Why Investors are still wary of the G1 Therapeutics $100 million IPO

Cancer treatments are the hype of modern day research companies. With an annually growing potential market and potentially large profit margins, the cancer treatment niche seems like a wise investment choice for investors. As it stands now, most cancer treatment companies are all in their clinical trial stages. This stage is slow in development, and investors’ earnings remain to be seen in future, making cancer treatment biotech companies such as G1 Therapeutics a risky bet.

Started in 2008, G1 Therapeutics (Pending: GTHX) is a biopharmaceutical firm based out of Research Triangle Park, North Carolina. The US-based company is currently working on inhibitors to reduce the side effects caused by chemo cancer treatments.

The prospects for G1 Therapeutics in its IPO, airing on the week of May 15th, do not look good. Some investors are wary of getting involved in the deal for several reasons. The deal is estimated to run up to $100.8 million. G1 Therapeutics intends to put 6.3 million of its common stock on the market within the range of $15 to $17. Some shares might even be sold to insiders. If G1 manages to sell most of its shares at the midpoint of the proposed range, its market capitalization will be approximately $479 million. JP Morgan will be working with Cowen & Co. as joint book runners on the issuance.

G1 Therapeutics is headed by CEO Mark Velleca,. Velleca is renowned in the cancer-drug industry for the biotech he co-founded, CGI Pharmaceuticals. Velleca’s presence in the market may make you think about buying into G1 Therapeutics. But is it enough to make your spend your money in the IPO? Most analysts don’t think so. The reasons for that are many, and you’ll find most of them if you look up any biotech start-up.

The first reason is that G1 Therapeutics, like other start-ups, is capital intensive but has almost zero returns. Think about it like this. A company has an idea. Everybody agrees that the idea is good, so the firm decides to actualize it. To do that, the company borrows large amounts of cash. All the while the creditor doesn’t get any money. Such a person may or may not get his or her money back depending on whether idea is accepted into the market or not. For G1 Therapeutics, even the effectiveness of its primary candidate is unsure. If, by any chance, the company makes some money, it has to use the money to make more product for testing and to pay debts. In the end the company accumulates so many liabilities that investors take a back seat when it comes to prioritizing payment. Investors cannot hope to get their money back until the company starts drug production, which may take years or even decades.

Finally, the cancer treatment market may be a large one, but it’s very competitive. There’s nothing to guarantee that products like the G1T38 and the G1T48 will not be edged out later by cutting-edge cancer treatments in future. This competition makes the IPO even riskier for investors.