Goodwin Insights July 07, 2020

Capital Markets in the Time of Pandemic – Second Quarter Biotech Update

As we reach the mid-point of 2020, the second quarter was the busiest quarter for biotech equity to date and we continue to see an active IPO market with issuers pushing to expeditiously get on file and take advantage of the continued investor receptiveness to biotech equity offerings. The activity and interest in the biotech equity market has also attracted a high number of foreign issuers, including two from Canada, and we believe there is a significant pipeline of other foreign companies from the UK, other European countries and Australia eyeing to tap the U.S. market in 2020.  

The continued effect of COVID-19 has brought about some interesting trends during the 2020 IPO frenzy. Although many were at first hesitant to launch an offering in light of the pandemic, Zentalis Pharmaceuticals and Keros Therapeutics were early canaries in the coal mine and successfully launched and priced their upsized offerings at the top of the range. The inability to have the traditional 10-day in-person road show meetings as a result of the pandemic has resulted in companies participating in truncated four-day virtual road meetings, which was the strategy utilized by both Zentalis and Keros and the biotech IPOs that followed. This shortened book-building process has shifted priority and significance to testing-the-water meetings, resulting in more robust and fulsome meetings to allow issuers and underwriters to assess market interest. Additionally, with the XBI outperforming the S&P, we have seen more generalist investors shifting their investments to biotech. This increase in demand has, in turn. resulted in larger-than-usual IPO pricings, with several early-stage issuers raising in excess of $200 million after upsizing their offering and pricing at the top of – or above – their initial offering range. Importantly, the completed IPOs have generally traded well, opening sharply up on the first day of trading, which in turn continues to fuel the pipeline of issuers and demand.

Another differentiating characteristic of the Class of 2020 IPOs has been a return to earlier-stage issuers. In 2019, we saw a trend of banks shifting their focus to companies that had demonstrated proof-of-concept and earlier-stage companies were often advised to wait for data before commencing their IPO. Instead, 2020 is shaping up to be more akin to 2018 and 2019 with earlier-stage companies completing successful offerings without Phase 1 data. In particular, we have already seen several pre-clinical companies complete IPOs for proceeds in excess of $200 million.

2020 is also the year where the ever-present insider participation language has been largely absent. In 2019 and previous years, issuers typically signaled the support of their pre-existing investors by placing prominent legends on the cover of their S-1s stating that these insiders had expressed interest in a large portion of the IPO. Similarly, in 2019, banks typically looked to have insiders commit to the  entire offering amount before launching the deal. In 2020, we have seen banks move away from this express disclosure and marketing angle. We believe the banks are still signaling strong to full insider coverage to investors during discussions, but have moved away from the express S-1 disclosure in order to signal to new investors that meaningful allocations will be made available as the company looks to diversify its inventor base.

As we look forward to the back half of the year, July is shaping up to be another busy month with several companies having publicly filed their S-1s to commence the 15-day waiting period before commencing their road shows. The desire for companies to commence their IPO process with organizational meetings and bake-offs continues, and if the market holds, the third quarter (and even the fourth) could continue on the trends we have seen to date.

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