Driving Value From the IPO Process in Life Sciences

Life sciences executives can find themselves facing crossroads that can fundamentally shift the paradigm of their business. From M&A and IPOs to facility construction, geographic expansion, and new commercial offerings, these transformative events can be critical junctures that affect a company’s success.

This series explores transformative events for companies in the life sciences industry and the challenges and opportunities that those events present. Whether a particular challenge is new or familiar, it is important to be aware of those challenges and related risks and to consider the need to engage the services of a third party to help fully address potentially wide-ranging impacts.

In their journey toward going public, life sciences companies meet complex, rigorous demands and face heavy scrutiny from investors and regulators. Even seemingly minor oversights or errors can be highly consequential, costing precious time and potentially damaging a company’s reputation.

Preparing for an IPO offers management a unique opportunity to perform a holistic assessment of the business and identify potential areas of growth and improvement.

While the journey can be daunting, the opportunity is valuable. Management should use this time to verify that the company is ready to pivot quickly, meet investor demands, and take advantage of new markets and new opportunities down the road.

Here are a few key challenges and opportunities involved with life sciences IPOs:

• Financial preparation and reporting. While going public requires a company to fulfill substantial new reporting requirements, this enhanced reporting also can offer internal and external stakeholders meaningful and actionable insights.
• Compliance and risk management. Management will expend considerable time and resources to meet new compliance requirements as a public company and build a SOX-compliant control environment. However, strong risk management and a culture of compliance and risk awareness also bring about substantial benefits.
• Operational readiness and efficiency. The ongoing demands of being a public company don’t end with the opening bell – but management can take advantage of its compliance function and go beyond SOX efforts to drive increased operational efficiencies.

Challenge: Substantial new reporting requirements

While it opens a door for significant growth opportunity, an IPO also represents a substantial burden of new Securities and Exchange Commission (SEC) requirements – and a limited window in which to implement the necessary changes.

The readiness effort will involve multiple steps – from ensuring that financial systems can support reporting requirements and working toward a public company close timeline to transitioning away from private company practical expedients and other changes that could be necessary to comply with the applicable financial reporting framework. For companies in the life sciences industry that already must comply with considerable regulatory requirements and might be involved in commercial arrangements with complex accounting considerations, this additional lift can be especially challenging.

Financial reporting becomes an even more vital part of any company’s operations in the lead-up to – and aftermath of – an IPO. A company’s financial reporting and disclosures might need to be built out from scratch, and stakeholder demands can place greater pressure on management’s ability to produce timely, accurate, and meaningful reporting.

The selection of an independent auditor is a key part of going public, and management should carefully consider an audit firm’s industry experience and qualifications throughout the selection process.

Beyond that, management also might consider engaging the services of a separate, external third party with both IPO- and industry-specific expertise to help with robust and efficient preparation. A third party engaged in this fashion can drive the IPO readiness process, or it can support management by providing resources as needed.

Opportunity: Meaningful insight for both internal and external stakeholders

While new SEC reporting requirements can be burdensome, management can reap significant benefits from improved financial reporting capacity. It can be well worth the up-front time and effort put into building out a company’s financial reporting, as agile and automated reporting functionalities can vastly improve management’s insights into the company’s operations and performance – thus contributing to better financial forecasting and decision-making support down the road.

Challenge: Significant and ongoing compliance burdens – and building the control environment from scratch

IPO readiness is only the beginning of the journey toward being a public company. Throughout the readiness process, and once the company goes public, management also will need to dedicate time and resources to SOX implementation and continued compliance efforts. Establishing a compliant SOX control environment represents another significant lift – especially for companies in the life sciences industry, where different products, lines, and commercial arrangements can give rise to distinct processes with disparate risk profiles and risk points.

Additionally, the transition to becoming a public company can lead to increased scrutiny from auditors and regulators in other areas. Management might want to consider building out compliance programs in areas outside of SOX that could receive more attention post-IPO – for example, establishing a process around unclaimed property.

Opportunity: Mitigated risk and increased transparency

While compliance can be a burden, a strong risk management program also can add significant value for management. Implementing a compliant control environment requires time, resources, and continued maintenance, but it also is likely to add the benefits of mitigated risks of error or fraud and more efficient and uniform processes.

Management might want to consider engaging the services of an external firm to act as the company’s internal audit function, or it might use a supplemental source as it builds out its internal audit team.

Challenge: Increased demands of being a public company

Going public significantly increases the demands on a company, and management will need to rapidly evolve its capabilities in order to meet those demands. Leadership must find the right equilibrium, weighing significant strategic moves with the flexibility to realign and adjust its approach as necessary.

Because of this, it will be more important than ever for management to have a thorough and detailed understanding of all business processes – so that it can identify areas of improvement and opportunities for increased efficiencies as the company matures. A mindset of continual improvement is a key element of success for any public company, not only from a SOX-compliance standpoint but also from an operational one.

Opportunity: Increased visibility and identifying opportunities for continual improvement

As previously mentioned, implementing a SOX program for the first time is a far-reaching exercise that touches almost every part of the company. Thus, while management has already invested time and resources into SOX compliance, it can be cost-effective – for both time and resources – to invest in other operational efficiencies at the same time.

Internal audit often is closely linked to the SOX compliance program. However, the function also can add value outside of SOX. An internal audit function can initiate and plan operational audits, offering executive management increased visibility into different areas of the business and providing recommendations for improvement.

Operational audits can be one-time investigations or serve as periodic reviews, helping to identify efficiencies in areas such as supply chain management, procurement and vendor management, manufacturing processes, and more.