UK biotech comes to market
pharmafile | November 10, 2006 | Feature | Research and Development |Â Â biotech, investmentÂ
At last, the signals are getting stronger that the biotechnology industry is poised and ready to tackle the publicly quoted stock markets. There is now a constantly busy pipeline of potential listings, which includes a number of international companies looking to take advantage of a fast-track listing process for the Alternative Investment Market (AIM), such as Entelos, the US biotech company, which recently announced its intention to list on AIM.
The main reason for undertaking an initial public offering (IPO) is usually to raise additional capital for growth or to reduce debt, particularly if the company has reached a point in its life where other sources of funding, such as venture capital funding, bank loans and so on, are no longer available. Other reasons might include providing greater access to future capital or a market for the company's shares.
It's an attractive proposition, but before rushing in, it pays to give some careful thought to preparing a company for its IPO.
Last year was the strongest for the IPO and fund-raisings on the London Stock Exchange since 2000, with a total of 412 IPOs during the course of the year. Of these, 84 were on the main market and 335 were on AIM with total funds raised of £16.1 billion. In the pharma/biotech sector there was a steady flow of fundraisings with figures of £412 million on the main market and £234.97 million on AIM.
Official List or AIM?
When contemplating an IPO, a company needs to consider the market upon which its shares are to be traded – either the Official List of the London Stock Exchange ( the main market) or AIM. In the pharma/biotech sectors, the market of choice is AIM for a number of reasons, including the relevant size of the post-IPO company, which is likely to be less than £150 million market capitalisation. However, all the preparatory steps are equally applicable to a listing on the Official List or on AIM.
Since its launch in 1995, AIM has established itself as the most successful growth market in the world. It is specifically tailored to expanding businesses seeking the advantages of a public quotation in a flexible regulatory environment, and as a market, AIM is relatively lightly regulated, relying mostly on self-regulation.
For a company applying for its securities to be admitted to trading on AIM, there are some advantages over the London Stock Exchange. First, there is no minimum requirement for the number of shares that must be held in public hands (for a full listing on the main market of the London Stock Exchange, there is a 25% minimum requirement); nor is there a requirement for an established trading record (for a full listing, a company must have a three-year trading history). In addition, there is no need to submit the IPO documentation for approval to any regulatory authority (for a full listing, the listing document must be submitted for approval to the UKLA, now part of the Financial Services Authority).
Pros and cons of listing
Listing can also raise a company's profile and give customers and suppliers a greater sense of security. This, in turn, can improve a company's efficiency, as can the creation of employee share-purchase schemes. However, it's not all plain sailing and there are certain disadvantages of an IPO, which should be considered. These include greater susceptibility to market conditions, greater disclosure and reporting requirements, loss of privacy and control, costs and fees, and increased responsibility and time demands on company directors.
Consequently, the decision to go ahead with an IPO is one that should not be taken lightly. The company's management should understand from a very early stage how onerous the IPO process can be. On a day-to-day basis, the IPO process is time consuming (taking around 4-6 months in total) and costly in terms of manpower as the core team should include at least one senior director with authority to make key commercial decisions on behalf of the whole board, an in-house lawyer or senior employee to co-ordinate the legal work, and an in-house financial officer.
The verification process, whereby every statement of fact made in the listing document is confirmed as being true and accurate, may also require a considerable amount of resource from all parts of the company and this should be borne in mind at the outset. The burden on the company's management will increase towards the end of the process and it will be necessary to have a number of board meetings to approve the IPO, all of which require the time and attention of the directors.
The IPO team
The company will need to appoint a team of advisers at an early stage to assess the merits of the proposed listing and to plan the timetable for the IPO. These will include a nominated adviser who is the person responsible for the IPO and who leads the fundraising process on behalf of the company, plus legal advisers, accountants and PR consultants.
The nominated adviser, or nomad, will be responsible for managing the IPO process and co-ordinating the other advisers. He or she will advise on matters including the structure and composition of the board and the management team; the best method of bringing the company to the public market; and the IPO timetable.
Crucially, it is also likely to have the research analyst as part of its team, who will publish his findings on the company. This is important when it comes to marketing the company and ensuring sufficient interest has been generated among the likely investor base. In the pharma/biotech arena, there is a limited number of recognised specialist research analysts, and often for companies looking to IPO, this, together with the nomad's equity sales team, is the major factor in choosing the right nomad.
The nomad may also act as the corporate broker and be the main interface between the company and the stock market, keeping the company informed of current market conditions, assessing the likely level of demand for the company's shares among institutional and other investors, and marketing the shares to investors, including advising on the size of the issue, timing and price.
The role of the company's lawyers is to advise on the legal aspects of preparing the company for listing, which would include advising on re-registering as a public company, appointing and removing directors, overseeing changes to the company's constitutional documents and directors' service contracts.
The preparatory process
The team must also compile the legal documentation with due diligence, which the nomad will require in order to ensure that the company is suitable for a listing, and it must prepare the admission document or prospectus, and verify the accuracy of every statement of fact in this document.
