Trader Talk

NantKwest a huge IPO, but watch the small float

The NASDAQ exchange is seen in New York City.
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The biggest biotech IPO in recent memory started trading today on the NASDAQ. NantKwest, the cancer immunotherapy company controlled by L.A. billionaire Patrick Soon-Shiong, opened at $37 after floating 8.3 million shares at $25, well above the price talk of 7.0 million shares at $20-$23.

According to Renaissance Capital, the folks who run the Renaissance Capital IPO ETF, that makes it the largest biotech in at least the last 10 years, with an initial market cap of $2.6 billion.

Wow. Not bad, considering Soon-shiong bought the company for $48 million less than a year ago, and controls almost 60 percent of the company.

Let's leave that alone. Here's a different issue: the float is small. The valuation is big, but the float is small.

The company has 78 million shares outstanding (not including options). The IPO floated 8.3 million shares. However, 2.2 million shares were bought by management and Franklin Templeton at the offer price of $25. That leaves 6.1 million shares that are tradeable.

6.1 million shares/78 million outstanding = 7.8% tradeable float.

OK, I know cancer immunotherapy is a hot space, but this is a very small float.

Typically, the float of an average IPO is 10 to 20 percent of the total shares outstanding.

Unfortunately, keeping the float small (10 percent or below) has become much more common in the last couple years.

Why? Well, restricting supply does help with the price, right? Of course, no one would ever say that. Of course not. Hrumpf.

Still, this can be an issue. Most indexes, including those used for ETFs, have minimum float requirements.

The Russell indices, for example, have a 5 percent tradeable float requirement. The Renaissance Capital IPO ETF (IPO), a basket of roughly 60 of the most recent IPOs, also has a 5 percent float requirement.

NantKwest beat that requirement, but barely.

The other downside to a really small float is you get a really small representation in indexes you go into. Which means less influence.

None of this is on the minds of investors in NanKwest today, however. The stock opened at $37 and has held in the $30s all day.