Facing up to the biotech IPO and financing challenge - PART ONE

Biotech and Money, the industry’s newest and most innovative virtual, online and physical private biopharma community officially launched on 12th June with the ‘Biotechs and the City’ Evening Reception at Bird & Bird‘s offices in central London.

The VIP Networking Launch Reception was open to a selection of UK Biotech and Bioscience CEOs, Investors, Industry Analysts, Pharma and Financial Services professionals and was themed around IPO and raising finance in the UK. The evening featured an exclusive hour long panel and Q&A with leading industry and city thought leaders, with ample time for informal networking. We are serialising the panel discussion in the next couple of blogs and making the transcript available to all for free.

Key panellists at the event were:

  • Dr Karl Keegan, Chief Corporate Development Officer, Vectura - Raised £52m through public placement in March 2014
  • Dr Paul Cuddon, Equity Analyst, Healthcare and Lifesciences, Peel Hunt - Peel Hunt Ranked 1st Healthcare & Lifesciences (Thomson Reuters 2013 Extel Survey)
  • Simon Allport, Partner, Bird & Bird
  • Chris Mayo, Consultant, Primary Markets, London Stock Exchange
  • Neil Darkes, Co-CEO, Biotech and Money (chair)
  • Terence O’Dwyer, Co-CEO, Biotech and Money (chair)

In this first blog of the series, we bring you the thoughts and contribution of Simon Allport, Bird & Bird’s top corporate lawyer and expert on the public takeover code.

Understanding the legal challenges facing biotech’s raising capital

Terry O’Dwyer [TO’D]: Simon, let’s begin with you. The subject of this panel is IPO, and as you are the legal expert on the panel, perhaps you could share with us what you see as the particular legal challenges for a company considering an IPO?

Simon Allport [SA]: There a couple of comments I’d make on that. One is not really a legal point and the other one is. The fundamental about an IPO process is it’s all about preparation; it’s all about making sure that you are ready to go to market when you actually do that. In the real world if you’re going to do the job properly you need to pre-plan, you need to take a year plus from the point that you actually decide to go for it and then 3 to 4 months of actual intensive activity towards the IPO stage. The thing about the market at the moment is that we’ve seen a large amount of activity but there are concerns that there might be a bit of overheating and the window might close. What that tells you is that if you’re a biotech company and you’re planning to IPO you’ve got to plan well ahead and be able to react and be flexible because I don’t think we’re going to have a window shut in the way that we had for a number of years earlier on in the decade but there are likely to be spots where the market cools down a little bit and the opportunity to go with an IPO is going to close momentarily. For companies that are considering IPO you have to have done the prep work and to be flexible enough to take the opportunity when it arises but also to say no if the market conditions aren’t right. The other thing for biotech companies of course is that most biotech companies have a particular timeline for their products and you’ve got to have a degree of flexibility to be able to fit in with those timelines as well.

The second point that I would make, which is a legal point, is in relation to a biotech’s IP. Obviously that is the primary asset and it is important to make sure not only that you have proper ownership of it but also that you have the freedom to operate. IP is extremely important from a risk perspective but it’s not really something that ultimately investors are going to get excited about. It is however, something that they will expect to be covered off. Ultimately you’ve got to be able to sell the company on its strengths and it’s not really going to be the IP that clinches the investment in terms of a particular company, but it is a box that you absolutely have to tick from a risk perspective.

TO’D: What about the challenges of being a listed company where your masters are institutional rather than VC shareholders?

SA: The obvious difference between being a listed company and a VC backed company is the way you communicate with shareholders. With a VC owner, typically you’re going to have board representation, you can have very close lines of communication with one and possibly other secondary VC investors. With institutional investors of course, it’s a much different way of communicating with them. One of the fundamental things you have to get right on an IPO is the core message that you get people to invest on the back of because ultimately the investors are only ever going to be disappointed if you get that message wrong so the primary difference is making sure that when you IPO you put out the right story and you know you can deliver on it.

‘Make sure that when you IPO you put out the right story and you know you can deliver on it.’

It’s often said that the absolute no no for an IPO is to over promise and under deliver. That’s absolutely right. When you get to the point when you’re communicating with your investors on an ongoing basis after you’re listed, the amount of time that you’re going to have to spend on presenting to investors is very significant; it’s probably much more than the time you would spend on discussions with your VC owners but it’s much easier if you’re going through that process if you’ve actually got the messaging right at the outset and you’re not running up a hill trying to convince people that the story you’ve told them in the first place is the wrong story.

What impact did the Pfizer/Astrazeneca bid have?

TO’D:  I know you’re an expert on public takeovers and it’s been said you have an intimate knowledge of the UK’s takeover code, I wonder if you can tell me if the 2011 changes to the takeover code have had the desired effect in light of the the Pfizer / AstraZeneca bid?

SA: The 2011 changes I’m sure everybody will know came out as a result of the Kraft / Cadbury bid and a lot of the flack that arose in relation to that transaction was really political rather than anything else, it was more about prized UK assets being acquired by foreign inquisitors. The changes that were effected were not political, there was a lot of discussion at the time as to the lengths that the takeover powers should go to in changing the rules and some of the slightly more wacky ideas were to increase the percentage threshold that you’d have to get to in terms of acceptances before you could be a successful bidder. That flies in the face of what everyone would view a free market to be which is ultimately a company is owned by its shareholders and the majority of shareholders decide. The 2011 changes, they didn’t really grasp that political question in the same way as a lot of the discussions around the Pfizer / AstraZeneca bid has been whether the public interest test should be extended to biotech companies. That to my mind is a political question which ultimately the politicians will decide. In terms of the changes that were introduced in 2011, I’d make two observations really. One of the changes was to introduce the put up or shut up regime and that was motivated by two things, the first of which was to try and make sure that target companies were not put under siege. That might have worked but it might not, the reality is they are only frozen out for 6 months and possibly only 3 if they get invited back into the fray. Is that really going to prevent them from being under siege? I’m not sure.

The other thing is that the put up or shut up regime was really driven by a desire to try and prevent virtual bids and of course the whole of the Pifizer / Astra Zeneca bid was a virtual bid; they didn’t actually bid at all. Whilst that objective of the panel was probably not achieved, in the case of Pfizer / AstraZeneca it’s not such a big issue because they are such large organisations that they clearly have to be mobilised anyway. For smaller business I’m not sure that particular objective was actually successful. The second thing I would say about the rule changes which really came to the fore on the Pfizer / AstraZeneca bid is that they introduced an obligation on bidders to say what their intentions are and to be bound by those intentions and obviously Pfizer made a lot of promises as to what they would do with the Astra Zeneca bid going forward. I think there is still a degree of mistrust as to the effectiveness of those promises and the ability of the takeover panel to actually enforce them so there was a lot of debate around if these guys say they’re going to do x or y are they really going to do that and will life change? How can you make that enforceable? If the regulators look at that and decide that they are not comfortable with the way in which they could enforce it they would have to adopt different models so one of the things they could do would be to adopt the sort of approach the competition authorities adopt where you have contractual undertakings that are enforced by the regulator. There is still some question mark over the appetite and the ability of the panel to actually enforce some of these provisions

Part Two in this series will feature the comments made by Paul Cuddon of Peel Hunt. If you can’t wait for the next blog and would like to see the entire transcript of the panel click here to access it.

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