IPOs, Initial Public Offerings: pre & post IPO

TESARO (TSRO)

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Update: prices at mid-range, $13.50

Based in Waltham, MA, TESARO (TSRO) scheduled an $81 million IPO with a market capitalization of $360 million at a price range mid-point of $13.50 for Thursday, June 28, 2012.

[S-1] filed June 19, 2012.  Original S-1 filed March 23, 2012.

UNDERWRITERS
Manager, Joint Managers:  Citigroup; Morgan Stanley; Leerink Swann
Co Managers:  BMO Capital; Baird

SUMMARY
TSRO is an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients.

Formed March 2010, TSRO had 20 employees as of March 31, 2012.  Post IPO at the price range mid-point TSRO would have a market capitalization of $360 million at the price range mid-point of $13.50.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of IPO Analysis terms

TSRO SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

0

1

C, 5

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing March qtr

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

TESARO (TSRO)

$360

n/a

-10

2.2

2.2

22%

SHAREHOLDERS EQUITY
Pre-IPO shareholder’s equity was $88.5 million.  Proforma after the IPO, shareholder’s equity would be $161 million, and the market capitalization would be $360 million.

CONCLUSION
TSRO is a company with 20 employees, a little over two years old and has an accumulated deficit of $35 million.  The company has licensed technology and must raise money for stage 3 clinical trials for the most advanced product candidate, Rolapitant.

There are only two main competitors for Rolapitant (see ‘competitors’ below), so if Rolapitant passes its stage three clinical trials the payoff could be very large.

IPOdesktop’s recommendation is to pass on the TSRO IPO because it is appears to be very risky.

BACKGROUND
TSRO was founded in March 2010 by former executives of MGI PHARMA, Inc., or MGI PHARMA, an oncology and acute-care focused biopharmaceutical company. While at MGI PHARMA, TSRO’s senior management team collaborated in the clinical development and commercialization of several cancer therapeutics and oncology supportive care products, including Aloxi (palonosetron HCl) for CINV.

TSRO investors include, among others, the following entities or their affiliates: New Enterprise Associates, InterWest Partners; Kleiner Perkins Caufield Byers;Venrock; Oracle Investment Management; Pappas Ventures; Deerfield Capital; Leerink Swann; Frost Gamma Investments and the TSRO management team.

TSRO seed investors have invested $179 million, S-1 page 59.  TSRO has an accumulated deficit of $35 million.

INCONSISTENCY IN SEC FILING
S-1, Page 58
“Preferred Stock Financing.    Since our inception on March 26, 2010, we have funded our operations primarily through the private placement of our equity securities. As of March 31, 2012, we had received $120.4 million in net proceeds from the issuance of preferred stock. As of March 31, 2012, our principal source of liquidity was cash and cash equivalents, which totaled $88.6 million.

“Pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 6, 2011, and as amended on July 7, 2011 and March 21, 2012, we issued 26,884,442 shares of our Series B preferred stock to certain existing investors on March 21, 2012 for additional net proceeds of approximately $58.4 million.

The total received should be, therefore, $120.4mm plus $58.4 million, or $178.8 million.

HOWEVER – the total paid in capital was $123 million as of March 31, 2012, page 50.

OPERATIONS TO-DATE

TSRO’s operations to date have been limited to organizing and staffing the company, business planning, raising capital, acquiring and developing product candidates, identifying potential product candidates and undertaking preclinical studies and clinical trials of the product candidates.

BUSINESS
TSRO is an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients.

TSRO has in-licensed* and is currently developing three product candidates, rolapitant, niraparib and TSR-011.
* In-licensing and collaboration agreements frequently involve competitors, or at least potential competitors…read more

Upon successful development and regulatory approval of any of product candidates TSRO intends to make them available to cancer patients in North America, Europe and China through TSRO’sr own commercialization efforts and to establish a network of licensees and distributors in other geographic areas.

PRODUCT CANDIDATES
Rolapitant
a potent and long-acting neurokinin-1, or NK-1, receptor antagonist currently in Phase 3 clinical trials for the prevention of chemotherapy induced nausea and vomiting, or CINV;

Niraparib
formerly known as MK-4827, is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor that has undergone a Phase 1 clinical trial in cancer patients as a monotherapy and is currently under evaluation by Merck & Co., Inc., or Merck, for use in combination with temozolomide for the treatment of solid tumors. TSRO intend to evaluate niraparib for the treatment of patients with solid tumors; and

TSR-011
an orally available anaplastic lymphoma kinase, or ALK, inhibitor (targeted anti-cancer agent) currently in preclinical development. TSRO plans to test TSR-011 in clinical trials as a treatment for non-small cell lung cancer, or NSCLC, and potentially other cancer indications.

LICENSE AGREEMENTS
Rolapitant
In December 2010, TSRO entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant. The license agreement also extended to an additional, backup compound, SCH900978, to which TSRO has the same rights and obligations as rolapitant, but which TSRO is not currently advancing.

In consideration for this license, TSRO paid OPKO $6.0 million upon signing the agreement and issued 1,500,000 shares of Series O preferred stock. At the time of this transaction, the fair value of TSRO’s Series O preferred stock was determined to be $0.6 million.

TSRO is also required to make milestone payments to OPKO of up to an aggregate of $30.0 million if specified regulatory and initial commercial sales milestones are achieved. In addition, TSRO is required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved.

