Warning signs that preceded the current economic squeeze in the biopharma sector were not heeded by investors seeking rapid profits. Now, biotechs interested in making the leap to the public markets must get creative.
Pictured: Illustration of a businessman and businesswoman with a graph of an increasing stock value and the term IPO/iStock, saifulasmee chede
I might be aging myself a little, but this is the fourth microcap meltdown that I’ve witnessed; 1987, 2000, 2007 and 2022-2023. These are all cyclical, and the cycles can be tracked.
Looking at the last 12 months or so before the bubble burst, just about any biotech company could go public and did so. Special-purpose acquisition companies (SPACs) reemerged and became a common vehicle for public offerings regardless of sector. Cryptocurrency was predicted to take over the world. In other words, prior to mid-2022, a lot of common sense went out the window. Greed and ambition outshone rational thinking, and rapid profits were the priority.
As a regular advisor to companies in helping them secure capital and enter the public markets, I advised caution, as I always have, but it felt that I was one of the lone voices in the wilderness, and the warnings—and warning signs, no matter how obvious—were not heeded in the gluttony brought on by the pandemic and post-pandemic euphoria. However, things did not make sense.
As the overwhelming desire to go public was coupled with an increasing difficulty to raise capital, a lot of biotech companies that went public during this time were rapidly required to enact reverse stock splits, with many giving up two warrants per share to raise the necessary capital. As is often the case, warrant holders made money, but the stocks, by and large, were crushed in both valuation and spirit.
Today, more of these public companies than should be are either declaring bankruptcy or offering themselves up as takeover targets, with many even becoming shell companies because of poorly executed, insufficiently funded or otherwise failed science. As a result, there is now a big market for reverse takeovers. Yet, it remains very hard for a private biotech company to go public at this time. In contrast to the staggering 152 companies that went public in 2021, fewer than 10 biotech companies entered the market through IPOs in the first half of 2023.
Things may be looking up, however, as some analysts anticipate that biotech IPOs will become more common as the year goes on. For those with the fortitude to carry on the process of seeking to enter the public markets, the question is: If investment banks are not able to raise the capital needed to enter the public market, or are requiring that companies find a portion of the funding elsewhere, where can biotechs raise the money they need to do so?
Here are some ideas:
1. U.S. Government Grants
Usually obtained by applications to NIH-based institutions such as the National Cancer Institute, this is non-dilutive money, meaning that the dollars are given outright to the companies, not in exchange for stock, which would “dilute” the value to other shareholders by expanding the share count.
2. International Governments
Numerous governments outside of the U.S. often provide incentives in the form of cash and/or tax benefits. For example, Australia’s Research and Development tax incentive allows companies to receive a tax rebate of up to 43.5% on clinical trial–related R&D costs. And in areas of the U.K., there is also available money and similar tax incentives for companies that choose to incorporate there.
3. Big Pharma
Large pharmaceutical companies are regularly looking for partnerships and long-term acquisition targets. Especially now, the pharma industry is in a downcycle of in-house innovation and is funding trials of products developed by smaller biotechs. Big Pharma also has venture and investment arms that are often open to providing funding outright or to buying stock or significant positions in emerging public biotech companies.
4. Family Offices
Smaller institutional investors have smaller total capital under management but significantly higher tolerance for risk. This is more difficult, but if you find the right family office, they will invest, and sometimes lead the round that drives an IPO.
5. Investor Relations Firms
Third-party companies that provide potential investors with information about your company also have familiarity with many of the contacts above, as well as with the investment banks that are driving the IPO market. In addition to helping with your communications with existing investors, hiring an investor relations firm could provide partnership introductions that can result in potential investment.
The cycle will always continue. First, we will see better-funded companies go public, then midrange companies will follow. Then companies either at the earliest stages of research or with poor funding will go public again—if they can stay around until the market opens up.
Don’t give up hope—there is money out there!
David Diamond is a National Life Science & Technology Leader for CBIZ MHM, a business consulting, tax and financial services provider.
