Noel Brown: Welcome to our Pathfinders podcast series, where we'll be exploring the fast-moving world of biopharma and what the road ahead looks like for companies and investors in this sector.
I'm Noel Brown, Managing Director of Biotechnology Investment Banking here at RBC. Thank you for joining me and my colleagues Tim Papp, Managing Director, Healthcare Investment Banking, and Jason Levitz, Head of Healthcare Equity Capital Markets for part two of our episode on Biotech IPOs, where we’ll be taking a look at some of the new potholes to avoid on the road to going public.
Tim, maybe you could start and share some of your views on this.
Tim: Well… the last eight months or so would maybe indicate that there aren't a lot of pitfalls and potholes, but I think that's more of a short-term phenomenon than something that companies can really hang their hat on longer term. So what have we seen be issues in the past? I think one big one is valuations getting ahead of themselves on the private rounds, and then really having to struggle to continue to have to step up from round to round. And in particular, we get from crossover to IPO. In 2020, the average median step up has been 1.4 X. So we're seeing a good return for the private investors at the time of the IPO.
Tim: But the market right now, it may not persist, and so making sure you're taking capital at appropriate levels of valuation, and making sure that you're getting that right kind of syndicate around to support you in an IPO, I think that's a very important step along the way. And, obviously, building the company in the right way is important as well. Making sure that you aren't building a company to go public, but you're building a company for long-term success and investing in the right areas. Making sure you have a quality clinical program in place, and the right people to manage that. Making sure that you have defined your market opportunity, and can articulate what your position within that market will be, if you're approved. All of those are important to do from, essentially, founding the company. And so I think some of the pitfalls that we've seen in the past have been failure to really build the company along those lines from day one.
Noel Brown: Great point. And Jason, are there things along the path, to IPO, that you see kind of off in the distance and want folks to be more mindful of so that we can dodge these problems?
Jason Levitz: I think one key issue that companies should think more about as they develop their clinical plan is IPO timing. And by that, I'm less focused on the macro environment because there'll always be volatility and challenges there that you have to navigate around. But I think identifying the right time to IPO based on your business model, your clinical or preclinical plan, I think is really important. And where we've seen companies get into trouble in the past is in situations perhaps where companies didn't have enough catalyst in the relatively near-term post IPO to get investors interested.
Jason Levitz: One of the concerns investors have, particularly for those companies that are at a clinical stage, is the cadence of news flow and potential value inflection points after the IPO. And so thinking through how the investor will look at the opportunity to make money in the public market post-IPO as the company continues to prosecute the pipeline is really important. And that's not to say that companies can't go public very early in their life cycle, I.E., pre-clinical, which we've seen in many cases this year, or that late stage companies can't get successful IPOs done if they don't have a relatively near-term binary event. But just thinking through how you're going to tell the story post IPO, and what investors are looking for, I think is critically important. And making sure that you've got a really tight story around the use of proceeds, and how those proceeds are going to drive value for investors in the public market is really important. And we've seen companies, at times, get hung up on that issue, whether it's just the quantum of capital they're looking to raise, how they're going to deploy it and how that's going to translate to value for investors in the short and intermediate term.
Noel Brown: You highlight a real problem when you start to talk about news flow.
Noel Brown: For example, we look at some of the Alzheimer's companies that are doing great work. But when you think about an Alzheimer's trial, the length of time that it takes to get to meaningful milestones, you really end up in this quandary of how am I going to deliver something to keep the market engaged while I'm pursuing a three year trial? So now, you're in this thing of, I've got to create additional indications to pursue that are going to generate news along the way, which consumes resources, people's time, it consumes dollars.
Noel Brown: But you're almost left without a choice but to do that because you will have to provide some kind of significant news along the way. I mean, the market won't put money into an IPO and wait for three years to get a result, I find that challenge sometimes difficult for companies because it takes you off the path of what your core indication is, solely because you've got to be in a position to deliver news along the way.
Jason: one other potential pitfall I think we've encountered, is the challenge around BD and balancing the desire for partnerships and external validation with retaining upside and ultimately value for equity investors. So interested in your perspectives on how you advise clients to think about that issue.
Tim: It can definitely be a tough decision about when and if to partner, particularly when you're talking about something that is a really critical component of the value of a given company. So if you're looking at a lead asset and you are thinking about partnering that with big pharma and giving away a substantial portion of the rights, that can be viewed negatively by IPO investors because they're looking at this on a risk reward basis. You're de-risking it somewhat from the capital side. And you're suggesting that a big partner has seen value in this program and therefore it provides that validation, but you're also taking away a substantial portion of the upside. One of the things that we have seen companies do is maybe a geographic deal. So you partner in geographies where you're really not going to market the program. Typically, you'll see that happening more. I would say post proof of concept data as opposed to early in the life cycle of a program. But that's one way to maintain a significant amount of upside while also getting some of that validation.
Noel Brown: Again, it's that delicate balance of validation versus not giving away the entire shop
Tim: I've certainly seen clients be very hesitant to partner anything because they just view their platform as so proprietary they really don't want to. They think the value is going to really accrue to them as they get more and more data. And that's certainly been a philosophy that I think has been supported by investors over the years. Even partnerships for earlier stage programs, they can view that as I wouldn't say negative but not meaningful in terms of how they think about the value of a company. And so if you partner early you're getting some capital, you're getting the opportunity to advance more programs and diversify the clinical story, but you're really notgoing to get a lot of credit for that from investors necessarily.
Noel Brown: So recognizing that there are challenges with doing an IPO, should companies be thinking about alternatives? Are there ways to get the ultimate goal achieved to drive your drug forward? Maybe perhaps I'll turn that to Jason to start and share some thoughts around what are some alternatives?
Jason: There certainly are alternatives, Noel. I think the IPO path will be the most popular and will continue to be so for those companies that are well positioned in biotech, but certainly I think there are perhaps three other potential paths, two which I think are quite viable. The third still evolving and probably less applicable. Those being a potential SPAC transaction, or reverse merger into a public company, often a shell. And then last, the direct listing, which again, I think will make sense for most biotech companies, for reasons I can discuss at a high level. But I think the SPAC alternative is the one that is perhaps the most interesting and topical given the explosion in that market. And we've seen roughly $10 billion of fresh SPAC capital raised a month for each of the last four months. And really over the past year, we've seen a tremendous amount of capital raised.
Jason: Those entities are targeting largely private companies and are increasingly turning their focus to healthcare and to life sciences. So while there are general SPAC, there are also those that are focused on life sciences with sponsors that are experts in the sector. And there's some clear potential advantages around a SPAC transaction, given the past market, the opportunity to avoid the conventional traditional IPO process. There's still a need perhaps to raise capital and transition the investor base so it's not without some friction costs, but again, given the amount of capital available and the quality of the backing of some of these SPACs, I think that's a real potential opportunity in select situations. I'll let Tim talk more about the reverse merger path, but I think that's still clearly an option. I think the key there, much as it is with the SPAC, is ensuring that on a pro forma basis, you're positioning the company for success.
Jason: By that I mean attracting the right investors and promoting enough liquidity in the public markets so that the currency is actually valuable and one that is liquid enough for investors to own and move in and out of.
Jason: And then lastly, the direct listing, that's been frankly a topic that's focused on technology companies to date. I think it would be only the rare unicorn biotech company that had a broad enough investor base and potentially didn't need capital in a very short term, that would consider a direct listing. I think that works best for larger profitable companies that have broad shareholder basis, clearly established valuations in the private market with some liquidity there as well. But it is a topic that we hear more about from clients and there've been a number of high profile recent transactions, including Palantir but again, I think of those three options, the SPAC is probably the most interesting for most of the clients we talked to. Tim, your thoughts?
Tim: Yeah. I mean, SPACs are in general, nothing new they've been around for a while, but like you said, the SPAC market in bio pharma in particular is significantly more active than it's ever been. And there are a number of SPACs out there seeking acquisition targets and yeah, so we've heard anecdotally that there are some pretty lofty evaluations floated on the private company evaluation side. So, it can look very attractive. I think, there's always the question with both a SPAC transaction or a reverse merger of sponsorship on the sell side. And are you going to get the analyst attention, the aftermarket support that public companies need for long term success, but I think they're increasingly buyable on the SPAC side and reverse mergers have been around for a while and there continues to be reasonable deal flow there. Those are predicated on companies failing and despite our comments about high quality companies going public, there will be failures and there will be new reverse merger opportunities cropping up on a monthly basis, most likely.
