Catalyst - Winter 2013 - Readying for an IPO?
Readying for an IPO? Make Sure to Get All Your Ducks in a Row!
There's no doubt about it; life science and biotechnology companies are coming out of labs, classrooms, and incubators to test the now-
overflowing IPO waters. The market is hotter than ever, but do you what it takes to swim with the big boys in the deep end of the pool?
Steven Kreit, an audit partner in EisnerAmper's technology practice, and veteran technology and life science/ biotech attorney Andy Gilbert, co- managing partner in DLA Piper's Florham Park Office, agree that the past year has been opportune for companies at various levels of the development chain to dive in. However, as always, and perhaps more than ever, they said, be prepared for fierce questions and strict due diligence on the part of investors.
Dollars & Sense
Kreit said Priority 1 is having the company's financial house in order. If you don't have financial history records that are ready for
viewing by someone outside of your finance department, including statements and audit reports, "you can't even start the process." "Investors want to see that your company has the discipline and structure to go through the public process. That starts with being able to compile the documents needed for registration. If you have gone through at least two audits, you can prove you have the ability to go through a lengthy financial examination," Kreit explained. "Put together a good board of directors and get your audit committee in place."
He pointed out that the JOBS Act does give companies the option of taking what amounts to a "temperature check" of the potential investor pool without having to show paperwork to anyone. "Until recently, I haven't seen anyone take that road. However, most of the current crop of IPOs have taken advantage of the confidential filing opportunities to get the SEC review cleared and test the marketability of the offering."
Next Up: Processes
Public companies need to have financial information at the ready, including: projection numbers, management discussion and analysis information, and how much was spent on what -- and why. Kreit said, "It's great if your CEO has a picture-perfect understanding of the company's financial information. However, without a way to collect it and be able to present it to the public, you have a problem."
The reason this might be an issue for even the most organized firm is because many companies don't use a standard information collection and reporting format. In other words, when you are a private company, your management needs to understand these methods and perhaps your investors do, as well. However, when it comes to going public, there is only one way to present the information: the way that reflects the industry's best practices. Further, if you have a particular investor or investors who care only about specific aspects of your documentation – perhaps the technologist only wants to know about milestones achieved, while a VC wants to be able to monitor the cash balance -- you may not even be capturing important data that you will need to present for view should your company go public.
"My best advice on this is to do it right from the beginning," Kreit advised. "Put the internal processes in place from the start. Even if you are not serious about going public now, you can begin gathering the correct information so it's easy to access when you need it."
These processes include: an internal communication structure that streamlines how information from various departments is reported; and a robust projection/budgeting process so that anyone who wants to ask can immediately find out where the company is now versus where you are headed.
Assembling the Right Team
If you are feeling blindsided by the preceding section about processes, the thought of making sure you have the right team in place might cause downright panic. No need, said Kreit. His advice is to hire people to do the worrying for you -- including a director of financial reporting, for example -- who can dot all the "i's" and cross all the "t's."
"It's important to understand the difference between any team and the right team," Kreit explained. "When you are a public company, good people may not be good enough. You need talent and experience. You want people on your team who have taken companies public before."
And, again, he said, every person doesn't have to be sitting in his or her office on IPO Day. The IPO isn't the finish line; it's the beginning of the process. Have a plan to have the right people in place to manage the requirements for the long run.
This area requires considerable attention, perhaps because it's the least glamorous part of the puzzle. It's much more exciting to focus on the external community. However, it's the behind the scenes stuff that people just expect to be humming along that causes problems when the gears grind to a halt.
Entity level controls ensure that the company has a plan to accurately report financial information. Seems like a no- brainer, right? Clearly, what's the point of recording anything inaccurately? Make sure you pay attention to things such as: financial reporting oversight (does someone have the skill and knowledge to review and take ownership of everything coming and going from the finance department); do you have basic fraud controls in place; and do you have people in charge of governance who have effective oversight? Your public documents list many risk factors - do you have systems and procedures in place to monitor them on a regular basis? Additionally, on the processes side, make sure you have proper segregation around cash; have one person paying the bills and another doing the bank requisition.
The bottom line in the entrepreneurial world of biotechnology and life sciences companies is that, most of the time, many of these important "Must Haves" are not in place because company founders/inventors/scientists are far more concerned with creating the next best thing that the world can't live without -- and less about how to fund it.
