Going public was an appealing option as recently as three years ago. In 2014, total U.S. IPOs reached one of the market's highest points, with 273 companies making their initial public offering. Biotech companies made up nearly 25 percent of total public offerings according to research compiled by Renaissance Capital.

IPOs in 2015, however, failed to live up to 2014's highs. Only 169 companies in total went through an initial public offering in 2015. The froth in the market that had been there in 2014 dissipated with Federal Reserve concerns, increases in mergers and acquisitions and private market transactions, and for the biotech industry, the fallout from the Martin Shkreli price-raising controversy. When political leaders denounced the activity and started talking about the need for pharmaceutical price regulation, it had a chilling effect on the biotech market. The chilling effect continued into 2016, and when combined with other concerns such as the U.K.'s "Brexit" from the European Union and the presidential election, proceeds from IPOs fell to a 13-year-low. Offerings and filings also decreased significantly from 2015.

At the beginning of the year, at the J.P. Morgan conference, there was a lot of optimism that 2017 would hopefully be a better year for biotech IPOs than 2016 because of the new administration and a stronger U.S. economy. 2017 started with a big backlog of companies looking to go public, and year-to-date, very few of them have gone public. The first quarter had only four biotech IPOs. With that, companies right now are looking for other ways of raising capital.

The Impact of Poor IPO Market Performance

An IPO may be appealing to biotech companies because it offers an opportunity to raise additional capital for expansion and it creates an exit opportunity for current investors. A sluggish IPO market closes off the stock market as a means of an exit strategy, and it limits funding opportunities.

In the current climate, if biotech companies want to go public, their investors are forced to participate in the IPO to a greater extent than they've had to previously in order for the public offering to be successful. Another consequence of this is that because companies cannot go public, existing investors are forced to put more of their own money into their investments in order to keep them viable. Companies may also consider licensing one of their products to Big Pharma and using that money to fund research and development until the IPO market opens up. We've also seen some companies give up rights to their product in China in exchange for Chinese investments coming into the companies.

Alternative methods of going public have become more appealing.

Option 1: A Reverse Merger into a Public Shell

Companies considering a reverse merger have two methods from which to choose. One is to merge with a failed public company that has money in it. The other is to find a "clean shell", which is set up with seed money that would allow a private company to merge into it.

Option 2: Form 10

A Form 10 is an alternative to a traditional IPO that resembles a Private Investment in Public Entity transaction. Companies looking to go public can register securities with the SEC after they raise their money. The registered securities are not publicly traded, but they will require the company to provide documentation normally required of publicly traded securities, including the Form 10-K.

The Form 10 opens up the potential to receive public equity funds, and the company may also use over-the-counter market exchanges for their securities. Once enough investors have come on board using the over-the-market exchanges, the company would enter a public exchange. Form 10 offerings may be of particular interest to biotech companies because they open up opportunities for additional capital.

Both the reverse merger and the Form 10 should only be considered if as the transaction is completed, an infusion of capital comes into the company that will be enough to ensure the company will be viable.

Option 3: Regulation A Plus Offering

With Regulation A Plus Offering (Reg A Plus) offerings, companies go through the SEC approval process for an IPO. Once approved, the company is permitted to use a broader pool of investors than the traditional pool of accredited investors, who must meet certain financial requirements. Crowdfunding an IPO is a relatively untested avenue, and to date, some biotech companies have tried the Reg A Plus offering but haven't been successful in raising meaningful amounts of money.

Option 4: Overseas Exchanges

Some U.S. companies are looking to go public in overseas exchanges, including Brussels, Germany, China and Taiwan, and some have been successful. However, raising subsequent rounds of funding has been more difficult.

Select the Best Method for Your Company

Meeting with your financial advisors can help companies evaluate the current marketplace and which route could best help the company achieve its capital objectives. For specific comments and questions about the IPOs for biotech companies, please contact David Diamond at ddiamond@cbiz.com or 858.795.2014.

Published on April 06, 2017