Reflecting on 2020, The Year of the IPO?
- Jan 8, 2021
- Marc Fogarty
2020 will be remembered as the year we “stayed in place.” The term “work from home” reached a new level; parents became teachers; and vacations were put on pause. Yet through it all, a vaccine for COVID-19 got started, tested and finalized within a calendar year. And none of that could have been done without the appetite for investors believing in science and giving companies the nod to spend their investment dollars on research and development. The pandemic shined a bright light on the need for therapies, and vaccines. The beneficiary of all of this was the initial public offering (“IPO”) market, and more specifically, the life science IPO market.
During 2020, the IPO market was the hottest it’s been in over in 20 years with more than 400  offerings being completed by early December 2020. Over 75% of these IPOs occurred in the second half of 2020, when the U.S. was still learning how to do everything remotely. It is clear that the life sciences industry produced the lion share of these IPOs.
“There has been $180 billion invested in the IPO market this year,” said Ira Miller, CEO and chairman of Zone Capital Partners, a California-based M&A advisory firm for small- and mid-cap companies. “Life sciences is a big part of that as a percentage. The reason is that health care is 17% of the GDP so it will always play a significant part of the IPO market.” The traditional IPO process can take a long time to complete. Between having a well-documented financial history and selecting board members and underwriters, the process unfortunately is built to miss peaks in the market. Private life science companies survive on fundraising in the early years and will rarely reach commercialization without access to the public market.
Having another option to become public, like a special purpose acquisition company (“SPAC”), has become a viable route for companies that seek access to the public markets, but in a less-than-traditional manner. SPACs are publically traded companies with no commercial operations. They raise money through an IPO with the sole intention of acquiring a fully operational private company, essentially allowing the private company to become public in a less traditional way. SPACs generally have two years to spend the money they raised in the IPO on a target company or they return it to the investors at the end of the SPAC term. For several years, private companies going public via a SPAC were not treated the same by the subsequent investing public; however, all that has changed in recent years and most notably 2020. The reason for the change in mindset: “The new normal.” 2020 taught us that everything traditional needs to be re-evaluated and the SPAC market was no different.
“M&A is expected to grow to $300 billion next year,” Miller said. “A big portion of that will be SPACs, which will be dominated by biotech and technology. Given COVID-19, SPACs have become more prevalent because they are faster to come to market, less expensive and have a redeemable feature such that if they don’t come to market in a certain timeframe, investors are able to get their money back through a trust. Next year, the SPAC market will be slanted toward biotech. The bottom line is that biotech SPACS have surged 250% since 2019 with two dozen being announced since mid-October targeting more than $3.58 billion in proceeds.” The pandemic year has shown us that medicine and science are important for the world to operate under normal conditions. Aside from the known players that have already developed a COVID-19 vaccine, there are several smaller companies that are actively looking for ways to improve on the delivery and effectiveness of the vaccine. These smaller companies are typically in pre-clinical or Phase I trials. Historically, most companies that are pre-clinical in nature are not IPO candidates; however, this year all that has changed. The desire from investors to get in earlier on these pre-clinical companies has become more attractive in the current period since the companies they invest in typically will touch a broader population of those than can benefit from the therapies/vaccines being developed.
The virtual nature of the current world has allowed companies and investors to meet over video and allowed many more meetings than typically would happen. The old process of getting on a plane and hopping city to city with investor presentations has been replaced with an efficient video call that allows companies to present to investors in New York at 10 a.m. and then San Francisco at 12 p.m. The virtual roadshow process for underwriters has opened many more doors than years past.
Many of the new normal ideas surrounding IPOs and target companies that were birthed in 2020 should not change in the immediate future and it is expected companies that are attractive to investors to continue to be attractive no matter the stage of development or geography. Everything has been expedited, and our work, whether performing audits or assisting companies in getting their filings done quickly, is no exception.
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Marc Fogarty, Audit Partner and National Biotech Sector Leader, within Technology and Life Sciences Group, and member of the firm's Public Companies, Cleantech and International Services Groups. Marc is experienced in public accounting, serving public and private organizations and has presented on IFRS to professional groups.
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