Biotech IPO Checklist: Compliance Readiness & Leadership
In the push to innovate patient care and improve health outcomes, biotech IPOs are on a hot streak this year. Endpoints reports that as of July 22, 82 firms have gone public through an IPO and an additional 47 have gone public via SPAC, globally. In total these companies have raised a combined $25.86 billion.
Both life sciences and healthcare organizations are being charged to develop life-saving vaccines and treatments to combat the COVID-19 pandemic, in addition to breaking down silos across the health ecosystem to bring down care costs and improve consumer health outcomes. To do this, companies must achieve five imperatives:
- Capitalize on data
- Maximize profitability
- Manage risk
- Transform to compete
- Innovate patient care
Types of IPO Transformation
Pursuing an IPO is one of the key paths companies can choose to achieve the fourth imperative, Transform to Compete, but there are different ways transformation can take shape:
- Cash Transformation: An IPO strategy generally provides substantial permanent and easier access to future capital through secondary offerings that can help an organization meet its immediate and long-term objectives.
- Stakeholder Transformation: An IPO not only serves as a potential method for current stakeholders to monetize their investments, but it can also attract new stakeholders.
- Talent Transformation: An IPO creates a wider range of compensation and incentives in the form of stock options or stock purchase plans that can help an organization attract and retain the top talent needed to innovate patient care.
IPOs can be a thrilling milestone, but transforming into a public entity is not an easy undertaking. A successful IPO requires significant focus, as well as time and resource investment, before stakeholders get to ring the bell. Indeed, leadership should view an IPO as a fulcrum point in the organization’s lifecycle and take the opportunity to reexamine the business’ operations and long-term strategy.
Organizations should consider the following steps — and answer the corresponding questions — ahead of IPO consideration.
Assess and Strengthen Financial Reporting Capabilities
Early in their lifecycle, organizations might not allocate resources to administrative tasks. Delivering for the earliest backers often takes precedence over less pressing tasks, such as developing robust financial reporting functions.
As an organization prepares to undergo an IPO, however, organizational and investor priorities change. Investors — especially new or potential investors — will want to see that leadership knows how to run a business well, as well as progress in the organization’s stated vision. This necessitates taking steps to transform the organization into a well-oiled machine, and fully prepare it for all the requirements of being a public entity. The first step in this process: Make sure that the financial reporting and accounting systems are prepared for the demands of a public organization.
Public organizations are required to provide timely financial reports to investors and federal regulatory bodies year-round, but in recent years, the burden has been intentionally eased on emerging growth organizations like biotechs. The 2012 JOBS Act reduced the reporting and disclosure requirements organizations initially file when they go public and extended the grace period of reduced filing requirements for up to five years after the IPO.
The Trump administration focused on capital formation and showed an openness to reasonable requests for waivers of existing rules. While the Biden administration had indicated some desire to crackdown on antitrust activity, by increasing M&A scrutiny, there’s been no indication of increasing IPO regulations or restrictions. While frequency or volume may change, public entities will always be required to provide at least some level of financial disclosures to federal agencies and investors. Additionally, organizations should familiarize themselves with the new ASC 606 revenue recognition standard and ASC 842 standard, as well as ensure their systems are fully compliant under the new guidelines.
Organizations may need to build these reporting functions from the ground up, which may require onboarding a team specifically tasked to helm this initiative. Don’t underestimate the importance of having reporting, data gathering and storage systems in tip-top-shape — regulatory bodies and investors will thoroughly examine the books in preparation for an IPO and the rest of an organization’s lifecycle.
|IPO Readiness Project
Many organizations start behaving like a public entity well before an IPO, which may take the form of an IPO readiness project to prepare their teams for the real thing. Putting teams through the motions of working in a public organization is essential to a smooth transition. This ‘practice period’ gives leaders and staff time to adjust to the new rules of the road and iron out any kinks that surface. This part of the process — while perhaps not the most exciting — is a crucial investment in an organization’s future, helping to ensure long-term, sustainable growth.
Financial Reporting & Compliance: Internal Assessment
- Does the organization have the appropriate resources, information, technology, and systems necessary to meet reporting needs?
- Is the organization aware of the deadlines it will have to meet?
- Does the organization have someone who can effectively communicate the contents of financial documents and other materials to regulators and investors?
- Is there capacity to handle this reporting on a regular basis?
- Are current teams trained in these requirements?
- Does the company have the appropriate advisors to cover specific needs such as valuation, income taxes, preparation of the initial SEC filing, or will these need to be outsourced?
Bridge the Gap between Talent & Governance
As an organization grows, so do its priorities, responsibilities, and talent management needs, which may require onboarding new team members.
Existing team members may even need to be retrained in the new or expanded responsibilities of their existing roles. For instance, organizations may need to hire an entire team dedicated to handling operational scaling as the business grows. If an organization has plans to expand internationally, they may need to onboard team members with expertise in navigating international regulatory environments.
Additionally, organizations undergoing an IPO must become compliant with Sarbanes-Oxley (SOX), which dictates rules for corporate governance, as well as any stock exchange-specific rules. For instance, NYSE adheres to one set of rules while NASDAQ identifies with another. SOX dictates that a board of directors must have a majority of independent members, and that audit committees must be made up of at least three independent members with one member that qualifies as a “financial expert,” per the SEC’s definition.
The most pressing talent need for organizations on the path to an IPO is engaging with legal, operational, and financial advisors with prior IPO experience. Organizations undergoing a talent audit should also reexamine their investors and board members. Running a public entity often requires a different set of expertise and responsibilities than leading a private organization. Through conversations with current board members and investors, an organization’s leadership may discover that an investor or board member might not be suited — or even desire — to remain in the organization after its IPO. Investors may take the IPO as an opportunity to exit their position in the company. Departing investors and board members should be replaced with fresh talent with experience advising or running public entities.
Talent & Leadership: Internal Assessment
- Does the organization have an individual who can handle investor relations and effectively communicate financial results to shareholders?
- Is there a person capable of leading expansion and scaling operations?
- Is there a need for individuals with international financial, legal, or operational experience?
- Is the current leadership suited to run a large public entity?
- Does the organization have individuals experienced in undergoing an IPO?
- Has your organization given due consideration to board structure and composition, policies, procedures and oversight approach?
|IPO Checklist, Part 2: Planning for Growth & Digital Transformation
In Part 2 of our Biotech IPO Checklist, we examine additional steps biotech companies should consider before moving forward with their IPO, including planning for future growth and implementing strategies for digital transformation.
If your company is considering a future IPO and you’re looking for guidance from a seasoned team of advisors, please don’t hesitate to connect with a member of the MFA Team.
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