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By RBC Capital Markets
As COVID-19 continues to spread globally, investor interest in the biotech sector is gathering pace and the market for IPOs is booming. But even with keen investor interest and friendly markets, there are pitfalls for the unwary.
“What’s interesting about today’s markets is that you might think there aren’t a lot of potholes,” says Tim Papp, managing director, biotechnology investment banking at RBC Capital Markets (RBCCM). “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, then struggling to continue to step-up from round to round, especially when we get from crossover to IPO,” says Jason Levitz, head of healthcare equity capital markets at RBCCM.“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 taking capital at appropriate levels of valuation is an essential factor.”
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The right time to IPOAnother vital issue companies should consider as they develop their plans to go public is timing. Biopharmas need to find a time when they can be sure that they have an interesting story to tell post-IPO.“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,” Levitz points out.
“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 dangers of dilutionAnother 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,” Papp explains.
“On the flipside, you’re also demonstrating that a big pharma partner has seen value in your program, which provides validation. The trick is to find that balance of validation versus not giving away the entire shop.”
Alternatives to going publicAn IPO might not always be the best move for a biotech firm, and there are alternatives worth considering in today’s market. Special purpose acquisition companies (SPACs), mergers, even staying private should all be part of the assessment.
“SPACs are perhaps the most interesting option, given how popular they are in the current market,” Levitz says. “We’re also now seeing SPACs with sponsors who are experts in the biotech sector.”
“Another alternative,” says Noël Brown, managing director, biotechnology investment banking at RBCCM, “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?”
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Selecting the right syndicate
Biopharmas approaching this decision-making process need to ensure that they have right advisors – those that are going to give advice that’s in the best interest of the company. If the company does decide to go public, then it needs to build a syndicate of banks to advise and underwrite the IPO.
Syndicate selection is not always a straightforward choice. Papp advises biopharmas to look for diversity in the banks, in order to get the right levels of advice and support.
“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,” he says.
“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 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,” says Levitz.
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