After spending all day last Wednesday at Biotech & Money’s IPO workshop presenting and talking to Life Sciences start ups about their IPO plans, we thought it might be interesting to bring together some of our key thoughts on IPO preparedness.
Companies thinking about an IPO can never start planning too early. IPO planning and execution is time consuming and requires a shift in behaviour from how you might have operated as a start up or privately-held growth company. The building blocks for your equity story are assembled over time and are demonstrated through transparent professional company documentation and the ability to communicate with the market.
Here are five ways to start thinking about your IPO preparation:
1. Choose the right market to list on
There are a wide range of factors that will shape where companies choose to list, whether in the UK or further afield such as on NASDAQ or the Hong Kong Stock Exchange. Key considerations include the costs of listing, which vary in each market; the recent valuation track record of peer companies in that market; tax treatment; and the burden of continuing obligations.
Companies going public in the UK may choose to list shares on the Main Market of the London Stock Exchange or seek admission to AIM. Companies listing on the Main Market have to satisfy more stringent regulatory criteria and post-listing obligations. AIM offers smaller companies the chance to raise money from outside investors and the barriers to entry and subsequent compliance burden are proportionally less. It is worth noting too that while the costs of coming to the market for the first time are significant, subsequent capital raisings are proportionally much easier to execute for a listed company than for a private one.
2. Start to formulate your equity story
One of the most important gating factors for biotech and Life Sciences companies deciding to pursue an IPO is whether the company can demonstrate a strong equity story to the market. Your equity story needs to be able to tell the market in a clear and succinct way why you are investment-worthy. Being able to demonstrate healthy and predictable growth is fundamental. As biotech and Life Sciences companies often go public pre-revenue, the equity story needs to show future potential through a clear-sighted analysis of the addressable market your company is serving and of your competitive position within that. Most importantly, your equity story needs to demonstrate how you differentiate your company from the competition in your specific vertical.
3. Build a great leadership team
Leadership is a critical consideration on the path to IPO. Public investors need to feel they can trust the leadership of a company they will invest in, so building relationships with the investor community over time is vital. The track record of your leadership team can be another helpful factor – investors typically view favourably leadership teams that include public company expertise garnered through tenure at another public company or by successfully taking other companies public. Once you’ve got great people in place, you need to have a plan for incentivising them appropriately and you need to be sure that your remuneration approach stands up to regulatory challenge.
And its not just the leadership roles within the company that matter, the whole picture of how the company is run goes to demonstrate that the company has trustworthy controls in place. Biotech and Life Sciences companies seeking to go public should also think about the structure of the Board to ensure that it includes independent industry experts and their external advisors include a reputable accounting firm, auditor and legal adviser.
4. Ensure that regulatory aspects are well covered
Biotech and Life Sciences companies operate in a highly regulated area, and investors are more likely to invest in those companies that can demonstrate a high level of compliance with regulatory requirements. Investor appetite will also vary depending on the stage of development of the company’s products and the risks associated with novel drugs or other products. Helping investors to understand the nature of government-regulated clinical trials, the company’s path through testing and approval processes, and the timeline for completing trials and bringing the product to market will be particularly important. This applies both to investors’ willingness to invest and the value applied to the company on IPO.
It will also be important to demonstrate that the company has adequately protected its intellectual property, and is not subject to third party infringement claims. The company needs to ensure that all employees, consultants and other workers have assigned ownership rights in the products they have developed to the company.
5. Focus on financial and other internal reporting procedures
Nowhere is the absence of professional leadership more apparent than if your financial reporting is not up to market standard. Are you already producing financial statements in IFRS? Do you have appropriate IT and budgetary systems in place to enable you to deliver robust and timely management information? Have you adequately captured and documented all arrangements and transactions so that you can effectively report on related party transactions? All of these factors will be assessed by your advisers and relevant regulators as part of your “IPO readiness” review. The single best piece of advice for a biotech and Life Sciences company considering the transformational process of an IPO is to give yourself the “look and feel” of a listed company long before you are one.