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European Biopharmaceutical Review

Going Public

The biotechnology sector is booming. That is according to the number of life sciences companies that went public last year. The 33 biotech initial public offerings (IPOs) completed and the $2.5 billion raised are more than the totals from the previous five years combined, and far exceed the levels reached at the height of the tech bubble in 2000.

2013 was, without question, the most active year for biotech IPOs since 2000, and it seems the biotech bonanza is set to continue this year, with over 13 offerings having already taken place in the first two months of 2014.

No Sign of Slowdown

The sheer number of IPOs in the biotech sector over the past 12 months has led some to believe that we are witnessing the creation of a new bubble. Concerns have also been raised that investors are increasingly taking risks on companies prematurely, when they are still at the earliest stage of medical research.

Despite this, it is fair to say that most listings have seemingly gone smoothly, with some trading at double or even triple what they were at IPO. However, there have undoubtedly been some casualties too. One only has to look as far as Prosensa, the Dutch pharmaceutical company – whose shares plunged 70 per cent post-listing after the failure of a clinical trial – to realise that the IPO market can be as cruel as it can be kind.

So, with no sign of a slowdown in the public markets and investor appetite for biotech at an all-time high, what should UK firms considering an IPO know before they make what is often the most pivotal decision in their firm’s lifetime? Furthermore, what are the lessons they can learn from the successes and failures of the past, to not only help them avoid the pitfalls that an IPO can present, but also ensure they can maximise value later down the line?

What’s Driving the Boom?

In order to understand how companies can make the most of a potential IPO, or decide if it is indeed right for their business, it is important to first take a look behind the numbers to see what is actually driving the so-called ‘boom’ and why investors are increasingly looking at the life sciences sector.

Biotech companies are well-known for being among the riskier investments, particularly smaller businesses that are attempting to push prospective medical breakthroughs through clinical trials. In these cases, if successful, they hold the potential to generate huge returns for investors seeking to take a punt on them. On the other hand, they are often entering new territory at the forefront of scientific discovery – which may or may not lead them to the desired results in the end.

Given the somewhat ‘risky’ nature of the biotech business, the US has proven a much stronger and adventurous investment market than the UK, where investors are typically more conservative. However, given that Europe generally follows in the footsteps of the US, it is hoped that the increased activity on the public markets in the US will lead to an increase in appetite among UK investors for biotech companies.

In terms of the listing process, NASDAQ is proving to be the favoured market among biotech firms, with the overwhelming majority – 97 per cent – of all IPOs in the sector last year choosing to list with it. As one of the most heavily regulated and transparent markets, NASDAQ is an obvious choice for potential IPO candidates. As shown in Figure 1, NASDAQ also has a strong track record of successful public offerings in the life sciences sector – an added bonus for investors seeking a little reassurance.

Key Considerations

Should owner-managers of a biotech company decide that an IPO is the right decision for their business, there are a number of considerations to bear in mind before taking the plunge.

Timing is Critical
As with any IPO, timing is critical. Public markets are reliant on ‘good news’, so ensuring the business has a consistent flow of positive news to disseminate shortly after the listing is hugely important and should not be underestimated.

This is particularly acute in the biotech sector, where clinical trials can make or break young life sciences companies. The Prosensa case is a good example of where a poorly-timed listing can prove detrimental to a business; just three months after the company floated in June 2013, the company’s experimental muscular dystrophy drug failed its clinical trial and shares fell 70 per cent. Management should therefore look carefully at the company’s news cycle and plan their IPO accordingly.

Adopting the Public Company Mindset
Going public can be a daunting and nerve-wracking experience for any business, particularly for senior management who have not previously had public company experience – which is often the case for private life sciences companies that have grown from small start-up businesses.

Adopting a public company mindset is without a doubt one of the single most challenging aspects of the entire IPO process. It requires a great deal of mental and administrative preparation on behalf of the management team – and can take up to six months of planning and due diligence prior to the listing.

Management must come to terms with the fact that as soon as the company has gone public, it will be impossible for them to go ‘under the radar’ from that day on. All future deals, company results and any other notable transactions will have to be communicated to the market, whether the business likes it or not. It is therefore important that the management team fully understands what will be required of them well in advance of going public.

Lock-Ins and Clean Exits
Shareholders must also ensure that they understand exactly what the IPO means for the business, as well as for them personally. Some people mistakenly view an IPO as an opportunity for a clean exit – and to make a quick buck in the process. In reality, an IPO is simply the next stage in a company’s lifecycle.

Majority shareholders are often tied in to lengthy lock-up periods which prevent them from selling their shares for a certain period of time post-listing. Practices differ between the US and the UK in this respect, but the periods can be very long – in some cases up to 18-24 months after the IPO.

The recent listing of Dicerna Pharmaceuticals, which raised $90 million in late January, was an exception to this rule. Astonishingly, its shareholders were not subject to a lock-in period. Seven per cent of shares could be immediately sold after listing and 93 per cent within 90 days. The company even stated in its prospectus that “the sale of a significant number of our shares may cause the market price of our common stock to drop significantly”. Despite shares surging 207 per cent on its first day of trading, shares have since dropped 30 per cent from its first-day closing price.

Structuring the IPO
Once the decision has been made to take a biotech company through to IPO, there are a number of structural considerations that need to be addressed. While there is no industry standard, there are certain frameworks that are typically favoured. For example, investors – particularly venture capital firms – will want to see appropriate structures in place to protect their investment (including their liquidation preference in some cases) on the IPO. At the very least, they will want to ensure that the valuation on the listing, and the likely value of the stock at the time they come to sell, is sufficient to fulfil their internal rate of return. Most will not be prepared to proceed unless these criteria can be achieved.

Then there are decisions to be made with regard to where the company to be listed is domiciled, and whether a US or UK listing is more appropriate. There will be various tax considerations to bear in mind at this stage too; there is no set standard procedure when it comes to this, it will vary on a case-by-case basis.

Think Before You Leap

Owner-managers of biotech businesses reading this may be surprised by the number of factors that need to be considered prior to an IPO, particularly given the recent flurry of listings in the sector, which gives the dangerously false impression that IPOs are a means to a quick buck.

However, as we have seen with the likes of Prosensa, and more recently with Dicerna Pharmaceuticals, it is essential that companies invest the time and resources, including seeking the right professional advice, before they take the jump into the public domain.

An IPO can be the route to great success – and fortunately, in most cases, it is. But in order to avoid the potential pitfalls that can – and often do – arise, and to maximise value at every step of the way, it is worth doing the necessary due diligence in advance and really thinking about whether your particular company is an appropriate IPO candidate. Again, the right advisors can help with this assessment.

The US IPO market is booming, and hopefully the UK and Europe is next in line to catch the biotech bug. Circassia, a UK company developing allergy cures, recently announced London’s biggest IPO in the sector for years. With Europe keeping a close eye on the US markets, the biotech bonanza is expected to continue for some time to come.

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About the author

Sophie C McGrath
is a Partner in the London office of Brown Rudnick LLP. She advises on a wide range of corporate matters, including private and public financings, mergers and acquisitions, public offerings and restructurings. A strong focus of her practice is in the venture capital and private equity sector. Sophie is recommended as a leading lawyer for Venture Capital, Pharmaceuticals and Biotechnology in The Legal 500 UK, and was nominated for the Corporate – Rising Star Award at the Euromoney Women in Business Law Awards 2013.
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Sophie C McGrath
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