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JOBS Act Succeeds in Jumpstarting Bio IPOs

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By Mari Serebrov
Washington Editor

In the wake of the Jumpstart Our Business Startups (JOBS) Act, more than 230 initial public offerings (IPO) are expected this year, with small biotechs and other emerging growth companies (EGCs) accounting for much of the resurgence in IPO interest.

“We’ve got the most robust IPO market” since 2007, Joel Trotter, a partner at Latham & Watkins LLP, told BioWorld Today. He credits most of the activity to the Title I provisions of the Jobs Act, which was signed into law in April 2012. (See BioWorld Today, April 16, 2012.)

For the most part, these are not bargain-basement deals. Most IPOs for EGCs over the past 17 months priced within or above the expected range. While 25 percent came in below the range, 55 percent were within the range and 19 percent were above it, according to a Latham & Watkins report, which was presented Tuesday to the SEC Advisory Committee on Small and Emerging Companies.

Eighty-five percent of all IPOs undertaken since the JOBS Act became law have been by EGCs, and more than 90 percent of the EGCs going public have used at least one provision of the act to ease their way, the report indicated.

While the EGCs using the JOBS Act represent a variety of sectors, a healthy number have been biotechs. Jeffrey Solomon, CEO of Cowen and Co., told the advisory committee that 31 biotechs have used some of the JOBS provisions to raise a total of $2.5 billion. That’s about 15.5 percent of the $16. 1 billion raised by EGCs in IPOs across all sectors since the JOBS Act was passed.

The most popular provisions of the legislation to date for biotechs include the confidential review, the ability to test the waters through active discussions with institutional investors and the five-year IPO “on-ramp” that reduces the regulatory burden, and cost, of going public, Trotter said.

In years past, small start-ups were held to the same regulations as large successful companies that had been public for years, he explained, but the JOBS Act offers a regulatory scheme scaled to the size of the company.

As a result, EGCs are taking advantage of such Title I provisions as the extended phase-in of the internal controls audit and the streamlined executive compensation disclosure. For instance, Latham & Watkins found that:

About 40 percent of the EGCs with a recent IPO provided two years of audited financial statements;

About half of the EGCs with annual revenue of less than $100 million provided two years of audited financial statements;

About a third of the EGCs with three years of audited financial statements had fewer than five years of selected financial data;

At the time of their IPO pricing, about 15 percent of the EGCs had an operating history of less than five years.

Two decades ago, exit strategies for investors in small companies were evenly split between IPOs and mergers and acquisitions (M&As), Trotter said. But in the past decade, 90 percent of exit strategies were M&As, which was bad news for the economy since an M&A doesn’t produce the jobs that an IPO can. The aim of the JOBS Act was to re-create a robust IPO market that would once again make IPOs an attractive option for small companies – before they become household names.

It appears to be working. More than 80 percent of the EGCs going public since April 2012 had annual revenue of less than $250 million, with nearly 66 percent having annual revenue of less than $100 million, according to the Latham & Watkins report.

In the biotech sector, Solomon said, that trend could lead to exponential growth for companies developing cancer therapies and orphan drugs and provide a complementary source of financing to National Institutes of Health grants.

Since the SEC hasn’t fully implemented the JOBS Act – it has yet to raise the Regulation A cap or draft rules for crowd-funding – it could take years before the full impact of the act is realized, Trotter said. (See BioWorld Today, May 2, 2013.)

Meanwhile, experts are already considering next steps. At Tuesday’s meeting, Solomon pointed out the need to help small companies that went public before the JOBS Act was passed. He also called for fostering more liquidity and analyst research for small-cap stocks.

The lack of research sponsorship and the difficult market structure remain the “biggest impediments to fundamental trading liquidity,” he said.