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Direct Listings Overtake SPACs – U.S. Biotech’s Preferred Route to Public

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PitchBook predicts that many more companies will go public via direct listing, rather than launch an initial public offering (IPO) in 2021, especially large-sized technology startups. Simultaneously, the global biotechnology market is expected to increase from its US$142.92 billion valuation in 2019, to be worth US$210.96 billion in 2023. As this industry expands, public listings will too, but probably not via IPOs or the trending special purpose acquisition companies (SPACs) option.

But where is this biotech prediction coming from? Why aren’t SPAC the obvious choice? Before I go further into why SPACs are not likely to be the preferred route to public for biotech, let’s take a step back and consider why biotech companies are expected to grow.

Demand for technology and healthcare is experiencing a growth spurt.

There is undeniable demand for biotech in 2021. European biotech involved in drug discovery raised a record US$5.9 billion in equity investment during the first quarter of 2021. Some global biotech companies, that were originally founded for other means, pivoted in the face of the Covid-19 pandemic to support vaccination, treatment, and prevention efforts. One such company began to develop tests for Covid-19: the U.S. startup, Curative.

The spread of Covid-19 also brought an overdue global economic downturn. Biotech companies were not alone in wanting or needing interest-free capital to stay afloat, but companies related to health innovations specifically needed capital fast to take advantage of the pandemic.

Investment in biotech already grew in 2020.

The two main areas for venture capitalist investment — technology and healthcare — grew during the Covid-19 pandemic. Investment in the adjacent space of biopharma increased in 2020, such that Pitchbook analysts expected injections to surpass US$20 billion in 2021. These investments are needed to fund the restart of clinical trials and elective procedures.

[bctt tweet=”The two main areas for venture capitalist investment — technology and healthcare — grew during the Covid-19 pandemic.” username=”globalpeo”]

Moreover, investors have ample dry powder to deploy for biotech and pharma firms. Recent history indicates a probable growth opportunity in the biotech sphere.

“Look at the speed at which companies developed vaccines around the world [in 2020]. MedTech companies that were crunching numbers to stay ahead and make sure innovations worked will continue to get investment,” Russ Shaw, Founder of Tech London Advocates recently told Globalization Partners. “Interesting companies in the UK include Benevolent AI and Babylon Health — just two examples of companies that are doing this.” 

What is driving biotech companies to go public?

To take advantage of the recent growth in demand for medical tech, pharma, and biosciences around the world, biotech brands need to grow now. Therefore, biotech companies may be going public in order to raise funds, for the purpose of research and development or for new market expansion. Both objectives require hiring the best talent, and if companies can be location-agnostic in this venture, biotech brands could find excellent candidates in lower-cost jurisdictions.

Biotech hubs around the world include China, India, Belgium, and South Korea, so while the U.S. has the largest number of biotech companies, it needn’t be the only source for top candidates. If market expansion is the objective of biotech companies’ decision to go public, a global Employer of Record can ease this process for companies looking to hire one person, a handful of employees, or a full team in another country.

Why aren’t SPACs the right route for biotech to go public?

These “listed shell companies” buy private companies for the sole purpose of taking them public. The New York Times cited 300 SPAC funds looking to place US$100 billion in cash in early 2021. SPACs have rapidly grown in number, but analysts say the market is now overcrowded.

SPACs’ attractiveness also dwindles when they prevent companies from holding out for a good deal: These entities generally have to use the money raised for a takeover within two years or return it.

Rushed recovery of cash encourages decision-makers to accept less-than-favorable deals, making SPACs less attractive for any type of company, not only biotech companies. Nonetheless, the major demand for pharma, medical innovations, and tech throughout the 2020 pandemic means biotech leaders can afford to be picky.

Adding to these downsides for SPACs, new regulations have Crunchbase analysts thinking that direct listings will look more attractive to U.S. biotech: Firstly, the New York Stock Exchange has been approved to allow direct listings. This permission “democratizes investor access and provides companies with another path to go public,” according to NYSE President Stacey Cunningham.

The new U.S. administration’s policy also contributes to expectations that more companies will go public: Foreseen proposals on taxes, immigration, and trade policy are encouraging investors, persuading them that regulators are committed to increasing access to capital.

how stable is your employer of record - man leading meeting on flat screen tv

What makes direct listings more attractive for biotech, as economies regain speed of growth?

Biotech bets its bottom dollar

Direct listings are a cheaper way to go public than IPOs, because companies save on commissions they would have paid to underwriters. Selling shares directly to the public without getting help from intermediaries, with no lock-up period, is less expensive than going the IPO route.

Although direct listings do not ensure the shares sell, they are a fast way to generate capital, so historically, smaller companies in biotech have gone public via a direct listing.

Over the years: Examples of direct listings in tech

  • 2017 – Clariant and Huntsman
    The specialty chemical company entered a dual stock exchange direct listing on the Swiss Exchange and the NYSE.
  • 2018 – Spotify
    This historic tech direct listing was preferable for the music streaming technology over an IPO, because it offered greater liquidity.
  • 2019 – Appili Therapeutics
    The biopharmaceutical focused on anti-infective drugs hosted a direct listing on the TSX Venture Exchange.
  • 2020 – Palantir Technologies
    A Big Data software company began trading on the NYSE after a direct listing.

[bctt tweet=”Direct listings are a cheaper way to go public than IPOs, because companies save on commissions they would have paid to underwriters.” username=”globalpeo”]

Can we expect the U.S. to lead biotech direct listings in number through 2021?

“Countless forefront biotech companies [in the U.S.] are emerging with pioneering discoveries in therapeutics like oncology and immunology,” says scientific writer Geema George. So logically, the U.S. market is likely to see more biotech companies going public via a direct listing simply due to industry penetration.

Of 3,060 biotech startups that StartUs Insights analyzed this year, the top 5 to watch in 2021 were U.S. based companies. The inherent benefits of avoiding underwriters, lock-up periods and, potentially unfavorable deals suggests that many more will be choosing the most beneficial setup for their journey to public.

2021 will be the year of direct listings, not SPACs or IPOs, for biotech in the U.S.

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