• Biotech IPOs: New Steps To Success On The Road To Going Public

    Investor interest in biopharmaceuticals has surged and 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 fundamental changes to IPO strategies and processes.

    Get industry insights from RBC’s expert biopharma team.

    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 (RBCCM). “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 in 2020. What’s more, investors who bought all of them would be up 42% this year.

    “That’s remarkable – and it’s driving more investor interest,” Levitz says.

    Looking Beyond the BoomThe question is, how long will the IPO boom last? Today’s deals are well-positioned to succeed at launch, but there’s more powering this boom. There’s a new level of depth and breadth in companies and a new level of sophistication in investors.

    “I think it reflects a wider maturation of the industry in recent years,” says Tim Papp, Managing Director, Biotechnology Investment Banking at RBCCM. “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.”

    What are the new predictive factors for biotech IPO success?

    Papp also flags the incredible growth in the pool of capital now dedicated to biopharma, another reason the boom looks set to continue.

    “The majority of companies are going public with very strong balance sheets,” he explains. “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.”

    Levitz agrees that companies today have the balance sheets that can weather a few squalls, and that makes them much more attractive at IPO.

    “The average biopharma IPO this year has roughly 28 months’ worth of cash,” he says. “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 FocusA 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,” Levitz says, “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.”

    Investor focus is another critical success factor for going public today. The market has specific interests, whether it’s modalities or certain therapeutic areas.

    “We definitely have to be mindful of investor bias,” says Noël Brown, Managing Director of Biotechnology Investment Banking at RBCCM. “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 TrackBrown also flags another crucial predictive factor for IPO success: M&A appeal.

    “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?”

    “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,” he says.

    Gain perspectives to help you lead today and define tomorrow with Pathfinders, RBC’s new podcast for companies and investors in biopharma. Learn more.

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