If commercial sales of rolapitant commence, TSRO is required to pay OPKO tiered royalties on the amount of annual net sales achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which TSRO expects will result in an effective royalty rate in the low teens.

TSRO is responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant.

TSRO recorded the entire purchase price to acquired in-process research and development expense of $6.6 million.

Niraparib
In May 2012, TSRO entered into a license agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck, under which TSRO obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib and a backup compound, MK-2512, for all therapeutic and prophylactic uses in humans.

TSRO is not currently advancing MK-2512. Under the terms of the license agreement, TSRO made an up-front payment to Merck of $7 million in June 2012, and that amount is not reflected in TSRO’s financial results as of March 31, 2012.

TSRO is  also required to make milestone payments to Merck of up to $57 million in development and regulatory milestones for the first indication, up to $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives.

If commercial sales of niraparib commence, TSRO will pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis.

TSRO is responsible for all clinical, regulatory and other activities necessary to develop and commercialize niraparib. At the time of the license transaction, niraparib had completed a Phase 1 clinical trial in cancer patients as a monotherapy. It is currently under evaluation by Merck for use in combination with temozolomide for the treatment of solid tumors.

TSRO will record the entire purchase price of $7 million to acquired in-process research and development expense.

ALK Program
In March 2011, TSRO entered into a license agreement with Amgen, Inc., or Amgen, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell certain licensed ALK inhibitor compounds.

Under the terms of the license agreement, TSRO made an up-front payment to Amgen of $0.5 million. TSRO is also required to make milestone payments to Amgen of up to an aggregate of $138 million if specified clinical development, regulatory, initial commercialization and annual net product sales milestones are achieved.

If commercial sales of a product commence, TSRO will pay Amgen tiered royalties at percentage rates ranging from the mid-single digits to slightly above the single digits based on cumulative worldwide net sales until the later of the last patent licensed from Amgen covering the product, the loss of regulatory exclusivity for the product, or the tenth anniversary of the first commercial sale of the product, in all cases, on a country-by-country and product-by-product basis.

TSRO is responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize the ALK product candidates.

At the time of the license transaction, ALK was a preclinical compound. None of the assets to which TSRO acquired rights have alternative future uses, nor have they reached a stage of technological feasibility

TSRO recorded the entire purchase price to acquired in-process research and development expense of $0.5 million.

INTELLECTUAL PROPERTY
See above licensing agreements

COMPETITION
Rolapitant Competition
Aprepitant and its pro-drug fosaprepitant, which are both known by the brand name EMEND and marketed by Merck, are currently the only commercially available NK-1 receptor antagonists. Helsinn Healthcare has an active clinical program for an oral combination NK-1 receptor antagonist and 5-HT3 receptor antagonist product (netupitant plus Aloxi (palonosetron HCl)) that would be marketed by Helsinn Healthcare and Eisai, Inc.

Niraparib Competition
TSRO believes the products in development targeting the PARP pathway consists of Abbott Laboratories’ ABT-888 (veliparib), currently in Phase 2 clinical trials, and AstraZeneca Plc’s AZD-2281 (olaparib), Eisai, Inc.’s E-7016, Cephalon, Inc.’s CEP-9722, Clovis Oncology, Inc.’s CO-338 (rucaparib) and Biomarin Pharmaceutical Inc.’s BMN-673, each currently in Phase 1 clinical trials.

TSR-011 Competition
There is currently one ALK inhibitor that is marketed, Xalkori (crizotinib), a dual MET/ALK inhibitor marketed by Pfizer. In addition, TSRO is aware of four oral ALK inhibitors in clinical development. These products are Chugai Pharmaceutical Co., Ltd.’s AF802, currently in Phase 1/2 clinical trials, and ARIAD Pharmaceuticals, Inc.’s AP26113, Astellas Pharma US, Inc.’s ASP-3026 and Novartis AG’s LDK378, each currently in Phase 1 clinical trials.

EMPLOYEES
TSRO had 20 employees as of March 31, 2012.

72.5% VENTURE CAPITAL OWNED  – PRE-IPO
Entities affiliated with New Enterprise Associates, 50.3%

Entity affiliated with InterWest Partners, 12.7%

Entities affiliated with Kleiner Perkins Caufield & Byers, 9.5%

USE OF PROCEEDS
TSRO expects to net $73 million from its IPO and anticipate that it will use pre-offering cash resources plus the net proceeds of this offering for the following purposes:

$65 million to fund the development of rolapitant, currently in Phase 3 clinical trials, through the submission of an NDA;

$25 million to fund the development of niraparib, including Phase 2 clinical trials;

$15 million to fund preclinical and Phase 1 clinical development of TSR-011; and

the remainder to in-license or acquire, as the case may be, product candidates, technologies, compounds, other assets or complementary businesses, for general corporate purposes and for working capital.

FINANCIAL

TESARO TSRO, C, 5

Post IPO shares: 27mm

In-licensed cancer drugs
Waltham, MA

2010

2011

March qtr ’11

March qtr ’12

IPO Mkt

Loss

-$9

-$16

-$3

-$9

Cap (mm)

$360

@$13.5

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing March qtr

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

TESARO (TSRO)

$360

n/a

-10

2.2

2.2

22%

TSRO SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

0

1

C, 5

 

 

 

 

 

 

 

 

 

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