Experts from the life sciences industry shared their insights on the steps to going public in a virtual summit hosted by Woodruff Sawyer. The Summit featured leaders representing Cooley, the New York Stock Exchange (NYSE), Deloitte, Ambrx, Cowen, JP Morgan, Maze Therapeutics, Bain Capital Life Sciences, Gilmartin, Mammoth Biosciences, NewYorkBIO, Eventide, and Woodruff Sawyer.
“I would say what’s been so astounding and phenomenal is that the volumes we’ve seen in the markets —including in life sciences—have been incredibly robust for a prolonged period of time,” said Amanda Hindlian, Global Head of Capital Markets of the New York Stock Exchange, in the introduction to the Summit. “And, as I look forward and out into the end of this year and next year, I don’t see that abating.”
According to Hindlian, the most significant innovation in life sciences at the NYSE this year is the creation of ICEBIO (ICE Biotechnology Index). “That index now has behind it the vast majority of assets that are tracking any biotech index anywhere in the world,” she said.
“And really what that means for life sciences companies, in general, is that they have choice—exchange choice. And I would expect, as a result of that, we will see an increase in the number of life sciences companies.”
Legal, Accounting, and Insurance Factors That Impact IPOs
The IPO process typically takes about 18 to 24 weeks from the first organizational meeting to pricing. However, four to six months of work must take place before that initial organizational meeting.
Preliminary Steps to IPO:
- Coordinating with your auditors
- Having current financial statements ready for SEC review
- Preparing detailed descriptions of results of preclinical studies, including clinical trials
- Showing compliance with cyber data privacy laws (especially for China-based businesses or businesses with China-based access)
Since 2012, the SEC has allowed a vast majority of life sciences companies a confidential submission process. However, there are some limitations. An important part of a successful IPO is getting to know the investors and the research analysts in the life sciences space.
|Biotech has been the dominant industry in IPOs over the past year, with over $50 billion of capital raised.|
The JOBS Act enacted in 2012 allows early-stage companies easier access to the capital markets. Most life sciences companies qualify, because you need to have less than a billion dollars of annual gross revenue and have issued less than a billion dollars of non-convertible debt over the past three years.
|Your bankers and your C-suite are the ones who dictate the terms and timing of an IPO.|
After your company submits a draft registration statement to the SEC, that governmental organization does an initial review and then issues a comment letter on a confidential basis. These documents become publicly available when you complete the offering.
Required Financial Statements Include:
- Audited balance sheets from the two most recent fiscal years
- Audited statements of operations and comprehensive income from the two most recent years
- Potential for audited financial statements of your predecessor
- Potential for audited financial statements of “significant business acquisitions”
- Quarterly financial information
- Selected financial data (JOBS Act permits two years)
The key theme is getting ahead of the things that are going to add time to the process, because once the process starts it moves quickly. Advance preparation is the key to a successful IPO.
Strategic Questions to Test Your IPO Readiness:
- Do you have a business plan to sell your story to the public markets?
- Are all the stakeholders prepared for and committed to an IPO?
- Is management prepared for the disclosure requirements imposed in an IPO?
- Do you have a project plan to manage the IPO process?
- Do you have the necessary resources?
- Are your financial statements in order?
- Do you have the information required for the preparation of an IPO prospectus?
- Do you have adequate reporting systems and processes in place?
- Can you prepare financial information within a reasonable time after period-end?
- Do you understand the requirements for periodic and other disclosure filings?
- Do your corporate governance policies and practices meet public company standards and long-term investor concerns?
- Have you considered the tax implications?
Going Public: An Insurance Perspective
The two main factors that impact the way underwriters look at pricing D&O insurance are frequency and severity.
In terms of frequency, the current number of open, unresolved securities claims is probably in excess of 600. Since those claims all have the potential of settling out, carriers are reevaluating how they price D&O insurance based on that potential. As far as severity, the average cost of settlements in 2020 was $9.5 million—an amount in excess of the 10-year average.
Another factor affecting D&O pricing and retention is the recent SPAC (Special Purpose Acquisition Companies) phenomenon.
Between 2020 and 2021, there have been 775 SPAC IPOs placed in the market. Those companies are fighting for the attention and the capital from the same underwriters that you will be fighting for.
|Companies that are planning for an IPO are using federal form provision language, which is more predictable for the underwriters.|
At a time when you are busy with investor meetings, the way you pitch your story to investors and what’s important to investors may trip up the underwriters in some instances. Understanding some of those nuances so that you can tell your best story to that stakeholder group is a valuable part of the relationship you build with your insurance company.
Since D&O insurance pricing is so expensive, companies should start the planning process early. Evaluating your broker during this time is important not only for D&O insurance but also for how you will grow and manage your insurance over time. Your insurance broker can help you prepare for the questions underwriters will ask.
What It Takes to Raise Capital
For investors and equity capital market professionals raising capital for an IPO, there are many factors to consider. Perhaps the main factor that distinguishes the life sciences vertical from almost every other kind of public and private company is that biotech are not usually revenue-generating companies and are typically in a perpetual state of fundraising.
According to the investors and equity capital market professionals who paneled at the Summit, there has been a lack of appetite or willingness from a broad pool of investors to be there to support biotech stocks. However, that environment may be changing.
ATMs continue to be an important component of the whole arsenal for taking a biotech company public, though the panel stressed that an ATM is only part of the toolkit.
SPACs are an alternative tool for life science companies to go public. One advantage to using the traditional IPO path is that you’re able to control the shareholder base from crossover through IPO.
|Investors and equity capital market professionals expect capital markets in Asia to continue to grow and evolve.|
The CEO IPO Experience
Three CEOs who recently led their biotech companies public made several informative observations at the Summit. They concurred that the journey to going public takes many years of planning and cooperation with investors. Looking outside what might be considered traditional biotech investors is vital to success.
Innovative practices, such as joint ventures and spin-outs, can help attract investors. One of the key ways to differentiate your company from the competition is through your technology platform.
Investors want to see a strategic vision for your product or platform, including delivery methods and stages for the next 10 years. Your company’s continued financial success depends on the execution of your plan. How can you maximize distribution and innovation? Further, competition for lab space can be fierce, and some companies neglect to plan for the physical space they need to do their work.
Investors value having a diverse board of directors that helps you think differently about business problems and scientific problems. But it’s not just the board that’s critical to success. Supporting your team members in their career journeys can pay dividends to your company over time.
For further insight, watch the recording of the Life Sciences IPO Virtual Summit.
Volatile Stock Price and Litigation Risk: D&O for Life Science Companies
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