Episode 1

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

In our launch edition of Pathfinders, we look at the best practices to follow on the road to IPO and the new predictive factors for success in today’s buoyant biopharma markets.

By Noël Brown, Tim Papp, and Jason Levitz
Published November 10, 2020 | 3 min read
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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.

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.”

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

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

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“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.”

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.

“The average biotech IPO this year has roughly 28 months’ worth of cash. Companies are well-positioned to work their way through multiple value inflection points.”

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

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“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 biopharma 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.”

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