Episode 2

Biotech IPOs: Navigating the New Landscape

Even in a boom, many biotech executives may be unprepared for the risks involved in undertaking an IPO. Noël Brown, Managing Director, Biotechnology, Investment Banking, Tim Papp, Managing Director, Healthcare Investment Banking, and Jason Levitz, Head of Healthcare Equity Capital Markets at RBC Capital Markets discuss the right steps to take, and the pitfalls to avoid, in today’s unique markets.

By Noël Brown, Tim Papp, and Jason Levitz
Published November 10, 2020 | 4 min read
Share This Article 

Key Points

  • Taking capital at appropriate levels of valuation is essential
  • The need for positive news flow is a challenge for many firms
  • Companies need to balance the desire for partnerships while retaining upside value for investors
  • Identifying the right time to IPO based on your business model is critical
  • The criteria that governs IPO syndicate selection has evolved

As COVID-19 continues to spread globally, investor interest in the biotech sector is gathering pace. Biotech IPO markets are booming. But even in a boom, going public is rarely a straightforward process. The rewards are significant, but potholes remain on the road to executing a successful IPO.

“What’s interesting about today’s markets is that you might think there aren’t a lot of potholes,” says Tim Papp, Managing Director, Healthcare Investment. “But they’re there, and it’s always worth considering the issues we’ve seen play out in previous cycles.”

Step-ups in valuation

“One big issue is valuations getting ahead of themselves in the private rounds,” continues Tim, “then struggling to continue to step-up from round to round, especially when we get from crossover to IPO.”

“In 2020, the average median step-up has been 1.4x, so we’re seeing a good return for the private investors at the time of the IPO. But the markets right now may not persist, so making sure you’re taking capital at appropriate levels of valuation is an essential factor.”

The right time to IPO

Another vital issue companies should consider as they develop their plans to go public is timing.

“Thinking about how you're going to tell a post-IPO story that joins the dots between the volume of capital you’re looking to raise, how you’re going to deploy it and how that's going to translate to value for investors in the short and intermediate term is critical.”

- Jason Levitz, Head of Healthcare Equity Capital Markets at RBC Capital Markets

Share       

“Identifying the right time to IPO based on your business model is really important,” says Jason Levitz, Head of Healthcare Equity Capital Markets. “Where we've seen companies get into trouble in the past is in situations where they didn't have enough catalyst in the near-term post-IPO to get investors interested.”

“One of the key concerns investors have, particularly with companies at a clinical stage, is the cadence of news flow and value inflection points post-IPO. That’s why thinking about how you're going to tell a post-IPO story that joins the dots between the volume of capital you’re looking to raise, how you’re going to deploy it and how that's going to translate to value for investors in the short and intermediate term is critical.”

The importance of news flow

For Noël Brown, Managing Director of Biotechnology Investment Banking, the need for positive news flow highlights another potential problem for biotech firms. “If you think about an Alzheimer's trial and the length of time it takes for a company to get to those meaningful milestones, it’s hard to keep the market engaged over that three-year period.”

“As a result, companies start looking for additional indications to pursue to generate more significant news flow along the way. That consumes time and resources and, ultimately, takes them off the path of their core indication.”

The dangers of dilution

Another potential pitfall on the road to IPO is balancing the desire for partnerships while retaining upside value for investors.

“Partnering with big pharma and giving away a substantial portion of rights can be viewed negatively by IPO investors, because they're looking at this on a risk/reward basis,” explains Tim.

“On the flipside, you're also demonstrating that a big pharma partner has seen value in your program, which provides validation. But you're also taking away a substantial portion of the upside. The trick is to find that balance of validation versus not giving away the entire shop.”

Alternatives to going public

Recognizing that an IPO might not always be the best move for a biotech firm, are there alternatives they should be considering?

“There are alternative paths,” says Jason, “like a SPAC transaction, or a reverse merger into a public company, or even a direct listing. SPACs are perhaps the most interesting option, given how popular they are in the current market. We’re also now seeing SPACs with sponsors who are experts in the biotech sector.”

“Another alternative,” says Noël, “is to remain private. Sometimes when clients tell me they want to go public, I'll ask where they want the company to be in five years, because some have short-term plans to get acquired. If that’s the case, why go through an IPO if you could just raise privately?”

“Not only will you dilute yourself, you’ll also lose the ability to control your valuation. When you’re public, your value is your market cap. If your value might be greater than what you’ll initially be trading at, the right advice might be no deal.”

Selecting the right syndicate

“That highlights a need to have advisors that are going to give you advice that’s in the best interest of your company,” agrees Tim, “especially if you do decide to go public and you’re building a syndicate of banks to advise you and underwrite on the IPO.”

So, what criteria should govern syndicate selection? Which categories of banks are going to provide you with right levels of advice and support?

For Tim, diversity is critical. “In any syndicate, you need firms that complement each other in different ways, so you get well-rounded coverage, analysts that are supportive of you long term, and complimentary distribution capabilities.”

“It might be one firm brings a really strong research analyst in a particular therapeutic area, while another firm brings a particular strength around investor targeting or deal flow.”

The final piece of the puzzle, concludes Jason, “is the attention you’re going to get in the aftermarket with firms that have a track record of research support, trading and liquidity support, non-deal roadshow activity, conferences, etc. There's a broader value proposition post-deal that’s really important, so fully evaluating that syndicate criteria will be critical.”

“I think that’s what distinguishes our approach at RBC Capital Markets. You need to maintain a holistic view of the whole IPO process and not just look at companies in a vacuum. We have a collective focus not just on the opportunities or challenges our clients face now, but for what’s on horizon.”

View audio transcript

Subscribe Today

Get the latest insights from RBC Capital Markets delivered to your inbox.

Related Articles: