The journey to becoming a public company requires strategic planning and thoughtful coordination. While the IPO process typically spans six months or more, laying the groundwork should begin much earlier to ensure a smooth transition to life as a public company.
Fenwick’s Chelsea Anderson and Ryan Mitteness recently teamed up with Deloitte to explore key strategies for achieving this balance in the CLE session “Navigating the Life Sciences IPO Journey - Key Financial and Compliance Considerations.” Here are some important considerations.
One of the most critical and time-intensive aspects of IPO preparation is ensuring that required financial statements meet public company reporting standards. Companies must transition from private company accounting practices to comply with U.S. Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) requirements, which may include an “audit uplift” of prior private company financial statements. These heightened requirements go beyond simply updating financial statements—they require more detailed line items, enhanced disclosures with lower materiality thresholds, and rigorous documentation to support the audit of the financial statements.
A registration statement on Form S-1 includes audited financial statements for the registrant and any predecessor(s). Financial statements included in the registration statement must meet certain age requirements, and the number of periods to be included depends on the registrant’s status as an emerging growth company (EGC) or smaller reporting company (SRC), as well as the timing of the submission or filing. An EGC or SRC generally has the option of presenting two years rather than three. In addition, depending on the amount of time between the most recent fiscal year and the filing of the registration statement, the registrant may also be required to include unaudited interim financial statements.
The audit uplift process demands early engagement and planning with auditors, ideally one to two years before a planned IPO. Key areas requiring particular attention during the audit uplift include:
Financial Statement Requirements: Companies, working with their advisors, must determine which financial statements are required to be included in their registration statement, considering factors such as corporate structure, predecessor entities, and any significant business acquisitions, dispositions, or equity method investments.
Accounting Standards: Life sciences companies must evaluate their adoption of accounting standards and unwind any private company alternatives they previously employed.
Complex Financial Instruments: The classification and accounting treatment of financial instruments common in the life sciences industry require careful consideration and documentation.
The organizational meeting represents the kickoff of the IPO process for the full working group, and the initial confidential submission generally occurs about six weeks later. Following the initial confidential submission, companies should expect the SEC to deliver its initial comment letter approximately 30 days later.
The SEC review process typically involves multiple rounds of comments, with each subsequent review taking up to two weeks. However, as the number of open comments is reduced and a company gets nearer to the launch and pricing of the IPO, strong and open communication with the assigned SEC examiner may help expedite review times ahead of those critical events.
Recent SEC reviews have shown particular attention to several areas specific to life sciences companies:
Pipeline Charts: The SEC has become increasingly strict about pipeline chart presentations, for example requiring identified targets for all product candidates included in the pipeline chart and clear depictions of the phases of development.
Hyping Language: Terms like "best-in-class" or "first-in-class" face heightened scrutiny, with the SEC generally requiring their removal. Companies should also be careful to avoid language that may overly hype product candidates, such as “groundbreaking” and “life changing.”
Total Addressable Market: Descriptions of market size, prevalence, and incidence rates are carefully scrutinized and must align precisely with a company's actual target patient populations and geographic focus and be adequately supported.
While emerging growth companies may have up to five years before becoming subject to Section 404(b) of Sarbanes-Oxley Act (SOX) requiring an independent audit of internal controls, certain requirements of SOX apply immediately post-IPO. Additionally, management will need to attest to disclosure controls in their first annual report on Form 10-K and to the full internal control structure in their second Form 10-K.
Early-stage life sciences companies often operate with lean teams and systems, which can present challenges for establishing the robust controls required under SOX. Common areas requiring attention include:
Companies looking at conducting an IPO should begin thinking about SOX compliance and how to implement controls to meet these areas as early as the IPO planning stage.
The successful completion of an IPO marks the beginning of life as a public company, bringing new obligations and considerations. Companies must maintain quarterly and annual reporting schedules while monitoring their EGC status.
EGC status provides valuable accommodations but requires ongoing monitoring of revenue levels, market capitalization, and other metrics that could trigger a change in filing status. Companies should begin preparing early for the eventual transition out of EGC status and the accompanying, more fulsome disclosure requirements, including critical audit matters (CAMs) and comprehensive SOX compliance.
To optimize IPO readiness, life sciences companies can:
The path to becoming public requires a careful balance between maintaining efficient operations and establishing the infrastructure necessary for public company compliance. While the process can be complex, proper planning and early engagement with key advisors can help ensure a successful transition to operating as a public company.
Working with qualified advisors who understand the unique challenges facing life sciences companies can help navigate these requirements while maintaining focus on core business objectives—advancing innovative therapies and treatments that improve patient outcomes.
Register to watch the full CLE session—and learn more about Fenwick’s life sciences and capital markets capabilities.