IPO Readiness: What Biotech Startups And Others Need To Know

By John Wai

To say that the biotechnology sector is booming would be a significant understatement. The industry has grown to $1.38 trillion as of 2023 and is projected to balloon to $4.25 trillion by 2033. Given this success, many biotech companies are looking to move on to the next phase of their organizational growth — which may mean an initial public offering.

Despite the slow IPO market thaw in recent years as the financial world has been forced to cope with market disruptions ranging from geopolitical upheaval to battling against inflation, 18 biotech companies have priced out IPOs through September 2024. As optimism grows, market conditions may stabilize in 2025 — particularly in the wake of the recent interest rate cuts — and more biotech companies may consider offerings.

However, going public is of course easier said than done. With that in mind, here are some key ins-and-outs that biotech companies should keep in mind as they consider an IPO.

What exactly is an IPO, and what types exist?

An IPO is a pivotal step for any company, offering greater access to capital and market visibility.

There are three main forms of IPOs: conventional IPOs, which involve established companies; emerging growth company IPOs, offering reduced regulations; and SPAC IPOs, where a blank-check company facilitates the listing.

Deciding on the appropriate IPO demands careful consideration, planning and execution across multiple areas.

Financial reporting and transparency

One of the most notable “shocks” that businesses face when going public is the amount of financial scrutiny from regulators.

Most biotech companies are vaguely prepared to face stricter compliance guidelines set by Securities and Exchange Commission regulations. But compliance expectations don’t just end there — public companies must also adhere to numerous other demands including generally accepted accounting principles and the need to timely file financial statements such as quarterly (10-Q) and annual (10-K) filings, and other disclosures (8-K).

Alongside these expectations, biotech companies must also establish strong internal controls to instill confidence among investors that their company is operating in a transparent and accountable way.

Given the lengthy road to an IPO, it is crucial for management to engage early in the process. Companies also need robust financial forecasting capabilities to provide timely and accurate revenue growth and profitability guidance, which are key factors for potential investors.

Corporate governance and leadership

Going public requires enhanced corporate governance structures, including a board of directors with independent members. Building a successful board of directors is not a one-size-fits-all proposition as each industry and company will require a unique mix of expertise among its board members.

For biotech companies, this process is particularly challenging as finding the right mix of scientific expertise, public company experience and successful track records can be difficult. Nonetheless, building a board with the correct balance of competencies and experience is vital for credibility and success.

Legal and regulatory compliance

Addressing legal and regulatory issues early is essential. Companies must ensure their intellectual property is protected and that they are prepared for ongoing litigation risks. For IP-heavy industries like biotech, effective patent strategies are critical to preserving competitive advantages and long-term value.

Compliance with the Sarbanes-Oxley Act, which mandates stringent internal controls over financial reporting, is another crucial aspect as is establishing a compliance function capable of meeting these regulatory demands.

Business model and growth strategy

Investors evaluate not only a company’s past performance but also its future potential. A clear and compelling business model that demonstrates scalability and profitability is a must. Companies need to communicate their strategy for market share growth, risk management and maintaining competitive advantages.

Providing insight into growth drivers such as new product launches, market expansion or strategic partnerships helps investors understand how IPO proceeds will be deployed and how shareholder value will be created. This in turn will allow biotech companies to inspire confidence among investors and build a reputation that will help them stand out from their competitors.

Biotech-specific considerations

Biotech companies face additional complexities due to the industry’s reliance on innovation and lengthy regulatory approvals. With long research and development milestone cycles that require significant capital investments that may not generate revenue for years, companies must clearly communicate the progress of their drug pipelines, clinical trials and regulatory timelines.

In addition, it is important to note that investors in biotech IPOs often focus on future potential rather than immediate profitability. Thus, the more transparency regarding product progress, their addressable market, and the competitive landscape that biotech companies can provide, the better.

Investor relations and telling their ‘why’

A frequently overlooked aspect of IPO readiness is effective communication of the company’s value proposition to potential investors. This begins early in the process, with companies needing to communicate a compelling narrative that highlights their strengths, market opportunities, growth potential, unique value proposition and telling their “why.”

Investor relations teams play a critical role in ensuring that the company’s message is clear, consistent and backed by data. Whether it’s showcasing technological innovation, operational efficiency or revenue growth, the aim is to attract long-term investors with a strong, data-driven story.

Post-IPO planning

After going public, companies face new pressures, including quarterly earnings expectations and go-to-market targets. For companies accustomed to operating with more flexibility as private entities, managing market expectations can be difficult.

Maintaining regular communication with shareholders and meeting post-IPO targets are crucial to long-term success. Companies that fail to deliver on promises risk seeing a drop in stock price and market valuation, which can be difficult to recover from.

John Wai is a principal at UHY. He has more than 20 years of experience as a value-driven financial and accounting leader with diverse experience in public accounting. He has taken on multiple financial and accounting roles to address initial public offerings, PCAOB SOX requirements, revenue recognition, equity transactions, acquisitions, integrations, multicompany and multicurrency consolidations, financial software implementation, technical accounting, operational process transformations and financial analysis with a focus on value-driven business decisions.

Illustration: Dom Guzman