Advice of Counsel March 2000 - Is there anything different about current public offerings when contrasted with prior boom periods in the industry?

Advice of Counsel Q&A On Tech Transfer

Question: Given the seemingly unlimited ability of biotechnology companies recently to raise funds in the public markets, is there anything different about current public offerings when contrasted with prior boom periods in the industry?

Answer: The biggest difference is, of course, in the pre- money valuations and the amounts of funds raised. Pre-money valuations for IPOs are typically in excess of $300 million, and the typical offering raises $70 million or more. Both of these figures represent approximately three-fold increases over historic levels. But there are a number of other differences worth noting.

SEC Review of Follow-On Public Offerings. It used to be the case that if a company had not been reviewed by the SEC for three years, it could expect a review of a follow-on public offering (i.e., offerings undertaken by already public companies). No more. Because it's flooded by new deals, the SEC has largely given up reviewing follow-ons. Typically, the SEC will notify the company one week after it has filed that it will not review the prospectus, allowing the company to immediately begin its road show.

Initial Public Offerings. IPOs are still reviewed by the SEC. The prospectus must comply with the SEC's "plain English" guidelines, which require the company to avoid technical jargon and legal boilerplate in the prospectus. For example, the Risk Factors section of the prospectus, formerly filled with a litany of routine hazards that read like an insurance policy, must now be specific to the company. The Competition section must list actual competitors, instead of relying upon the former approach of saying, in general terms, that it is a competitive world. Corporate alliances must now be spelled out in detail, not using the press-release Bioworld dollars, and specifying whether there is an option on the part of the pharmaceutical company to terminate the arrangement prior to completion of the collaboration. Aside from the prospectus, the SEC is very sensitive in this over-heated market to public statements by company representatives during the "quiet period." Webvan, a highly touted Internet company, was forced to put its offering on the sidelines due to excessive PR during the offering. Such a delay could be disastrous in a market where time is of the essence.

Accounting Issues. The big issue is revenue recognition of the proceeds received from corporate collaborations. The new policies basically work to force the company to spread out payments over the term of the collaboration (at a minimum) or, in certain cases, over the lifetime of the patents being licensed to the pharmaceutical company partner. Previously, up-front payments, for example, could be recognized as immediate revenue, boosting sales and making a P&L look rosier than the SEC seems to believe it should look.

Underwriting Arrangements. Offerings are now handled by a minimum of three and often up to five underwriters. The identity of the "lead" underwriter has become unclear. So has the former fee-splitting structure which entitled the lead firm to a 50-55% share of the underwriting commissions. It is now more common to see "co-leads," or for the lead underwriter to receive less than 50% of the commissions. Aside from fees, underwriters have become more aggressive in asking for lock-ups from management and significant stockholders, due to concerns that the market bubble may burst at any time. Lock-ups now begin, for secondary offerings, upon the filing of the prospectus with the SEC, not on the closing of the offering and can extend for 180 days rather than just 90 days.

International Offerings. Increasing numbers of offerings are being made on European exchanges in addition to NASDAQ, such as the Neur Markt and the Nouveau Marché, where there is a shortage of high-quality European biotechnology companies. As a result, US companies are taking advantage of the opportunity to offer on these exchanges.

The Internet. Few companies are availing themselves of online underwriting firms, such as Wit Capital or Hambrecht & Co. However, NetRoad-show is being used as a key marketing element in most offerings (i.e., the opportunity to view a roadshow presentation over the Internet). Increasingly, companies are using their websites to assist in the promotion of the offering, subject to the legal requirement that the website cannot include information that is not contained in the company's prospectus.

Generally, the process of public financings has been significantly accelerated. Follow-on offerings now take about a month; IPOs about three-that's about a month less than usual for each. Speeding up the process are investor demand, the SEC's decision not to review follow-ons, and the widespread fear that this biotech bull market won't last. Indeed, since the mid-March market swoon that followed the misreporting of the meaning of the Clinton-Blair statement on gene patents, platform technology companies are being much more careful in their use of the word "genomics" (i.e., the Human Genome Project and other public initiatives must be portrayed as a strategic benefit, not a threat to intellectual property protection).

All in all, the current environment is rich with promise and perceived opportunity. If it would only last until... after the offering on which I am currently working.