The Road Show is the great equalizer, Kreit concluded. All the members of the team -- those with experience in the public arena, and wide-eyed newbies -- get brought up to speed very quickly when a company dips its toes into the market to check for opportunity and interest.
Don't be afraid, he said. With a great technology, the proper financial planning and a great team in place, jump into the deep end. The water's fine.
It's easy to concentrate on the numbers when considering an IPO. After all, it's all about the money, right? However, DLA Piper's Gilbert, an attorney with more than 20 years of experience in corporate and securities work for emerging growth and biotech/life sciences companies, can't stress enough how important the legal side of the equation should be for companies looking to go public. "The IPO market has been so hot in the past several months that companies are going public at an earlier stage than any time in recent memory," Gilbert said. "There is a major need for more disclosure and an increased focus on the clinical and regulatory risks."
Without an experienced legal team by your side throughout the process, you are leaving yourself open to unnecessary risk.
Many companies approach a lawyer before they even get out into the market to test the waters. "Companies come to us to find out if we think an IPO makes sense from a legal prospective," Gilbert said. "We can introduce them to underwriters who can help determine if the company could even be a viable IPO candidate."
Protect Your Wares
If the decision is made to go on a meet-and-greet fact-finding mission in the public arena, Gilbert's team advises companies to protect themselves before the CEO even reaches out for the first handshake.
"Your particular intellectual property is the one thing you have that no one else has, why would you leave it unprotected," Gilbert questioned. "Moreover, it's not even only about protection, it's about how strong your IP is to begin with. Also, will it stand up to a challenge in the future?"
This is of critical importance in the biotech and life sciences marketplace where copycats are many and the rise of generic pharmaceutical companies puts all products at risk. Further, because patents are under more scrutiny than ever before, Gilbert said, a company's patent portfolio must be rock solid.
Know Where You are Going and the Risks to Getting There
It sounds obvious but, Gilbert advised, "think through your timeline and risks you may encounter along the clinical pathway and FDA approval process."
Having a timeline will help to establish costs as well as how long it will actually take before you make it to market -- and start to see income from your product. You may want to know this information because you are excited and anxious about the impending success. However, you need to know this information because you can't go public without the ability to readily answer these questions for the investing public.
"Your company's clinical and regulatory paths will overlap and you need to be prepared to disclose where the drug is in development and what it will take to get it approved. To do that, you need a very good understanding of timing and when investors will see a real revenue stream," said Gilbert.
Have a Go-to-Market Strategy
If you are planning to go public and you don't have a go-to-market strategy, how do you know that the actual market is even big enough to create the size demand you need to be successful long-term?
"This is a question of textbook economics. If you get your drug approved, how will you get your drug to market," Gilbert said. "To raise the right amount of money in a public offering, you need to know the business behind your business."
Some of the business issues at hand include: cost to commercialize, sales force considerations; drug licensing issues; manufacturing choices; and other risks.
Sometimes a company doesn't even really understand the full risk potential. Gilbert said: "when a company that has never commercialized anything tells an investor it plans to commercialize their product themselves - in house - that's a real risk."
Other huge questions: Who are your customers and how much are they willing to pay to buy it? "This is a simple equation - the price you can get for a drug will dictate the company's profitability," Gilbert said. "If the insurance companies and other third party payers aren't willing to pay the price you want, you are going to have a struggling economic model. No sales equals no profits. That's why your house must be in order from the beginning."
There are many things beyond a company's control. You don't know for sure how patients will respond to the drug until the trials are over. You don't know how long, if at all, the FDA will take to approve your drug. Further, you don't know if you'll make it to market with enough steam to be profitable. All of that being said, the things within a company's control must be controlled well. Plan ahead. Have the right team in place. Protect your IP. Have a strategy for success.
At the end of the day, Gilbert said, there are many issues that must be managed from beginning to middle to end of the IPO process and certainly beyond. "The best case scenario happens for a company when each of the parallel paths on the road to IPO come together to tell a good coherent story to attract investors. When that happens, you may very well have a winner."
EisnerAmper's Catalyst: Winter 2013
- Welcome! One Size Doesn't Fit All - Corporate Finance for Life Science Companies
- 'Strong Story' Leads Niche Biotech Intercept to IPO Success
- IPO Window Wide Open as Biotech Stocks Sizzle!
- Tips from the Financial and Legal Gurus - Readying for an IPO? Make Sure to Get All Your Ducks in a Row!
- Weighing All the Options
- PTC's IPO Breaks Initial Records