Goodwin partner: Specialist investors driving UK biotech IPOs to Nasdaq

➤ Global law firm Goodwin Procter LLP's London-based technology and life sciences partner, Sophie McGrath, says biotech valuations have been boosted by toggling between M&A and capital markets in 2021.

➤Nasdaq's large cohort of existing biotech companies gives it a strong reference market, in addition to access to deep pools of capital and analysts.

➤ While equity capital markets are still seeing lots of activity in biotech after a pandemic-related boost, the year ahead might not be quite as strong as 2020 in Europe and the U.K., McGrath said.

Sophie McGrath, technology and life sciences partner at Goodwin Procter — which has advised companies including Vaccitech PLC, Achilles Therapeutics PLC and Kymab Ltd. — spoke to S&P Global Market Intelligence about capital market options for biotech companies in the U.K. and the U.S. What follows is an edited transcript of that interview.

S&P Global Market Intelligence: Why do so many U.K. life sciences companies list on the Nasdaq?

Sophie McGrath: Historically, biotech companies have tended to go to the Nasdaq. I think everyone buying stock into that feels that they can price it compared to a peer group. It has even been a problem for the New York Stock Exchange, they're really trying to get into the biotech market with limited success. Because when you're faced with that choice as an adviser, you look at the two markets, and there are just so many companies that go to Nasdaq that you don't necessarily want to be the test case. And so it almost becomes a self-fulfilling prophecy.

But without a shadow of a doubt, Nasdaq is still the front runner by some way … There seems to be a perceived wisdom that maybe investors buying stock on the London Stock Exchange are not interested in growth-stage companies or growth players. They're interested in established companies with revenue streams, which biotech is absolutely not.

What can the London Stock Exchange and its Alternative Investment Market [AIM] do to make themselves more attractive to biotech listings?

A really important piece of work [was the U.K. government-commissioned review] looking at what could you do to make the capital markets more efficient and more attractive to growth-stage companies and a lot of those recommendations were borne out of looking at the U.S. experience. I think there's a view that what happened with some of these tech stocks recently may not have helped. And if the choice is the tried and tested route of going to Nasdaq and having fairly good certainty about how your stock will be treated, and how it will perform in the aftermarket, versus going to the LSE, and just not really knowing — at the moment, I think a lot of companies will find that a tough, tough decision.

But it's a shame because there's no reason why the LSE or the U.K. capital markets should not be competitive. And I think it's a matter of when, not if. It's so important that as a financial center, and a country and region that develops high-tech companies, we try to have capital markets that can sustain those companies domestically, rather than them at the moment almost being forced to move offshore.

Various tech and life sciences companies, including Oxford Nanopore Technologies Ltd., have indicated they intend to list in the U.K. in the second half of the year. What do you think persuaded them?

I think there are a lot of companies that are extremely supportive of wanting to stay a U.K. or a European story. We act for a lot of companies in the U.K. and Europe who, if it was a like-for-like comparison between the domestic public markets and Nasdaq, would like to stay as a local story. I don't think anyone wants to see any of these domestic listings go badly.

AIM had a great year for U.K. biotech. The market caps between AIM and Nasdaq are wildly different, though. In order to go up onto Nasdaq, you're looking at a $350 million to $500 million market cap pre-money as a minimum. And most companies on AIM wouldn't be anywhere close to that. The amount of capital being raised on AIM versus what companies can raise on Nasdaq is not a like-for-like comparison.

Would you attribute some of that to the fact that there are so many specialist investor groups and funds in New York compared to London, which has a lot of generalists?

Yes, that really is the driver — you just have access to a big pool of capital in the U.S. and a lot of that capital is specialist capital. So the other part of that is there's some commentary at the moment about some of the activity you've seen on the biotech indexes and on Nasdaq where it's softened quite a bit from the highs of the beginning of the year and 2020. So there's lots and lots of reasons for that. But one of the reasons that people posture is that last year bought a lot of generalist money into the sector, and that the specialists are willing to support those companies through difficult times, whereas generalists don't tend to be. And life as a biotech company can be pretty bumpy, you know.

It's a long road, and at times, that can be very binary. And I think there's a view that generalist investors don't read that maybe as well or as kindly or maybe don't have the same long-term view as some of the specialist investors.