’t quite over yet.
The market’s response — how investors who weren’t privy to those private meetings reacted to the stock — was also important to Seres. It would affect how the company was viewed around the world and could influence its ability to raise more public money in the future.
Seres executives were back at their desks early on Friday, June 26, dealing with work that had been put aside for nearly two weeks and waiting for the stock to begin trading at around 11 o’clock. Their bankers called with frustrating news — the open was being delayed for about a half hour — but the reason made them smile. Orders to buy the stock were coming in so quickly the Nasdaq exchange was having trouble organizing the opening process.
Pomerantz went to the office of Seres’ chief financial officer, Eric Shaff, to watch the first trades appear on a computer screen. The stock came out in the high $20s and kept moving higher. By the end of the day, Seres shares had almost tripled. As the afternoon wore on, the company party Seres planned to celebrate the IPO was getting a lot bigger.
There are two ways newly public companies can look at wildly successful initial trading days like that. They may have left a lot of money on the table — perhaps the offering price should have been higher — but they also establish a market they can use to sell much more lucrative additional stock offerings soon.
Seres stock price has since settled back to just above $35, a market cap of $1.4 billion and still about double the company’s IPO price.
Pomerantz said his current message to employees is all about getting back to work.
“From now on, don’t look at the stock. If you build drugs, the stock will follow, and that’s what we’re trying to do,” he said.