Dual Track Reboot: Five Key Considerations for Supercharging Your Life Science Company Exit - McDermott Will & Emery

Dual Track Reboot: Five Key Considerations for Supercharging Your Life Science Company Exit


There have been 44 initial public offerings (IPOs) listed on the US stock markets in 2024 thus far, many of which continue to trade at a premium to their initial offering price, demonstrating the strength and buoyancy of current public markets. Concurrent with the capital markets regaining momentum, 2024 to date has shown robust merger and acquisition (M&A) activity, with notable growth of close to 11% in life sciences M&A activity compared to 2023. These developments are in line with the macro trends of lower inflation, wage stabilization and the potential promise of lower interest rates later in the year and continued strong sectoral interest in life sciences opportunities. Whether you have been waiting for improved market conditions to realize liquidity or are seeing firmer indicators of robust market performance for the rest of the year, now is the time to dust off the “dual-track manual” and take stock of the best course to supercharge your exit and achieve your business growth and transformation goals.

A dual-track process involves preparing for an IPO while also running a private M&A process, often through an auction. While dual tracks are more complicated and resource intensive than single-track exits, they are a proven path to securing successful exits on favorable terms.

In Depth

The following are five key considerations for evaluating whether to dual or single track your exit:

  1. Strengthening Your Cap Table. Running a crossover financing round in the lead up to a dual-track process will give you the financial runway and an investor base to support your product through regulatory hurdles in the path to commercialization. Lead crossover investors will increase the attractiveness of your IPO by demonstrating your business’ ability to raise diversified capital. Furthermore, post-pandemic, private equity (PE) and venture capital (VC) firms have been working more collaboratively than ever. If you only have VC investors in your cap table, consider bringing PE investors in as well. PE is agile, has a longer investment horizon and can support management teams with additional expertise and resources.
  2. Getting Buy-In From Key Stakeholders. In addition to controlling shareholders’ support, who will need to approve either transaction, alignment across common and preferred shareholders, the board and senior executives is paramount. The nature of an exit will affect the value of any equity held by shareholders, including employee option holders, and so the short- and long-term effects of attracting, incentivizing and retaining the right team should be considered. One should also consider the implications of any change of control provisions in material contracts in the M&A scenario (and potentially in an IPO scenario), which may require third-party consent or the renegotiation of existing agreements with lenders and licensing partners.
  3. Considering Whether an IPO Is Suitable and if the Timing Is Right for Your Business. Your business’ roadmap (particularly for life sciences companies expecting clinical or regulatory results) has the potential to affect the timetable of an IPO or M&A exit and should be flushed out prior to commencing a dual-track process. It is necessary to understand early on whether the business, including its organizational structure and financials, is prepared to become a public company and whether it will benefit from going public.Undertaking an IPO typically requires six or more months, with the timetable influenced by preparation of the registration statement. The preparation of company financials in accordance with Public Company Accounting Oversight Board standards and responding to the US Securities and Exchange Commission (SEC) comment letter process, which typically involves multiple rounds prior to the SEC declaring the registration statement effective, can each add several months to the timetable. In addition to pre-IPO structuring considerations, as a public company, it will be more difficult to deal with corporate, accounting, legal and other issues because of public company shareholder scrutiny, extensive disclosure requirements and increased exposure to litigation for any material misstatements or omissions in public filings. Having the necessary infrastructure and public company experience at the board and management level is therefore key, including the legal and finance resources required to manage a publicly traded reporting company.The M&A process can be much shorter but may be equally sensitive to external regulatory clearances. Governments have adopted more aggressive approaches to antitrust actions, such as using theories of potential competition, innovation harm and national security, and have expanded the scope required with antitrust filings. Moreover, many jurisdictions have implemented or strengthened their foreign direct investment regimes, including in the healthcare and life sciences sectors. Even regulatorily complex deals are getting done but conducting an upfront analysis of required regulatory approvals and related timing implications will give clarity to your timetable.
  4. Focusing on the Objective: Complete vs. Partial Exit With a View Toward the Best Valuation. If executed at the right time in the business cycle/regulatory approvals inflection points for your life sciences company, a full exit will maximize immediate returns with an upfront cash payment and deferred consideration in the form of milestones or earn-outs. The recent seller-favorable trend of buyer representations and warranties insurance means you can exit with limited or no indemnification obligations post-closing and an unlikely need for an escrow.Valuation in an M&A process is often driven by considerations such as realizing synergies, pursuing short- versus long-term business plans, obtaining critical assets (often intellectual property), industry consolidation trends, recent comparable transactions, and the ability of buyers to invest in the research and development and commercialize a product. Most importantly, if an auction dynamic is created, whether through a dual-track process or multiple interested buyers, the purchase price will naturally be positively impacted by the competition and pricing tension generated from the sale process.Alternatively, IPOs are affected by stock market sentiment, volatility and comparisons (whether valid or not) with the recent trading performance of peers and global micro and macro political and economic trends. Pre-IPO companies should take the opportunity to assess market receptivity by taking advantage of confidential meetings with investors known as “testing-the-waters” meetings in the United States or “early look” or “pilot fishing” meetings in Europe, which may be conducted concurrently with SEC review of a confidentially submitted draft registration statement.After an IPO closing, investors in newly minted public companies can sell down over time in the public markets, subject to contractual lockups (typically for 180 days), insider trading restrictions and US resale restrictions with respect to unregistered shares. Stock market performance will guide the timing of any exit and may increase the overall value to pre-IPO holders who may benefit from public market premiums, which may yield a higher return than an M&A exit. The company will benefit from the ability to use listed securities as acquisition currency and offer liquid stock options to employees, as well as heightened corporate visibility.
  5. Having the Right Deal Team With Appropriate Safeguards in Place. Each of the IPO and M&A processes separately place significant demands on a business and its management. Having to deal with two contemporaneous processes will put even greater strain on time and resources, so it is necessary to assess the capacity and expertise of the team responsible for the processes.Coordinating work streams, such as due diligence and the preparation of the business plan that is critical to both processes, is essential and will reduce the costs and disruption of running a dual-track process. For example, preparation of the registration statement can be aligned with preparation of an M&A information memorandum and one data room can serve both processes.Most sophisticated professional service advisers can field teams to advise on both processes, often with some cost savings, while remaining incentivized to succeed under either track. Select legal advisers with the relevant corporate and regulatory experience and network to help you navigate both the IPO and the M&A tracks simultaneously. Additionally, consider retaining one financial adviser for the M&A track and a different adviser for the IPO track as this would make the IPO a more credible “stalking horse” and would give the flexibility of opportunistically keeping one track or both confidential.Maintaining confidentiality is key to the success of a dual-track process, so it is important to limit the size of the overall deal team and obtain non-disclosure agreements from prospective M&A counterparties early as leaks or intentional disclosure during the process may have adverse consequences for both tracks. Conversely, knowledge that a company may be pursuing an IPO exit could drive the M&A valuation higher, particularly with strategic buyers.