Life Science Cos. Navigate Dicey Path To Public Markets

By Tom Zanki
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Law360 (April 10, 2020, 11:38 AM EDT) -- Public markets are showing signs of life for capital-hungry life science companies, which are completing offerings despite volatility caused by the coronavirus pandemic, creating challenges for lawyers charged with crafting up-to-date disclosures amid unprecedented uncertainty.

The initial public offerings market has been shut since early March for most industries, and follow-on offerings have also been reduced. But life sciences companies, particularly precommercial-stage startups developing new therapies, appear to be bucking the trend.

Zentalis Pharmaceuticals LLC and Keros Therapeutics Inc. went public this month, accounting for both of April's IPOs so far. Both companies priced their offerings at the top of their range and have seen shares rally in post-IPO trading, generating hope for more life sciences issuers. IPO research firm Renaissance Capital notes that at least four companies could follow suit.

"With successful public debuts from Keros Therapeutics and Zentalis Pharmaceuticals, the most likely IPO launches include several biotechs, such as oncology-focused Ayala Pharmaceuticals and ORIC Pharmaceuticals, [ear-nose-and-throat disease] biotech Lyra Therapeutics and [central nervous system] drug developer NLS [Pharmaceutics]," Renaissance Capital said in an online brief published Thursday.

All four IPO candidates publicly filed initial plans with regulators in late February or early March, making them eligible to begin marketing their offerings. Clinical-stage life science companies frequently tap public markets to satisfy urgent cash needs even during tough markets, given that they have yet to generate revenue from product sales.

What makes this market especially challenging for lawyers advising IPO prospects is that they oversee regulatory disclosures that must provide investors with an accurate snapshot of the company's business environment amid an unfolding pandemic that requires constant attention.

The U.S. Securities and Exchange Commission has repeatedly urged both prospective and existing public companies to disclose coronavirus-related risks in their filings, acknowledging that the pandemic is a dynamic situation with varying impacts on businesses and industries.

"Given the fluidity of the environment, those answers may change on a daily, if not sometimes hourly, basis," said Latham & Watkins LLP partner Brian Cuneo, who advises life sciences issuers.

Cooley LLP partner Charlie Kim said he and his colleagues are asking clients a series of COVID-19-related questions to ensure that disclosures are up to date. Topics include whether employees are working at home, whether offices are closed, and how research and development is affected, among other things.

If research and development slows, that can delay a company's timetable for submitting an Investigational New Drug application — or IND — which is the first step in the drug review process by the U.S. Food and Drug Administration.

"You need to give the investor the best sense of where you are now and if you have a sense of real potential risks or changes that are going to possibly take place," said Kim, who was part of a Cooley team that represented Zentalis' underwriters.

Zentalis' and Keros' amended registration statements each contain more than 40 references to COVID-19. The companies cited the pandemic's impact on clinical trials, among other things.

Lawyers note that companies must disclose whether clinical trials have shut down or are being hampered. Relevant factors can include where the trials are based, the impact on trials as hospitals divert resources to treat patients with the novel coronavirus, and reductions in patient enrollment.

New York-based Zentalis, which is developing small molecule therapies for various cancers, also said it was experiencing enrollment delays of patients for its clinical trials, which are mostly based in the U.S.

"We plan to implement strategies to potentially minimize the impact of the COVID-19 pandemic such as exploring the opening of clinical sites in regions that are currently not significantly impacted by the pandemic," the company said in a March 31 SEC filing.

Despite the risk warnings, investors have embraced both companies. Zentalis priced its April 2 IPO at $18 per share, and Keros, a maker of therapies for blood and musculoskeletal disorders, priced its April 7 IPO at $16 per share. Both offerings priced at the top of their ranges and shares for each company, and have since risen 35% apiece as of Thursday's market close. The gains come as the stock market in general has begun to recover since steep March selloffs.

"It is very encouraging for companies to know there are investors that are looking at deals and are willing to deploy capital in this environment without punishing the companies, if you will, from a valuation standpoint," Cuneo said.

While companies that are actively selling securities must keep their disclosures fresh, lawyers point out that existing public companies also must stay atop developments even if they are not actively raising capital. Goodwin Procter LLP partner Caroline Bullerjahn said many of her firm's clients have updated annual reports first filed in late February or early March given how much COVID-19 has led to stay-at-home policies and lockdowns.

"So much has changed since late February, which makes this such an extraordinary time period for disclosure," Bullerjahn said.

Public companies can raise fresh capital through follow-on offerings in which they issue additional shares at a set price. Kim notes that follow-on offerings can be executed more quickly than a full-blown IPO, given that companies pursuing follow-ons are already registered with the SEC.

Genetic testing company Invitae Corp. on April 1 raised $160 after selling 17.8 million shares at $9 each, marking one of few issuers to complete a follow-on offering in recent weeks. San Francisco-based Invitae completed the deal even as it warned investors that test volumes began to decrease in the second half of March given "limitations and priorities across the health care system." The company further disclosed that it expects COVID-19 to have "material impact" on its financial results in the next quarter and potentially the full year.

Lawyers point out that the market volatility caused by the coronavirus pandemic will prompt some companies to consider alternate ways to raise money apart from traditional public offerings.

These can include so-called at-the-market, or ATM, offerings, which are similar to follow-on offerings. But rather than selling a large number of shares all at once at a fixed price, ATMs sell smaller increments of shares gradually based on prevailing market prices. This gives companies flexibility to avoid selling shares on down days even though they raise less money overall.

Lawyers may also advise companies to consider PIPE — or private investment in public equity — offerings in which public companies sell shares to private investors. Such deals can be executed quickly in down markets, but they typically sell shares at discounts to investors.

"We are seeing an increase in demand of interest for alternative financing structures," Goodwin partner Seo Salimi said.

Kim also notes that public markets are not closed to life sciences companies, despite the heavy volatility over the past month. He says he has participated in about three organizational meetings in recent weeks, all of which are being handled virtually much like IPO marketing roadshows, with companies that expect to price IPOs in 2020.

While it is impossible to predict how the pandemic will play out, Kim said it has become easier to understand its impact with each passing day. He is hopeful that "doomsday" scenarios won't materialize and deals will resume in a stabler environment.

The IPO market "has not shut down in terms of companies who want to still go out this year and are preparing and moving forward," Kim said. "That's still happening."

--Editing by Kerry Benn and Adam LoBelia.

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