THE HAZY, lazy days of summer are here. But at least in my part of the country, the weather has not heated up and neither have the biotech indices. If anything, they are heading south faster than geese after the first frost. What’s going on? Has biotech gone out of favor once again? No, I think what we are seeing is investor reaction to the FDA.
Investors are coming to the realization that even if a drug candidate survives all of the clinical trials, approval is not a slam-dunk. And any delay in obtaining marketing approval means a delay in reaching profitability. This increases risk for the investor. Separately, rather than becoming more efficient, the FDA seems mired in lack of direction.
I base this on on-going conversations I have with a number of people who closely follow the FDA, and they pointed out that without a permanent Commissioner at the helm, morale has dropped and experienced staffers are leaving or at least getting their CV’s in order. Amidst this uncertainty, staffers still of course must respond to biologics license applications with detailed questions and requests for more data to meet the mandated timeline. This will potentially push the application onto someone else’s watch.
If investor sentiment remains bearish, this will certainly have a negative impact on both public and private financings. But I see this recent downturn for biotech stocks as a short-term situation. Despite the recent FDA moves, the prospect for the sector is bright and genomics will continue to be a driver in drug discovery.
If you need to raise money, move ahead and do not allow yourself to be caught up with unrealistic expectations regarding valuation. If you would like to top off the tanks before your IPO, start with your current shareholders. Their participation is crucial for you to complete a successful round of financing.
The word I hear from bankers and management is that there may be an opportunity for some companies to launch their IPO in the fourth quarter of this year. You might be thinking, “yeah, sure.” But remember, a lot of deal making is psychology and a positive mindset can become a self-fulfilling prophecy. So if you think you may be at the stage where you are ready to be a public company, now is as good a time to start getting ready for your public offering.
What should you be doing? First, if you haven’t been speaking to banks, start setting up appointments. Speak to as many quality firms as possible. Focus on shops that have analysts that cover your space. You know the companies comparable to your own. Are any of them public? Which analysts cover them? Those analysts may not be interested in covering you, but this will give you an idea of the players in the space. Don’t get fixated on firms that were the most popular in the IPO frenzy. Mix them with the strong regionals; many of them have excellent analysts and quality, aggressive sales forces with good aftermarket trading. Make certain you have a crisp presentation to present to the bankers and the analysts. If you want to go public, act like a public company.
Present your plan to your board of directors and get their approval. And if you want to replace or add directors to your Board, do it prior to the offering.
Also ask yourself: Do you have the right law firm? Does your current legal counsel have the experience to take you through the registration process? Can they help you with the myriad of filings that you will be making as a public company? And even if they have the experience, are you happy with them? Now is your chance to change your legal counsel if necessary. The same advice goes for your auditors. If you would like to change your accounting firm, do it now.
Also take this time to review your employee stock option plan. Are your key employees (and in my mind all employees are key) well optioned? Make changes if necessary to make certain that your employees are happy. And while we are on the subject of options, work with your legal counsel and accountants to make sure you have the requisite number of shares authorized. Don’t wait to discover when you are ready to file your registration statement that you do not have enough shares authorized.
In general, this is the opportunity to do major house keeping. Simplify your capital structure, consolidate unnecessary subsidiaries, collapse partnerships, make certain leases are in order, and review your insurance (make certain your directors’ and officers’ insurance is adequate and up-to-date, and at the same time don’t forget your product liability insurance). No item or detail is trivial; leave nothing to chance. Even small items can hang-up a deal, and this can cost you the opportunity to go public.
And last but not least, good luck!
Ira Leiderman is managing director of the Palladin Group, a New Jersey-based investment management firm. He was previously a senior healthcare banker at Gerard Klauer Mattison. You can e-mail him at [email protected] .
TrendSpotter is a weekly column that focuses on how trends in politics, patent law, and the US and European markets affect the genomics industry. The column appears every Friday. Next week Robert Goldberg, a senior fellow at the National Center for Policy Analysis, will offer his thoughts regarding genomics and Capitol Hill.
To access previous columns just enter the word "Trendspotter" in the archive search window on the homepage.