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Trends & Developments - June 2015 - How Biotech Companies Can Manage the Pre-IPO Process

Jun 16, 2015

An Initial Public Offering ("IPO") is a pinnacle event in a biotech company's life cycle. An IPO can provide a company with the necessary capital to realize its business strategy and the means to acquire new assets or technologies.

Embarking on the IPO process, though, is not for the faint of heart. It is a stressful journey, that can be lengthy in nature with success highly dependent upon events (i.e., market conditions) and participants (i.e., investors and regulatory authorities) the company cannot directly control. Also, management's once very private business world is now opened up for all to inspect, question and at times challenge. Thankfully, some of the stress and anxiety that is inherent in this process can be mitigated through proper planning.

Pre-IPO Pitfalls and Best Practices

Some of the pitfalls that frequently plague companies stem from a lack of appreciation of the magnitude of work involved and the related timeline to accomplish those tasks. Best practices promote acting like a public company at least two years prior to the IPO.

Effective planning begins with the selection of appropriate management and governance resources. At least one member of the management team should be a familiar face to the investment community. That person should possess the credibility of having successfully executed an IPO and/or other successful exits. This individual should also have a solid understanding of the core business and be able to clearly articulate to potential investors the business/growth strategy and how it will be realized.

It is equally important that a member of the management team OWNS the process and acts as the driver. This individual should assist in the preparation and communication of the timeline which should detail the specific dates for significant deliverables. A good way to keep all parties engaged and on course throughout the process is to hold regular meetings or teleconferences with all members of the working group.

Another critical step in planning for an IPO is choosing an underwriter who will oversee the distribution of the company's shares in the offering. Management should begin meeting with underwriters 12 months prior to a planned IPO to ensure sufficient time for selection, familiarize them with the company, and demonstrate to them that management has command and control of the proposed IPO timeline.

The underwriter and, eventually, investors will want to see an appropriate governance structure. Up until this point, your board of directors may have been comprised predominantly of insiders (i.e., employees or significant shareholders). Pre-IPO, the company will need to reassess the composition of the board to achieve an appropriate mix of insiders and independent members that possess the experience and skill sets that will complement your business. If possible, take this opportunity to bring some name recognition to the governance team with the addition of a high-profile independent director.

Capitalization and Valuation

Two of the key required disclosures in the registration statement relate to capitalization and dilution. In order to accurately complete these disclosures, management needs to understand the rights and preferences of each class of debt and equity securities outstanding. This includes an understanding of any anti-dilution, price protection and conversion features and if any protective features will be triggered by the public offering.

Critical to performing this assessment is having a current and recurring valuation of the company prepared.  Valuation in general is a very subjective area and is one that is often challenged by the SEC as well as other parties to the IPO process. Valuations of privately held businesses are based largely upon expectations and forecasts of the future performance of the business. Considering this, management should perform a critical evaluation of the company's product pipeline and assess the likelihood of success (whether that be in clinical trials or the marketplace) and the opportunity in the current market for the company to successfully complete an IPO. Further, the accounting and tax implications of these valuations cannot be addressed too early in the process.

Choosing the Advisory Team

Management should also give attention to building out the working group. This group of external service providers consists of legal counsel specializing in federal securities laws and regulations imposed by stock exchanges and the SEC, auditors, financial reporting advisors and other supplemental resources.

Each service provider should possess two common traits: (1) a thorough understanding of your business and the segment of biotech industry in which your company operates and (2) depth of experience in IPOs or other exit strategies with companies similar in nature to yours. A proper understanding of your company and industry will allow counsel, underwriters and other service providers to effectively navigate the registration process in the most efficient manner possible. If your company has never been audited, it is of critical importance to discuss the timeline for completion of the required audits and financial statement reviews with your external accountants.

If internal accounting resources are lean, as is the case with most pre-IPO biotech companies, engaging external financial reporting consultants can help significantly with some of the heavy lifting related to financial statement preparation, audit process management, and drafting of certain sections of the registration statement including management's discussion and analysis, summary and select financial data, and the capitalization and dilution disclosures discussed earlier.

In summary, a winning recipe for managing the pre-IPO process is a combination of proper planning, engaging the right individuals both internally and externally and proactively driving the process from kickoff through closing of the public offering. Adhering to a policy of focused flexibility will allow you to meet the challenges that will inevitably present themselves, while staying the course without significant delay.

John Pennett is partner-in-charge of EisnerAmper's Life Sciences and Technology groups and Jaimie Gilmore a senior manager.

This article is printed with permission of and was first published in Pharmaceutical Compliance Monitor, April 27, 2015.

Trends & Developments - June 2015

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