By Lance Thibault, Managing Director
Given the cool climate for IPOs, many private biotech companies have sought alternative paths to go public ‚ÄĒ namely special purpose acquisition company (SPAC) transactions and reverse mergers. While the former vehicle saw increased activity in 2022, we are now seeing a rise in the latter.
A reverse merger occurs when investors of a private company acquire a majority stake in a publicly traded company. After the merger, the public company‚Äôs assets and operations are reorganized to absorb the formerly private company. In the life science space, private company investors typically seek a public company that has cash available but may have experienced a failed clinical program or similar set-back. The cash from the distressed public company will then be utilized by the formerly private company to advance its clinical programs and priorities.
Danforth has supported clients on both sides of the reverse merger process; private companies seeking targets and public companies considering strategic alternatives. Our experience ranges from strategy and negotiation through operational execution, reporting requirements of the merger, and the aftermath as a public company. Examples include:
- Elicio Therapeutics (Nasdaq: ELTX) and Angion Biomedica
- Graybug Vision (Nasdaq: GRAY) and CalciMedia
- Aadi Bioscience (Nasdaq: AADI) and Aerpio Pharmaceuticals
- Enliven Therapeutics and Imara (Nasdaq: IMRA)
As with any corporate transaction of this magnitude, careful consideration and planning are a must.
Understanding the Process. At a high level, steps will include cross-due diligence, deal negotiation, audits of the company‚Äôs historical financial statements, preparation of proxy materials, board and shareholder approvals, market exchange considerations, and preparation of either a Proxy or S-4 ‚Äď which will include pro forma financial statements and substantially the same information as would be found in a traditional IPO registration statement.
- Based on the SEC form being filed, have a clear understanding of the financial statement requirements for that particular form, and the age of financial statements requirements.
- Set clear expectations of all parties as it relates to the various sections of the filed SEC form.
Public Company Readiness. Consider your ability to meet SEC reporting requirements, assess the breadth and competency of your accounting and finance staff, develop your company governance and internal controls, and invest in your financial systems.
Insurance Assessment. The change in ownership represented in a reverse merger can trigger several key insurance programs to go into a run-off state, including D&O, Product Liability, Cyber Liability, and Transit policies ‚Äď which oftentimes have a change in control provision. Tail insurance coverage will therefore need to be secured. It‚Äôs particularly important to note if insurance is fully earned or if either party will see any return premium which will be pro-rated.
Investor Relations. There is less opportunity to showcase your company to potential investors in a reverse merger because these transactions aren’t marketed in the same way as IPOs. A strong IR program is therefore needed to quickly gain visibility with the investor community, communicate your value proposition and, potentially, raise capital. Having experts in place to develop investor interest and manage investor and stakeholder relations is critical.
Whether reverse merger or another path, coming to the right decision can be difficult. We act as both a strategic sounding board and an integrated tactical team, complementing your internal resources or undertaking the entire project ‚Äď including technical accounting, SEC readiness, Form S-4 drafting, insurance management, investor relations and coordination among Big 4 auditors and SEC counsel.
To be sure, every company is different and there is no single blueprint to cover every scenario. But having a ‚Äúseen it all‚ÄĚ team in place, with skill sets that are dialed in as needed, can be the difference maker in expertly and efficiently achieving your goals.