Drug development is a notoriously expensive business. Discovering, testing and advancing a medicine can cost hundreds of millions of dollars, putting immense pressure on young biotechnology companies to be on constant lookout for new sources of funding.
For such a cash-hungry industry, initial public offerings act as lifelines. Shares bought by big banks and institutional investors like mutual funds provide the money needed to keep research afloat and get new therapies to patients.
Over the last several years, though, a major downturn in the biotech stock market has made going public much harder for drug startups.
The worst of this storm may be over, as the 24 biotech IPOs conducted last year are a tick up from 2022 and 2023. Even so, the road to the public markets remains exceptionally fraught and energy-consuming. “It’s not for the faint of heart,” said Jeffrey Finer, CEO of Septerna, a San Francisco area drugmaker that in October raised $288 million from an IPO.
Finer, along with the CEOs of two other drugmakers that went public last year, shared their experiences and offered advice earlier this week, during a panel hosted by the Biotechnology Innovation Organization, an industry trade group. They cautioned how the transition from private to public can be rocky, especially if a company didn’t lay the groundwork for its IPO many months — if not years — ahead of time.
There’s also no guarantee the markets will continue to reward a company after its debut. Of the biotechs that went public last year, all but two currently trade below their offering share price.
“It is stepping into a different world once you get there, and you just have to be prepared,” said Daniel Schmitt, CEO of Actuate Therapeutics, shares of which are down slightly since the company’s $22 million IPO in August.
Forming the plan
Septerna launched in early 2022, backed by $100 million to support research on an expansive and diverse group of proteins known as “GPCRs.” The biotech then raised another $150 million from a Series B round that closed in July 2023.
Finer recalls the cash position was still strong by mid-2024. But costs were poised to “skyrocket” over the next few years as Septerna’s programs moved into more intricate studies. Fortunately, an IPO plan was already in the works.
In late 2023, Septerna did a full audit to “get our financial house in order,” Finer said. The company began talking to financial advisers around the same period, ultimately forming its banking syndicate about four and a half months before its October IPO.
Timing, according to those who’ve gone through or helped put together IPOs, is paramount. At Septerna, advisers felt the “sweet spot” for going public was the window between when the company’s lead program entered human testing, and when that program was six to 12 months out from producing results.
Rand Sutherland, CEO of Upstream Bio, a company with an immune system-regulating drug in mid-stage studies, found his potential investors also wanted to see a data release in a similar time range after the IPO.
Gabriela Morales-Rivera, partner at the law firm Goodwin, says biotechs should get their ducks in a row around one year ahead of a planned IPO. She recommends, for example, that they review any existing partnership and license agreements, as they might have provisions that require disclosures in the IPO process.
Other potential obstacles are “gun-jumping” rules established by the Securities and Exchange Commission. These can prevent a company looking to IPO from issuing certain press releases or attending certain conferences unless that’s been a normal part of the business already.
To stay compliant, the biotech can set a precedent by taking these actions regularly before going public. It can also hedge some investor questions by posting scientific journal publications to its website.
Morales-Rivera noted how SEC rules are inflexible. If proper diligence isn’t done ahead of time, the IPO process might be extended six months or longer.
Finer warns, too, that the process requires a daunting amount of materials to support the underlying investment thesis.
“We needed to back every single thing, every piece of data, every claim we had,” he said. “The backup materials were almost as much of a lift as the actual preparation of the S-1.”
Assembling the team
This mountainous workload is easier to scale with the right team, according to the CEOs. “You’re with this team a lot,” Sutherland said. “So you need to be very thoughtful about putting the team together and who’s on it.”
Companies frequently turn to law firms and banks with which they have existing relationships, as there’s already a level of trust. Septerna did that with Goodwin. Actuate did too, tapping its longtime corporate counsel as a legal adviser. “They knew where all the documents were,” Schmitt said.
The roster of investment banks is particularly important, since they’re the ones cultivating investors. It’s common to employ four or five banks over the course of an IPO. Finer said Septerna not only sought banks with strong analysts, bankers and equity capital markets desks, but also ones that could complement each other.
“Find people you know you will be able to work with and will stick with you through the process,” Schmitt. “To say that it’s a heavy lift is underestimating it.”
Biotechs gets introduced to “different phenotypes” during the process, but “it’s worth taking the time to really meet a lot of people,” Sutherland said.
That can extend to the investor base as well. By Sutherland’s estimates, Upstream’s bankers put the company in front of 120 or so potential backers.
Telling the story
Going into those investor meetings, companies are strongly encouraged to have a well-structured story showcasing why they’re unique and a worthwhile bet.
“If there’s a lot of push and pull on what the narrative should be, what should be the focus, that can derail the process,” Morales-Rivera said.
One way to hedge this problem, she said, is to ask the banks in the running for financial adviser spots to explain what they think of the company. If their view aligns with the company’s position, that’s a good sign.
