For much of the first half of 2020, the coronavirus pandemic ground most business to a halt. Biotech innovation, however, has continued in full force. Even during the turbulent first few months of the year, biotech companies have moved forward with successful IPOs.
The pandemic isn’t over, however, and cases continue to rise in parts of the U.S. What will that mean for IPOs in the second half of the year?
Below, the experts at Westwicke weigh in on what they have seen recently and what they expect to see in the coming months regarding the IPO market. They also discuss the unique considerations companies will need to account for when seeking an IPO in the near future, while the coronavirus crisis continues.
Chris Brinzey, Managing Director
Approximately 35 companies in the healthcare sector have gone public year to date. This number is probably above most pre-2020 expectations and certainly even more of a surprise given the global COVID-19 pandemic and the volatility it has created. Equally impressive is that approximately 86 percent of these deals have come within or above the anticipated pricing range, and on average, these stocks are up 47 percent from the offering price. This trend clearly shows strong investor demand, reasonable valuations, and interest in a sector with strong relative performance. Baring a scenario like the one we had at the end of the first quarter where the S&P 500 dropped to 2200 and the VIX spiked to 80, we anticipate a busy second half of the year as companies push to go public ahead of the November elections.
Setting aside the fact that everything is virtual (which may actually make certain aspects of the IPO process a little more efficient), one of the more challenging byproducts of COVID-19 on companies working towards a successful IPO is setting financial guidance and timing certain regulatory, clinical, or sales ramp milestones. While these are the metrics, in most cases, that will be the key drivers to a company’s stock performance post-IPO, they are exceedingly difficult to predict with normal precision in this environment. New disclosures, added discussion around potential “headwinds and tailwinds,” and added “cushion” around key milestones may be required elements to consider in this new environment.
Mike Piccinino, Managing Director
Investor demand for new issues remains strong in some healthcare sub-sectors, but not all. MedTech IPO investors continue to favor companies with large market opportunities, strong/visible growth profiles, and defensible competitive advantages and differentiation. As a result, MedTech IPO investors are willing to pay above-average revenue multiples at the IPO for companies that fit this profile.
Private companies that are targeting an IPO should remain focused on ensuring their story highlights both the growth opportunity and the path to profitability. Management teams should become comfortable with virtual meeting software as the in-person IPO road show format has shifted to all virtual meetings in recent months.
Robert Uhl, Managing Director
Companies with the right valuation, a compelling business strategy supported by differentiated technology, and a capable management team with a proven record of execution should continue to be able to access the public markets and successfully complete IPOs.
However, providing a future outlook for the business related to timing for achieving milestones will likely be a formidable challenge. Establishing future expectations has been one of the critical elements of any successful IPO, and management teams will need to exercise greater care in assessing the potential impacts of the pandemic on their ability to successfully conduct clinical trials and advance their new product development efforts.
In addition, the ability to predict the behaviors of patients, physicians, care givers, and others within the healthcare infrastructure while the virus continues to advance through the population adds a variable that no one has ever had to deal with.
John Woolford, Managing Director
If you are considering going public, you better hurry. While it seems like there is plenty of time left in 2020, there is a significant event coming in November — the U.S. presidential election — that could damper activity. Many expect that the uncertainty around the election could cause significant volatility and have an impact on capital markets activity.
Beyond that, if the biotech market continues to perform well, investors may be unwilling to take market risk that could harm performance for the year. In that scenario, January 2021 becomes the next time frame for IPOs.
Stephanie Carrington, Managing Director
The IPO market for life sciences companies is robust with over a dozen companies in the queue. The higher caliber companies are launching their IPO road shows with fully covered order books and conducting truncated virtual road shows lasting approximately four days. In the majority of cases, the demand for the IPO has been cultivated with institutional investors through the test-the-waters meeting process in the months preceding the offering.
In the current environment with the COVID-19 pandemic continuing, companies recognize that the virtual engagement model is here to stay and embrace it. This equates to placing more emphasis in cultivating relationships with institutional investors well in advance of the offering — say six to twelve months or more — and recognizing the heightened competition with biotechs garnering the attention of investors. Certainly continuing to demonstrate advancement of the clinical development programs and execution of the overall business strategy remains mission critical.
Asher Dewhurst, Senior Vice President
I was skeptical that someone would invest $20M in a company, management team, or story without meeting them in person and looking them in the eyes. It turns out I was very wrong and good stories and strong management teams can make great connections virtually.
It helps to level set with everyone on the call at the start. I’ve seen a couple of instances in follow-up roadshow meetings when an account brings in other portfolio managers that could invest, but since the analyst was running the meeting, they jumped into Q&A, and the PM that was new to the story missed out on the full story and didn’t engage.
Mike Vallie, Vice President
Given the virtual nature of the financing process, the marketing and subsequent closing of deals is being done in a much quicker fashion than ever before — a two week roadshow where management teams are forced to fly around to each of the major markets has become a one week virtual roadshow. While this is certainly positive in some regards for management teams, it also means that investors are required to make an investment decisions more rapidly, which could lead to accounts sitting on the sideline simply because they couldn’t do appropriate diligence.
With that in mind, it is critical to develop longer-term relationships with key IPO buyers to make sure they are very familiar with you and your company, giving them the opportunity to be buyers within an accelerated timeframe.
For biotech companies, the second half of 2020 presents a unique opportunity for IPOs, as long as you carefully consider how to move forward in this unique environment. If you are considering taking your company public, learn more by downloading our comprehensive guide, “Westwicke Insider’s Guide to Going Public.” For a more in-depth discussion, especially given the current economic climate, feel free to reach out.
