Why Axovant's $315M IPO bonanza should scare the hell out of you

Vivek Ramaswamy may not know anything about biotech and even less about treating Alzheimer's, but he just provided a master class on the current state of public investing and executing IPOs in the field.

The bare bones of Ramaswamy's new biotech venture, Axovant ($AXON), are much discussed these days. The former hedge fund manager grabbed an abandoned GlaxoSmithKline drug for Alzheimer's for $5 million. He gathered a team together and without recruiting a single patient for a pivotal study of a marginal drug designed to treat symptoms of the disease, just raised $315 million in an upsized IPO that came in at the top of the range and promptly gyrated much higher today as investors bought in.

Axovant, with no track record, no experience and one questionable product, leaped onto the market worth much more than $1 billion.

Given the fact that GlaxoSmithKline had a chance to take a look at this drug in the clinic, and concluded that they couldn't do better than selling it for lunch money, the IPO terms illustrate the kind of overnight riches a select few can find on Wall Street, provided you have the right kind of friends with money.

As Adam Feuerstein noted in a recent piece, two other hedge funds, RA Capital and Visium Asset Management, signaled an interest in buying up a bunch of these shares and were given a 90-day window to sell their shares, half the standard lock-up time.

None of this would be possible, of course, without the help of investors transfixed by the heady increase in the share prices of biotechs over the course of this bull market. 

The fact that someone can make something of this size out of virtually nothing should be of concern to everyone in the industry. Magical thinking will take you just so far (remember the intoxicating dot-com days?). The argument that the market for biotech can stay stable rests on the belief that many of these new technologies in the clinic offer a fundamentally new and better way to treat many diseases. Something real. But when biotech mania takes over and perfectly legal schemes like this rain money, the pitfalls start to look like the Grand Canyon.

On a final note, we're wrapping up our survey on biotech valuations and clinical trial execution. What a great day to provide us with your thoughts. You can complete the survey here. -- John Carroll (email | Twitter)