Biotech IPOs: New Steps to Suc­cess on the Road to Go­ing Pub­lic

By RBC Cap­i­tal Mar­kets

Key Points

• 2020 is on track to post the high­est num­ber of biotech IPOs in five years
• COVID-19 has cre­at­ed a new roadmap for go­ing pub­lic
• Crossover in­vestors are be­com­ing even more ac­tive
• Com­pa­nies are go­ing pub­lic with strong bal­ance sheets

As the search for COVID-19 vac­cines and ther­a­peu­tics con­tin­ues, in­vestor in­ter­est in biotech IPOs has surged. 2020 is on track to post the high­est num­ber of biotech IPOs in five years.

The pan­dem­ic has cre­at­ed a new roadmap for go­ing pub­lic. New prac­tices and pre­dic­tive fac­tors for suc­cess are emerg­ing, along­side more fun­da­men­tal changes to IPO strate­gies and process­es.

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Evo­lu­tion of the Crossover Mar­ket

“There are two con­nect­ed high-lev­el points around the IPO process that have changed this year,” ex­plains Ja­son Levitz, Head of Health­care Eq­ui­ty Cap­i­tal Mar­kets at RBC Cap­i­tal Mar­kets. “The growth of the crossover mar­ket is one, with more in­vestors look­ing at pre-pub­lic op­por­tu­ni­ties to fol­low through and par­tic­i­pate in IPOs. The oth­er re­lates to our abil­i­ty to get deals done vir­tu­al­ly.”

“Be­fore the pan­dem­ic, a tra­di­tion­al IPO in­volved an eight-day phys­i­cal road­show. Now we have vir­tu­al four-day road­shows con­duct­ed on Zoom™. And be­cause to­day’s deals are now large­ly sub­scribed at launch from crossover in­vestors, IPOs are over-sub­scribed and trad­ing ex­treme­ly well in the af­ter­mar­ket in high­ly com­pressed time­lines.”

“There have been 59 biotech IPOs year-to-date,” con­tin­ues Ja­son. “If you bought all of them, you’d be up 42% on the year. That’s re­mark­able – and it’s dri­ving more in­vestor in­ter­est.”

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Look­ing Be­yond the Boom

The ques­tion is, how long will the IPO boom last? “The fact that to­day’s deals are so well-po­si­tioned to suc­ceed at launch – cou­pled with the qual­i­ty of sci­ence and depth and breadth of com­pa­nies in this year’s IPO class – sug­gests this boom has legs,” says Tim Papp, Man­ag­ing Di­rec­tor, Biotech­nol­o­gy In­vest­ment Bank­ing at RBC Cap­i­tal Mar­kets.

“I think it re­flects a wider mat­u­ra­tion of the in­dus­try in re­cent years. If you think about how things were in the 2000s, the mar­kets didn’t have the in­tel­lec­tu­al fil­ters to as­sess great tech­nolo­gies or well-run tri­als. There’s been a tremen­dous ad­vance­ment in mar­ket par­tic­i­pants. Go to any road­show meet­ing now and al­most every­one is an MD PhD. Back then, that com­bi­na­tion was pret­ty rare.”

Tim al­so flags the in­cred­i­ble growth in the pool of cap­i­tal now ded­i­cat­ed to bio­phar­ma as an­oth­er rea­son why we’re un­like­ly to see the boom fal­ter any­time soon.

“The ma­jor­i­ty of com­pa­nies are go­ing pub­lic with very strong bal­ance sheets,” says Tim. “If any­thing, in­vestors are look­ing to in­vest more be­yond clin­i­cal ac­tiv­i­ty to make sure man­u­fac­tur­ing is ready to go for­ward, par­tic­u­lar­ly with some of the more ad­vanced modal­i­ties. They don’t want to be in a po­si­tion where there are de­lays on com­mer­cial­iza­tion be­cause they didn’t make a big enough in­vest­ment up­front.”

“The av­er­age biotech IPO this year has rough­ly 28 months’ worth of cash,” af­firms Ja­son. “Com­pa­nies are well-po­si­tioned to work their way through mul­ti­ple val­ue in­flec­tion points. They’ve got time to pros­e­cute their pipeline with­out sub­stan­tial fi­nanc­ing over­hang, which gives in­vestors time to wait for the com­pa­ny to suc­ceed.”

