Global Capital Markets Outlook
What are the important developments shaping investment trends in today’s markets? Where can clients find the most promising opportunities to unlock value—and what challenges may block the way? Our partners share their insights on what to watch for in the second half of 2018.
Europe: Continued Growth in Biotech IPOs: Q&A with David Revcolevschi
Q: What is the current outlook for biotech IPOs in Europe?
A: Looking forward, the potential upward trajectory of deal-making is very promising. There are an increasing number of European-based biotech companies that are maturing in terms of their readiness to launch short or mid-term marketable products; these are firms that have not already sold or licensed their future products and existing IP to major pharma companies. Also, there is improving availability of risk capital from European investment managers who are now more willing to consider higher risk investments that can generate longer term gains. This is part of a broader search for high caliber investments we are seeing internationally, and I think that European biotechs are well positioned to profit from this.
After the IPO market restarted in 2012 and particularly since 2014, we have seen a surge in biotech IPOs and capital raisings of European issuers on European stock exchanges, particularly on the Euronext stock markets which today are seen as the most attractive. Many of the companies which listed then are just starting to publish the results of their late or final stage clinical trials. Successes in these clinical trials will undoubtedly influence the dynamics of the European biotech IPO market.
Q: What are the most important developments to watch in the next 12-24 months?
A: European and non-U.S. investors are carefully watching how the U.S. administration evolves its attitude to global trading environments. I think this will have significant influence on whether European biotechs elect to seek IPOs in the European market, or go for a U.S. listing to make it easier to access the U.S. healthcare market.
The two are not mutually exclusive though—a first European listing may also be followed by a U.S. IPO—and the ultimate decision will be affected by the nature of the product and pipeline, the amount of clinical trial financing needed, as well as broader global markets, which offer equally tempting expansion opportunities for innovative product lines. Also, for earlier stage companies (which have not yet reached Phase IIb clinical stages, for example, for their main candidate product), European markets provide an easier access point than their U.S. counterparts for biotech companies that intend to raise between €25-50 million.
Secondly, we are tracking the outcomes of the announced intentions of several European governments, particularly France, to step up their support for the biotech industry. In particular, we are interested to see if this actually encourages companies to access more government support to accelerate their rate of progress to the point where an IPO is possible.
Finally, we have some regional issues which remain unresolved. The UK biotech sector is significant (the main followers are Germany, France, Switzerland, the Netherlands and Scandinavia), but so much of the post-Brexit position of UK-based companies remains uncertain. Because a great deal of research in this area is driven by university-based groups, this becomes more critical as companies move from development to market, or if there is a sharp clampdown on research visas.
Q: You have advised on a significant number of IPOs in the biotech and medtech space over the years. What are the major factors or trends you have seen that spur growth in IPO activity in this sector?
A: The major increases in scientific understanding of human biology made in the early part of the 21st century are now coming through into products that are nearly ready for the market. There are also increasing opportunities for translating more recent research into product concepts under development. I anticipate that, as the science advances, we will also see growing convergence between biotech and medtech to each sector’s advantage. That being said, most companies still have years to go to develop their first candidate product when they do an IPO.
Regarding European biotech IPOs, I believe that the next several years will also be very interesting as we are starting to see the success and failures of the several European companies that were listed after 2012.
The appeal of the U.S. as a source of IPO funding is not going away, but I believe we will see steady improvement in the listing process and availability of funds in France, the UK, Switzerland and Scandinavia.
Q: Which European countries are leading the charge? Why?
A: The traditional leaders in this area continue to be the UK, France, Switzerland, and the Scandinavian countries. However there are interesting research hubs developing in countries which offer strong support for biomedical research in universities to generate new ideas. Having a pool of the right talent, available funding, and good academic research to build on are essential.
Looking at how the European biotech sector has evolved, there is a base of established life science companies (GSK, Astra in UK, Sanofi in France, Novartis and Roche in Switzerland, and the manufacturing and research operations of many life science companies in Ireland) that provide a pool of talent—both research and managerial—to develop the companies, and financial advisers and lawyers who have experience in the sector to take them to market.
Regarding the IPO market, Euronext, the European cross-border stock market, now has a sizeable life sciences segment and it has succeeded to attract issuers from other European countries, something it had failed to do before. For example, I advised three Swiss life science companies on their listing projects on Euronext Paris over the last two years.
Q: When it comes to emerging companies in the biotech industry, are there certain key ingredients for a successful IPO?
A: Successful companies need to have a clear path to profitable product sales, with major risks having been identified, addressed and controlled. This means, as well, fully understanding the pricing models and treatment protocols in target markets.
Too little attention is given to the important role played by an experienced and balanced management team with good and broad market knowledge. Scientists who lead the discovery and development process do not often translate into natural CEOs, and the importance of having a truly professional management tier should form part of IPO planning if a company is to realize its potential.
It goes without saying—even if you would expect a lawyer to say so—that no IPO can be a full success over the longer term without top quality legal advisers to manage the IPO process in tandem with informed, supportive bankers. This is especially so given the value embedded in the firm’s IP, and the need for expert legal guidance to ensure it enjoys maximum protection.
Lawyers are also key players in the six- to 12-month transformative experience of the top management of a company, which often needs to shift from a mix of a commercial secrecy and somehow aggressive marketing culture to a more prudent and balanced disclosure-oriented one.
Q: What innovative approaches have you taken to help biotech clients achieve successful IPOs?
A: I believe it is crucial, when starting an IPO project, to spend significant time with key management members to explain the process in detail. Being as proactive and organized as possible is also important: CEOs and CFOs, and in biotech companies CMOs, often do not realize how time-consuming IPOs may be in companies that typically have limited human resources as they often outsource to third parties (CROs) the conduct of their product studies or trials.
Being close from the outset to key managers and helping them put together the information that will be used in the offering documentation is important. Working early on with lawyers responsible for the patents and other IP of the issuer is also helpful.
Likewise we do not hesitate, as soon as we start to get a good understanding of the company’s business, to jump in the discussions on the equity story, particularly when we feel that the company needs to refocus the story. From a technical standpoint, we were also happy to have recently overcome a series of legal issues in relation to the listing of Swiss life sciences companies on Euronext Paris and to have opened the way for others to follow.
Hong Kong: Reforms to Attract Innovators
In late April, the Hong Kong Stock Exchange adopted new rules to attract companies in emerging and innovative sectors. Among the first to take advantage of these reforms have been pre-revenue biotech companies, including companies based in the U.S., that have been unable to go public in their home countries.
Market veterans in Hong Kong, particularly at the stock exchange and the securities regulator, are bracing themselves for the potential consequences of introducing more high-risk companies into a market that is still heavily reliant on retail investors, but many believe that this is a tolerable risk if Hong Kong becomes a vibrant market for biotechnology and other technology companies from mainland China and other parts of the world.
United States: The Securities Act of 2020?
Has the time come for a new Securities Act to fuel innovation, increase access to capital, and re-energize the economy? Thomas Pollock makes the case for lawmakers to take action in an opinion column for The Hill.
Latin America: The Latest on Project Bonds
In our podcast, Cathleen McLaughlin and Alex Herman discuss trends in the project bond sector—from the types of projects best suited to bonds, to what sponsors need to know about them going forward.