Erasca (ERAS) Stock Has Potential, Good Bet for High-Risk Investors

There has been a flurry of IPOs over the last month and Erasca is listing on July 16. Is the stock a good buy for investors? What’s the forecast for the company?

Erasca is a clinical-stage precision oncology company that has set itself an ambitious mission of eradicating cancer. According to the company, it’s on track “to shut down one of cancer’s most commonly mutated signaling cascades, the RAS/MAPK pathway, which affects approximately 5.5 million lives each year worldwide.”

Erasca is offering shares at $16, which is at the upper end of its range of $14–$16. The company also upsized the offering and will issue 18.75 million shares as part of the IPO. It will raise gross proceeds of $300 million from the IPO. The offer is expected to be complete on July 20. The company will list on the Nasdaq Global Select Market under the ticker symbol “ERAS.”

BofA Securities, J.P. Morgan, Evercore ISI, Morgan Stanley, and Guggenheim Securities are the joint book-running managers for the IPO. Thanks to the flurry of IPOs, U.S. banks have reported handsome investment banking fees in the second quarter. Looking at the IPO pipeline, the current quarter also looks strong.

In its filings, Erasca said that it intends to use the proceeds along with the current cash on its balance sheet “to fund the research and development of our product candidates and other development programs and for working capital and general corporate purposes.” It also kept the option to pursue strategic acquisitions.

Being a clinical-stage company, Erasca is in the pre-revenue stage and is posting massive losses. It posted an operating loss of $109 million in 2020 compared to $13.2 million in 2019. The massive increase in loss was due to a provision of $71.5 million towards “in-process research and development.”

For clinical-stage companies, R&D turns out to be the biggest expense as they work towards developing the candidates. Also, in general, clinical-stage companies are a risky bet since they're a play on the underlying product under development.

According to Erasca, under its current plans, the IPO proceeds combined with the current cash are sufficient to fund its operations over the next 24 months. That said, clinical-stage companies tend to come up with share sales often. Usually, these companies combine a positive product trial with a share sale in a bid to capitalize on the spike in their stock price.

The market for cancer care is growing fast and companies like Erasca can be a good way to play the theme. Based on the outstanding share count and the IPO price of $16, the company will command a market capitalization of around $1.9 billion.

Being a pre-revenue company, we don’t have the metrics to value Erasca stock. There have been instances where clinical-stage companies have plunged way below the IPO prices when the trials didn't make much headway. There are also multiple examples where the stocks did very well after the IPO. The stock might appeal to investors who can tolerate the high risk associated with investing in clinical-stage companies.