There are several other useful preparatory steps which can help to make the IPO process run as smoothly as possible and make a real difference to the end result. First, the details of all the company's patents, trademarks and other registered and unregistered intellectual property and licences (known as IP) should be collated onto a central database at least three to six months prior to beginning the IPO process. This enables the company and its legal advisers to check the company's IP is correctly and accurately registered on any public register and that any IP provided to the company by its founders has been correctly transferred. Where the IP is licensed to the company, it will show if the licensor still owns the IP, whether the IPO process will affect the terms of the licence, and will confirm the company is still using the IP in accordance with the terms of the licence.
Another vital step is to ensure that all employment and consultancy agreements allow automatic transfer to the company of IP and inventions created by employees. It's important to bear in mind that if an inventor of company IP was not employed by the company at the time of creating an invention, in the absence of a formal transfer of the relevant IP rights, the company will not own these rights and they will not necessarily transfer across with any subsequent employment agreement with that inventor.
The company's IPO team should also have an understanding of the corporate and IP structure of the company and of the commercial value-drivers of the company business. It is common for high-growth companies and, particularly their nomads, to require the use of a firm of legal advisers that has a specialist pharma/biotech and corporate focus, particularly if the company's existing advisers were, for example, advisers to the original founders.
A thorough briefing, including a detailed review of the patent family tree, well before the IPO process formally starts means that much of the company's time and effort can be redirected into other areas once the IPO process is in full flow. But, this will only apply if the company's lawyers are able to deal with a number of the IP enquiries made of the company by the nomad and its advisers and can manage the preparation of the patent lawyers report by understanding the IP of the company.
Issuing of shares
In order to ensure that sufficient new shares are available for any issue of shares as part of the IPO, it is usually necessary to undertake a reorganisation of the share capital of the company. There should also be sufficient shares in circulation to ensure orderly trading arrangements.
Institutional investors in quoted companies tend to prefer a company to have one class of ordinary shares, but it is very likely that pharma/biotech companies, which have gone through several rounds of venture capital financing, will have issued a different class of shares at each round, and, therefore, a share capital reorganisation is usually inevitable. Careful early planning is needed with the company's venture capital investors to ensure that not only are they all supportive of the IPO, but that they understand the need to consider the post-IPO share structure and, most importantly, their ultimate holding well before the IPO process is in full swing, so that they can prepare for this reorganisation.
The law states that only a public company can offer its shares to the public, and, therefore, any company contemplating an IPO will have to re-register itself as a public company and if there is a large body of shareholders, this will require the holding of shareholders' meetings on a full 21 days' notice. Again, shareholders need to be made fully aware of this process as far in advance as possible as the resolutions at such meetings can often be very complex and need to be fully explained.
The special rights of shareholders (particularly venture capital investors) tend to be unwound immediately prior to, but conditional upon, the company being listed e.g. rights to appoint a director, receive a preferred dividend or ratchets, or liquidation preferences to determine a certain level of minimum return. In some cases, it may be necessary for significant shareholders to retain some rights and this will need to be considered and, most probably, negotiated with the nomad prior to the IPO. Furthermore, significant shareholders are likely to be required to enter into lock-up arrangements restricting their ability to sell additional shares for a certain period following the IPO, and experienced legal advisers will deal with this matter early to avoid any last minute difficulties.
In the situation where the company has a deficit on its profit and loss account, which in the main is represented by historic losses, it is possible and quite common for a reduction of capital to be undertaken prior to the IPO. As this is a process that requires approval of the High Court and shareholders, careful planning to ensure all the timings work for the final IPO completion date is vital. This is not something that can be organised a month before IPO.
The final checks
Needless to say, it is important that internal documentation is in order e.g. any intra-group loan arrangements, supply agreements, and management service contracts should be signed and correctly executed with any variations attached to them. Key contracts will form an integral part of the legal due diligence and should be checked to ensure that there are no changes of control or other onerous provisions which will be triggered by the IPO and which could have an adverse effect upon the business of the company.
And last but not least, any outstanding disputes, complaint letters and new disputes should be resolved wherever possible. All disputes will have to be addressed in due diligence and, where material, in the formal documentation. There is a danger that the existence of any disputes may affect the company's value and could even deter some potential investors.
In conclusion, while to the uninitiated an IPO could well be seen to be more effort than it is worth, the reality is that with the right team and the proper amount of preparation, the directors can focus on ensuring that the IPO provides their company with the platform to achieve growth levels which the private markets would find difficult to match. A look across the Atlantic demonstrates that small, but high-growth and forward-thinking companies can achieve great things. The challenge is to have directors with the level of ambition who, supported by experienced advisers, are able to see beyond what is, after all, merely a process.
Stephen Rosen is a corporate partner in the Biosciences Group at Olswang and has advised on the IPOs of Ventura Group plc and Phoqus Group plc as well as numerous VC investors on investments in healthcare, pharma and biotech companies. Tom Crease is a corporate solicitor in the Biosciences Group at Olswang.
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