Get Ready for the Biotech Market Rebound

Troutman Pepper

Troutman Pepper

Investors are still feeling the burn from biotech’s flameout. And with rising interest rates and increasingly strict regulatory scrutiny, it’s no wonder they remain wary of being singed by the sector.

Just look at the numbers — as of June 10, only 23 biotechs had gone public globally in 2022 versus 68 in the same period in 2021. The Nasdaq Biotech index is down by nearly 19 percent. Only a handful of biotech companies that went public last year in the U.S. are trading above their debut price.

But this is no time for biotech companies to lay low.

The market will rebound. And when it does, there will be a deal frenzy. Which biotech companies will be poised to take advantage of fresh funding, and which will find themselves scrambling to pivot?

It depends on who’s geared up for success.

Ready, Set, and Prepare!

Hunkering down and focusing on development programs is always valuable, but it’s not the time to hide behind the scientific work to avoid thinking about financing or the longer strategic play. Now is the time for biotech company leaders to meet with stockholders, board members, potential investors, and collaborators.

Organizations must understand how to communicate the organization’s story and vision. Clients can keep an eye out for companies with like-minded goals and strengthen those relationships. They can talk to bankers and other advisors about what can be done now to achieve long-term goals.

Considering Shelf Registration Statements

Companies that went public more than 12 months ago may consider filing shelf registration statements with the Securities and Exchange Commission (SEC) sooner rather than later to be able to offer additional public shares when the time is right.

In addition, more seasoned companies can review their existing shelf registration statements — is there sufficient capacity left on the shelf for a substantial financing? Does the shelf expire soon? If so, now is the time to file a new shelf registration statement.

It can provide the flexibility needed to capitalize on a market upswing. While it may just take a couple of weeks to draft the relevant documents and get auditor and board consent, encourage starting the process six to eight weeks in advance.

Considering At-The-Market Offering Programs

Public companies can also consider entering into at-the-market offering programs. ATMs allow public companies to sell newly issued shares into an existing market to raise capital at prevailing market prices. This flexible, lower-cost vehicle helps companies quickly raise capital while trickling shares into the market without a big impact on the stock price.

Exploring PIPEs

Public companies can raise capital quickly outside of the public markets by offering a private investment in public equity (PIPE) deal to institutional investors. In a PIPE, the company typically negotiates with the purchasers, although sometimes a placement agent is involved.

PIPEs have limitations. If the pricing is below market, stock exchange rules limit the offering to only 19.9% of the company’s outstanding shares. And some investors don’t like PIPEs because they can’t immediately resell their shares; they have to wait 30 to 45 days for the company to file a resale registration statement with the SEC.

Advise clients negotiating PIPE transactions to take care when providing information during diligence. Typically, investors don’t want to receive material nonpublic information (MNPI) during diligence — or they want companies to “cleanse” the information by making public disclosure at the time of the closing or shortly thereafter so that they aren’t restricted from trading.

Investors who purchase registered stock can immediately resell it, if they wish, without any delay. Investors in a PIPE, however, have to wait for the company to file a resale registration statement covering the purchased shares; that is, there is no immediate market for shares purchased in a PIPE, and might not be for many months.

Private Companies Can Also Prepare for an Upswing

As the market contracts, competition for financing increases. Private companies need to determine how much money they need to raise. What is their next valuation inflection point, and how much funding do they need to get there?

It helps to talk to board members to discuss the financing strategy for the next one to two years. Reaching out to industry associations will help clients stay plugged in with networks.

Keeping an Eye Out for Potential Deals

M&A activity in the sector is on the rise, with companies seeking to build their pipelines or consolidate. Larger biopharmaceutical companies, especially those that profited from COVID vaccines and treatments and have capital to spend, are eyeing smaller biotech companies to acquire innovation, R&D pipeline or skillsets. Some are looking to consolidate with other companies, expanding the pipeline and pooling resources to weather the turn in the financing markets.

The recent flurry of deals could give the biotech sector a much-needed boost. Companies can take advantage of resetting valuations to acquire targets that may have previously been unaffordable. Those with a stalled IPO or limited cash runway can talk to bankers and other contacts in search of a potential M&A partner that might be a perfect fit.

Telling the Right Story (to the Right People)

Of course, financing is just a bridge to where a company wants to go next. Where. When. How. And why.

Sometimes early-stage companies focus on getting financing first before they take a careful look at where they want to go and why investors would want to invest in them. This can be a pricey mistake. Know the company story, the value proposition, and how to tell it. Be ready. There’s no second chance to make a first impression.

Be ready to answer the questions as to why the company is differentiated, why investors should invest, and where the company is headed: one year out, three years out, five years, and beyond. Why should investors want to engage them in the long term? How does the company differentiate itself? Specificity is key, as is socializing ideas with the team.

Talking It Out with Trusted Advisors

Companies should communicate frequently with all outside advisors who can make introductions, share best practices and develop creative strategies. Private companies can leverage these relationships throughout the investor ecosystem and find new financing opportunities. Public companies benefit from lessons learned in the trenches, what went well and what didn’t as well as market trends and creative financings.

Collaborating (With Care)

Collaborations continue to be on the rise as large companies enter into deals with small-to-midsize companies that can give them an edge in promising, next-generation therapies and drugs. But biotech companies can also look to each other.

Consider how collaborations can advance the company’s technology, pipeline, and management team. Investors want to see diverse, robust pipelines — where one investment can ideally give them a lot more shots on goal — but with efficient capital utilization.

These conversations come with some risk. Create clear parameters about what information to share and when. If no deal results from the conversation, it’s very difficult to “unknow” what was learned, regardless of what the NDA provides. Understand the parameters of these business discussions. Knowing where the lines are and planning what information to share when is critical.

Determining the ideal strategy and what should and should not be revealed is key. A seasoned legal team can develop documents that reflect the strategy and go beyond the vanilla NDA. They can advise on how to behave and operate within the right parameters.

This article was published by Reuters on July 28, 2022. Reprinted here with permission.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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