How Biotech Companies Can Manage the Pre-IPO Process

An Initial Public Offering (IPO) is a monumental event in a biotech company's lifecycle. After years of developing that scientific discovery, an IPO can provide an organization with a sense of self-actualization with the necessary access to capital to realize its business strategy and the means to acquire new assets or technologies.

The IPO process is stressful and lengthy, and success is highly dependent upon events (e.g., market conditions) and participants (e.g., investors, and regulatory authorities) that the organization cannot directly control. Organizations, which likely have some level of transparency to meet certain regulatory requirements related to its scientific developments, now open their financial status to scrutiny from potential investors and the Securities and Exchange Commission (SEC). Frequently, organizations are plagued by a lack of appreciation for the magnitude of work involved and timeline to realize a successful IPO. Accordingly, it is prudent for an organization to prepare itself.

These past several years have seen an exceptionally low volume of IPOs with significant trepidation from investors, delaying access to public markets. The delay has hopefully allowed organizations to be better prepared and plan for the journey, especially as investors are hopeful for a more fruitful 2025 and beyond. Through proper planning, we hope to shed light on how to mitigate the inherent stress and anxiety in this process.

Effective Planning and Management Selection

Effective planning begins with the selection of appropriate management. Early-stage biotech organizations are often led by the lead scientist researching and advocating the drug, providing credibility to the organization’s story; however, an understanding of the science and story are not necessarily sufficient to successfully convince investors to support their IPO. Accordingly, at least one management team member, generally at the executive level, should be a familiar face to the investment community and have successfully executed an IPO and/or other successful exits. This individual should also have a solid understanding of the core business and clearly articulate its growth strategy, as well as how potential investors will realize it.

Depending on your size, separately identifying key officers to divide responsibilities over operations, commercialization, scientific activities, etc. allows the CEO and CFO to properly focus the organization during the IPO process.

Identifying Someone to Own the Process

It is critical that a management team member owns the process and acts as the driver. This individual should assist in preparing and communicating the timeline and detailing 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.

Choosing the Right Investment Banker

Management will also need to choose an investment banker, with strong capital markets and equity analysis capabilities, to oversee the distribution of the organization’s shares in the offering. Investment bankers will want access to the entity’s data room for due diligence to review all critical information of the company – governance documents, clinical results, patent filings, significant contacts, etc. Management should begin meeting with bankers 12 months prior to a planned IPO to sufficiently familiarize with the company, make a selection, access data rooms, and demonstrate that management has command of the proposed IPO timeline.

Establishing an Appropriate Governance Structure

Your board of directors may be comprised predominantly of insiders (i.e., employees or significant shareholders). Pre-IPO, the organization will need to reassess the board’s composition to achieve an appropriate mix inclusive of independent members with the experience and skillsets to complement your business and establish an audit committee. Take this opportunity to bring name recognition to the governance team by adding high-profile independent directors.

Successful organizations often thrive when the board is built of diverse and credible individuals who can provide the important insight to meet organizational goals (i.e., successful clinical results; commercialization) and to anticipate matters regarding regulatory compliance.

Engaging External Financial Reporting Consultants

Financial statements must be properly and timely prepared. The SEC requires at least two years of financial statements for emerging growth companies, including quarterly interim information, which must be audited and reviewed by a registered independent public accounting firm under PCAOB auditing standards, which are more stringent than audit standards for private companies.

First time audits are difficult, especially in cases when funds are lean and the cost to stay current on audits are deferred early on. A successful audit requires an organization to:

• Maintain accurate documentation, executed agreements, and board minutes – all key governance activities.
• Consider past transactions thoroughly for implications on the accounting records and the capitalization table.
• Establish proper controls and division of duties for financial reporting.

If internal resources are lean, as is the case with many pre-IPO biotech companies, engaging external financial reporting consultants can help ease the heavy lifting, including financial statement preparation and audit process management.

Building a strong team led by an experienced principal financial officer is important and will lead to successful financial statement preparation.

Know Your Cap Table

After several rounds of capital raises, beginning with investments from founders, friends, and family, recapitalizations for new investors, dilution of existing investors, issuances of stock options, and even possibly cash or stock compensation packages for its executives, an organization’s capitalization structure can be complex. Ultimately, the cap table should be built with critical “insider participation,” having a syndicate of investors to potentially participate in the IPO.

Key required disclosures in the registration statement relate to capitalization and dilution. To accurately complete these disclosures, management needs to understand the rights and preferences of each class of debt and equity securities outstanding, including any anti-dilution, price protection, conversion features, and protective features that will be triggered by the offering.

Preparing for Valuation Changes

Preparing a current and recurring company valuation is also critical, and is a very subjective area, 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 business’ future performance. Considering this, management should perform a critical evaluation of the organization’s product pipeline and assess the likelihood of clinical and commercial success, as well as the opportunity for the organization to successfully complete an IPO in the current market.

Choosing the Right Advisory Team for IPO

Management should also give attention to building out the working group. This group of external service providers who assist management through the process consist of legal counsel, auditors, investor relations advisors, and other supplemental resources such as external accountants for audit-readiness services or valuation specialists.

Each service provider should possess a thorough understanding of your organization and its segment of the biotech industry and a depth of experience in IPOs or other exit strategies with companies similar in nature to yours, so as to effectively and efficiently navigate the registration process.

Getting Started with the IPO Process

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 inevitable challenges without significant delay.

Do you need help assessing the IPO process in your organization? EisnerAmper professionals can help you get started. Contact us today to find out how we can support you.