Noel Brown:I guess the one alternative we haven't covered is the option to just remain private. I mean, sometimes I say to clients when they come in the door and talk about, well we want to go public, I'll ask them what it is that you want the company to be in five to 10 years? Because sometimes people have a very short term game plan, We want to get it to phase ... get through proof of concept and then we'll probably get acquired. And that whole timeline is probably 12 months. And to those folks I would say, well if that's the case, why would you go through the dilution of the process, if you could just raise that privately,
Noel Brown:Because that's perhaps the one instance where it makes less sense to dilute yourself. And more importantly, I would say then the dilution is the ability to control the valuation at the time of getting taken out. When you're public, your value is whatever is showing on Yahoo Finance as your market cap. And as we've seen from M&A activity, most acquirers are hard pressed to pay more than a 100% premium on what you're trading at. So if one feels that their value would be far greater than what they would initially be trading at, they may want to consider staying private so that when the suitor does come around to buy the company, the value is set by those that are selling.
Noel Brown:So I say this all just to have people think about, is going public at all the right move if I do plan to sell the company in the near term.
Tim:I think that's a good point, Noel. Not every company needs to go public. I certainly think that a company should be listening to advisors that are going to give advice in the best interest of the company and their investors and all the stakeholders. So with that in mind, maybe it's a good time to think about what companies should be looking for in terms of building a syndicate of banks to advise them on going public and service underwriters on the IPO. Maybe we could stay with you and just get your thoughts on what you see different categories of banks providing in terms of value to a syndicate and how companies should think about building an appropriate syndicate for an IPO.
Noel Brown: Yeah. Thanks Tim. I like the way that you teed that up and the company sort of building this team around them.
Noel Brown: I think the thing that has to govern people in their syndicate selection is who is genuinely going to provide the right advice for my company.
Noel Brown: There's going to be some consideration for brand. I think there still is in this industry, a lot of favoritism to brand because people can market off that to some extent. But I think as a management and a board, you really got to think about what are each of these banks providing me with.
Noel Brown: People will pick one bulge bracket because they want to have that sort of branding, that we got the interest of these large global banks. And that makes sense. So then sometimes there's some favor directed towards the boutique specialist firms because they've got some unique angles with some of the biotech specialist funds and you want to have some of that around you. I think beyond that. You also want to have folks who just genuinely are providing advice, right, to get the right process for you, to get the right thing done. And sometimes that's no deal. It may be the wrong timing. It may be the wrong valuation. There may be something else we think you need to do. You need to work with people who are comfortable saying uncomfortable things to you,
Noel Brown: Surrounding yourself with yes banks doesn't achieve your goals.
Tim: think different firms can compliment each other in very different ways. And I think that what you're looking for is that kind of complementarity across your syndicate where you're having, you're getting well rounded coverage. You're getting analysts that are supportive of you longer term and also complimentary distribution capabilities. Jason, if you could talk a little bit about some of your views on what's important in selecting a syndicate as well?
Jason: I think you've touched on the point I really want to amplify, which is, when you select the syndicate and if I were sitting in the shoes of a management team or a board thinking about allocating, let's say three or four or even five slots, depending on the size of the IPO, it's really about finding banks that can work well together, but also importantly that have somewhat different skill sets and a different approach. Try to get the best of all worlds.
Jason: So it might be that one firm brings a really strong research analyst with a focus in a particular therapeutic area or knowledge of comparable companies. It might be another firm that brings a particular strength around investor targeting, whether that be geography, investor type makeup, retail-
Jason: It might be a firm that brings brand to the table, or deal flow. I think you can find, with three, or four, or five slots, a group that's particularly well-rounded.
Jason: And then lastly, I think the key piece is the attention you're going to get in the aftermarket and those firms have a track record of supporting their clients both as far as research support, which again is out of the investment bankers control, but certainly a part of the firm, and a part of the calculus in selecting and partnering with investment banks. Trading and liquidity support, aftermarket non-deal roadshow activity, conferences, et cetera. There's really a broad value proposition post-deal that's really important, and so I think evaluating all those criteria, finding a group that has a diversified skillset is most important in my mind.
Noel: That’s a great point to end on. Thank you Tim and Jason for all of your insights in this special two-part episode on today’s IPO markets.
What else does 2020 have in store for the Biopharma industry? We’ll be keeping track right here on Pathfinders.
Until our next episode, thank you all for joining us. As always, if there are any areas that we discussed that you’d like more information on, please don’t hesitate to contact us directly for a more in-depth discussion, or visit our website for further insights.