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VectivBio: A Highly Risky Bet the Future

VectivBio Holding (NASDAQ: VECT), the Swiss Phase 3 biotech startup, plans on going public this week. VectivBio will price its offering on Thursday or Friday before going public. According to the company’s S-1 filing, VectivBio plans to offer 7.5 million shares, with an offering price per share between $16.00 and $18.00. This would raise between $120 million and $135 million. At the midpoint of the proposed range,the company would command a fully diluted market value of $634 million. The company filed confidentially on December 23, 2020. BofA Securities, SVB Leerink and Credit Suisse are the underwriters on the deal. 

According to its prospectus, VectivBio does not generate revenue. Losses widened from $23.5 million in 2019 to nearly $60 million in 2020. 

Background

Private businesses are choosing to stay private for longer, typically only going public after an average of eight years. It is incredible to think that VectivBio was founded in 2019 when Pfizer acquired Therachon Holding and spun off the clinical stage biopharmaceutical firm. 

VectivBio works on discovering, developing and commercializing innovative treatments for severe rare conditions which the company believes have a significant but as-yet unmet medical need. Their management is highly experienced and has great pedigree in the biotechnology and pharmaceutical industry. The company believes that it can become a fully-integrated, leading, patient-centric rare disease company treating patients from across the globe. 

At present, the VectivBio product pipeline is geared toward rare gastrointestinal disorders. The company intends to in-license or buy what it feels are transformational, differentiated rare disease assets. Its candidate, apraglutide, is a next-gen, long-acting synthetic peptide analog of glucagon-like peptide-2, that the company is developing as a differentiated therapeutic for a range of rare gastrointestinal disorders, starting off with short bowel syndrome. 

Preclinical and clinical data suggest that apraglutide can further the treatment of short bowel syndrome intestinal failure (SBS-IF) reducing the frequency of dosing and improving clinical outcomes. Apraglutide is at the Phase 3 clinical trial stage for use in treating patients with SBS-IF. 

VectivBio also plans on evaluating apraglutide’s potential in treating  other rare gastrointestinal disorders, for example, graft versus host disease, which it believes may benefit from GLP-2 activation. 

The Majority of Drug and Vaccine Candidates Fail

The decisive facts to know when evaluating a drug company whose products have not yet been commercialized or even approved by the Federal Drug Administration (FDA) is that the majority of drug and vaccine candidates fail to get FDA approval.

Investing in VectivBio essentially boils down to one’s confidence that it will get FDA approval. Financial results at this point are utterly meaningless. 

Now, drug development is one of the riskiest activities that a company can undertake. Take the race to develop a Covid-19 vaccine: huge pharmaceutical companies such as Sanofi, failed to develop a vaccine. Funding is not the issue. The best financed business in the world can still fail to develop a drug. 

Investors often neglect the contingent nature of investing in biotech startups. They are all too blinded by the potential to make outsized returns upon crossing the finishing line. Yet, this ignores the huge chances that a company like VectivBio, will fail to get FDA approval. 

VectivBio’s has done well to get as far as Phase 3 with its leading product candidate, yet, as the graphic below from the American Council on Science and Health demonstrates, the road ahead is perilous:

We can assign a base rate of 51.6% to VecticBio’s chances of getting FDA approval. This is not a no-brainer like getting lash extensions.

Not only is getting FDA approval not a slam dunk, getting approval is not a sign that a drug works well. Often, the FDA approves drugs simply because it is the best drug available, even if it is not a very good drug. This sounds scandalous at first, but consider the ineffectiveness of flu medication and the antiviral drug Tamiflu. These drugs hardly have the best clinical data, but they have FDA approval. This opens the drugs up to the possibility of being “disrupted” by another drug. The barriers to entry are not as formidable as having a patent implies. Consequently, not only is this a high risk proposition in terms of getting FDA drug approval, it is also high risk because FDA approval may not mean that apraglutide is a particularly great drug. 

One might find that paying a visit to Fastbase Investor Relations is a better investment proposition than investing in VectivBio. There are just too many risks inherent in a company like VectivBio for this to be a safe investment proposition. 

Research does show that biotech firms are 40% more effective than traditional pharmaceutical firms in drug development, so VectivBio’s chances of success may be materially larger than the base rate suggests. VectivBio’s rounds of texting and clinical trials will have done a lot to de-risk the company and certainly, having a pipeline of products means that the risks of overall failure are reduced. Nevertheless, there is so much that can go wrong between Phase 3 and seeking FDA approval. In fact, even if we assign a 100% chance of success to VectivBio, their path to FDA approval may be delayed for reasons that we cannot now imagine. The certainty of success does not eliminate the possibility of significant delays and problems along the way.