IPO vs. Acquisition for Life Science Companies: Expert Q&A

Life science companies, particularly those heavily invested in research and development, often face critical funding decisions. Should they pursue an initial public offering (IPO) to fuel their growth, or is a strategic buyout from a larger company a more suitable path?

In this exclusive interview, Taylor Wirth, a partner at Barnes & Thornburg,  offers his insights on evaluating market conditions, assessing company readiness, and weighing the pros and cons of each funding option. He also highlights the importance of considering factors such as drug development pipelines, FDA approval processes, financial health, and potential litigation when making this crucial decision.

How can life science companies assess the market receptiveness to their potential IPO, especially considering the biotech/pharma sector?

Taylor Wirth, Partner at Barnes & Thornburg: Practitioners and market watchers had initially anticipated a more robust IPO market this year. However, there have been fewer than 15 biotech IPOs in 2024 (compared to more than 100 at the 2021 peak). The first half of the year was stronger for IPOs, but there have only been five new offerings since April 2024. 

In addition, companies should consider the overall state of the market. Is there more significant economic uncertainty or market volatility that may impact the volume of IPOs and the valuation of your IPO? The early August 2024 market crash may have reduced valuations, making attracting interest from new investors more difficult and dampening IPO hopes.

Why are R&D-intensive biotech/pharma companies increasingly considering going public?

Taylor Wirth: IPOs allow companies, mainly growing and cash-intensive biotech companies, to:

1. Generate substantial cash quickly
2. Allow initial backers an opportunity to cash in
3. Improved access to financing via follow-on offerings and debt financing from public markets
4. Increased liquidity and valuation of stock
5. Enhanced public perception of the company (publicity, brand recognition, reputation)
6. Offer employees stock option plans and incentive plans to retain talent
7. Provide reassurance to customers and suppliers regarding financial stability

What are some warning signs that a company might not be ready to go public just yet?

1. Weak or inconclusive clinical trial data
2. Due diligence issues, e.g., inability to security intellectual property rights
3. Don’t meet market cap requirements or just barely meet such requirements
4. Insufficient cash reserves for research and development

You mentioned you recently created a guide for companies considering an IPO. Can you elaborate on some key points companies should be aware of in the current market climate?

Taylor Wirth: The current IPO market may be weaker than anticipated; however, companies should be mindful of preparing for an offering well in advance. Companies often take a year or two to prepare for the IPO process and start acting like a public company internally and externally, so companies waiting for improved market conditions should plan now. A readiness assessment helps to identify gaps and areas of improvement on the path to IPO:

1. Capital Market Review uses a company’s qualitative history and business model to develop an equity story for investors on its value proposition and path toward value creation.
2. Financial and Non-Financial Aspects –prepare for disclosure of financial statements, balance sheets, income statements, cash flow statements, internal controls, historical accounting issues and practices, and other reports to the SEC and ensure compliance with Sarbanes-Oxley
3. Corporate Governance –review corporate records and conduct any necessary housekeeping to comply with SEC and stock exchange requirements. 
4. Legal and Tax Review –review material agreements for change in control provisions, address any litigation, and determine the proper tax structuring.

You advise companies to engage with business stakeholders to determine the best path. Can you walk us through some key questions executives should ask their bankers regarding IPO vs. acquisition?

Taylor Wirth: The most significant consideration is whether an offering will ultimately bring value to the key stakeholders or whether it is better to sell to a larger competitor. The reality is that most successful start-ups will exit via acquisition. Do the costs of an offering outweigh a sale? What are your long-term goals, and does the company have the resources and personnel to maintain success as a public company? 

What internal factors within a life science company should be evaluated to decide between an IPO and a buyout?

Taylor Wirth:

1. Status and timeline of trials
2. Cash flow and burn
3. Long-term goals of founders and investors

You mentioned potential pending litigation impacting an IPO. Can you elaborate on how resolving intellectual property disputes can affect a company’s public offering strategy?

Taylor Wirth: Disputes regarding ownership of intellectual property have the potential to derail the process of going public. Protecting a company’s key technology or drug is paramount to maintaining the value of the company. 

First, companies should identify all proprietary information used in the business, including all intellectual property. This process should also confirm the location and security protections of all such information. 

Second, issuers are advised to document intellectual property assignments and confidentiality agreements with employees, consultants and others who have assisted in the development of the company’s inventions.

Lastly, counsel can assist in defending trademarks, copyrights and patents, whether by appropriately filing applications for inventions or defending against infringement claims.

About Taylor Wirth
Taylor Wirth is a partner in the Corporate Department practice of Barnes & Thornburg. Taylor counsels public companies across various industries, including retail and consumer products, healthcare, and real estate investment trusts (REIT). Taylor has represented issuers in a variety of securities transactions, including initial public offerings, secondary public offerings, at-the-market (ATM) offerings and private investments in public equity (PIPEs), and in other strategic transactions, including mergers and acquisitions, divestitures, going private transactions and tender offers. He regularly advises clients on corporate and securities matters, including public company disclosure, Section 16 and beneficial ownership issues, insider trading, executive compensation, and environmental, social, and governance.