In­vestor Val­i­da­tion and Fo­cus

A com­pa­ny’s abil­i­ty to at­tract long-term fo­cused, high qual­i­ty in­vestors with deep pock­ets brings an­oth­er ad­van­tage be­yond cap­i­tal.

“If you look at re­cent IPO suc­cess­es,” says Ja­son, “you’ll see a num­ber of spe­cial­ist bio­phar­ma in­vestors that reg­u­lar­ly pop up. Hav­ing those ref­er­ence in­vestors in­volved ear­ly on in a com­pa­ny’s life cy­cle is crit­i­cal. Be­cause in ad­di­tion to cap­i­tal, the oth­er val­ue they pro­vide is third par­ty en­dorse­ment.”

“The gen­er­al in­vestor com­mu­ni­ty un­der­stands that those se­lect in­vestors do a tremen­dous amount of due dili­gence, KOL checks and mar­ket analy­sis. So their val­i­da­tion be­comes vi­tal.”

Clear­ly, in­vestor fo­cus is an­oth­er crit­i­cal suc­cess fac­tor for go­ing pub­lic to­day. “We def­i­nite­ly have to be mind­ful of in­vestor bias to­wards a par­tic­u­lar modal­i­ty or ther­a­peu­tic area,” says Noël Brown, Man­ag­ing Di­rec­tor of Biotech­nol­o­gy In­vest­ment Bank­ing. “But we al­so have to be mind­ful that what the mar­ket is in­ter­est­ed in can change quick­ly.”

“Three years ago, im­muno-on­col­o­gy burned bright­ly and then fad­ed. It re­mains im­por­tant to­day, but right now it feels like every­body’s try­ing to weave in a gene ther­a­py an­gle, be­cause that’s where in­vestor in­ter­est is ex­treme­ly high.”

IPOs and M&A: Nav­i­gat­ing a Dual Track

Noël flags an­oth­er cru­cial pre­dic­tive fac­tor for IPO suc­cess in to­day’s mar­kets: M&A ap­peal. “That’s ab­solute­ly part of the in­vest­ment the­sis for prospec­tive IPO in­vestors. When I look at com­pa­nies that are about to go pub­lic, I think about how de­pen­dent they are on be­ing ac­quired to see com­mer­cial suc­cess.”

“When you start to ask how at­trac­tive a com­pa­ny is to po­ten­tial ac­quir­ers, it brings in a whole host of oth­er ques­tions. Are there man­u­fac­tur­ing ad­van­tages the com­pa­ny has which would ben­e­fit ac­quir­ing phar­mas? Is their tech­nol­o­gy a com­ple­men­tary ‘lock and key’ fit with some­thing that mul­ti­ple ac­quir­ers don’t yet have in their suite of tech­nolo­gies?”

“M&A comes in­to play quite of­ten in the IPO process. Com­pa­nies are fre­quent­ly on a dual track, en­gaged in both M&A and IPO di­a­logue. In many ways, not hav­ing a re­liance on ei­ther strength­ens your bar­gain­ing pow­er in each process. You’re like­ly to be more suc­cess­ful in M&A – or at least come to it with a stronger com­mit­ment to a suc­cess­ful deal – if you know your de­fault is the op­por­tu­ni­ty to do a great IPO. Equal­ly, you’re less like­ly to take a poor IPO val­u­a­tion if your al­ter­na­tive is a suc­cess­ful take­out on the M&A side.”

Gain per­spec­tive to help you lead to­day and de­fine to­mor­row with Pathfind­ers, a new pod­cast from RBC for com­pa­nies and in­vestors in bio­phar­ma. Learn more.

Au­thor In­for­ma­tion

Noël Brown

Noël Brown, Man­ag­ing Di­rec­tor, Biotech­nol­o­gy In­vest­ment Bank­ing
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Tim Papp

Tim Papp, Man­ag­ing Di­rec­tor, Biotech­nol­o­gy In­vest­ment Bank­ing
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Ja­son Levitz

Ja­son Levitz, Man­ag­ing Di­rec­tor, Head of Health­care Eq­ui­ty Cap­i­tal Mar­kets
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