At Upstream, the team felt it had crafted a compelling narrative. Their asset verekitug targets the same “TSLP” as Amgen and AstraZeneca’s approved drug Tezspire, meaning there was a clinical success story to point to. And the way verekitug works could make it useful for a variety of diseases with big commercial opportunities, like asthma and COPD.
“What we had to do was try to frame all of this up from a pretty complicated landscape into not only what are we going to do with the capital, but where is it going to take us?” Sutherland said.
“For a single-asset company with a lot of potential ways to go in the clinic, investors really resonated around focus,” he added. “Not so much against where all could you go and when? But really, what can you do now? What can I expect?”
Upstream secured $400 million from Series A and B rounds, then hauled in another $255 million from its IPO in October. The upsized offering sold 15 million shares for $17 a pop. Yaron Werber, a TD Cowen analyst, wrote in a note to clients shortly after the IPO that he expects verekitug to be a “strong competitor” to Tezspire. The less frequent dosing of Upstream’s drug “would be highly attractive to physicians and patients and should drive rapid uptake despite a later start to market.”
Setting the price
As Upstream demonstrates, the right offering price can entice investors, resulting in a more lucrative IPO.
“Testing the water” meetings, wherein prospective investors signal the price range at which they’d be interested in buying shares, typically start about a month into the formal IPO process, said Morales-Rivera. During these often confidential forums, biotech executives present their company to investors and then use their banking advisers to solicit feedback.
The presentation circuit is grueling. “It’s 15 meetings a day until you get the [investor] book built,” Schmitt said. But it’s also essential, and provides a window into who’s interested, why they’re interested, and are they the type of investor who’s going to stick around. “For us, it was a very, very helpful process,” Sutherland said.
Both Sutherland and Finer noted how they wished they had gotten more concrete guidance on the potential price range for their IPOs. Finer was reassured, though, by a few “really critical, potential anchor” investors that had flexibility in a price range the Septerna team thought was fair. The biotech ultimately priced shares at $18 apiece, above the $15 to $17 range it had previously set.
The CEOs emphasized the importance of planning ahead in terms of valuation. Before their Series B round closed, Finer and his team were thinking “very carefully about not getting ahead of ourselves in terms of valuation” and to save headroom for later.
“We had seen a number of companies that did private financing and valuations that were too high, and that just ended up causing all kinds of headaches for them down the road,” he said. “We probably left a little money on the table in that regard in our Series B, but it certainly helped us when it came time to do the IPO.”
As the IPO journey progresses, investor composition begins to matter more. At Septerna, many of the 16 investors from the company’s Series A and B rounds had “very significant interest” in taking on larger positions, according to Finer. So as the IPO neared, Septerna needed to decide how it would balance insider demand with diversifying its investor base.
“We wanted to add a number of new investors that were long-focused mutual funds,” Finer said. “If we wanted to have a handful of those with reasonable allocations, we had to potentially make the IPO a little bit bigger than we had originally planned.”
Bracing for change
The price point is further consequential, according to Morales-Rivera, because in some cases, if it’s high enough, it will trigger clauses in crossover organizational documents. As a result, the biotech must reach out to investors named in its charter, essentially asking their permission to close the IPO.
While these investors usually allow the offering to proceed, “there have been moments where there are conversations because they know they hold the cards,” Morales-Rivera said.
That’s just one of the many intricacies biotechs face as they wrap up their offerings and change over to the public markets. CEOs who’ve gone through the journey acknowledge that, even at its closure, there remains a learning curve.
Septerna was caught off guard at the last second, according to Finer, by a Nasdaq requirement that said the company needed to have a chief financial officer in place. Finer said his legal and banking teams had thought that could be done once the IPO was finished.
The Nasdaq and New York Stock Exchange have other rules that can trip up companies. Some are around board independence and composition, and if they aren’t met, a company can’t go public on those exchanges. This has become an important consideration, Morales-Rivera said, since market volatility in the last couple of years increased the number of private fundraising rounds, in turn making the boards of biotechs “fairly large.”
Those members “probably don’t want to come off the board,” so she advises having conversations with the board early on “to make sure that you can actually even list on the exchanges.”
Public company executives are also required to be much stricter about what they say.
That’s a significant change for many. Finer used to have regular conversations with those 16 early Septerna investors. On the other side of the IPO, “I had to basically tell everybody, ‘I can’t tell you any more than I tell anybody else.’”
In that way, public companies now have many more investors to answer to. Morales-Rivera suggests one of the best practices is to have very well built investor relations and human resources departments that will effectively manage the new pressures.
“I’m not a CEO, but I’ve taken a number of companies public. I know what gives the most anxiety, and it’s always the market volatility,” she said. “Having to deal with that, with the investors, with the board, with the employees, there’s a lot of incoming questions around: we priced at this number, but now our stock is at this number. Especially nowadays in biotech.”
