Editor

Between poor pricings for initial public offerings (IPO) and investors (not to mention Nasdaq) cracking down on reverse mergers, it's not easy for private biotechs to get public these days. But a few companies are exploring an alternate route to public listing: the Form-10 pathway.

"This process is one that is arising out of the limitations and drawbacks with traditional methods," explained Fran Stoller, a partner with law firm Loeb & Loeb LLP. The firm advised Coronado Biosciences Inc. on its Form-10 filing last week. (See BioWorld Today, July 20, 2011.)

Although not many biotechs have pursued the Form-10 pathway yet, "we are talking to a number of private companies who are thinking about it," reported Annette Grimaldi, managing director with BMO Capital Markets Corp. She added that biotechs "tend to be early adopters of unusual strategies for going public" because they are often seeking to access the public markets while still unprofitable.

In essence, the Form-10 pathway creates a two-step process for going public. First, the company files a Form 10 with the SEC, which involves providing disclosures and financial statements similar to those required for an IPO. Once the SEC has reviewed and blessed the filing, the firm becomes a public reporting company.

Form-10 filings are required for private companies with 500 or more stockholders of record – something not often seen in biotech, where the majority of private firms are closely held by a small group of venture capitalists. But a company with less than 500 stockholders could choose to file a Form-10 and become a public reporting company. Once it did so, it would be qualified to embark on Step 2: filing an S-1 to register its shares and applying to list those shares on an exchange.

In the past, some Form-10 shell companies have been created solely for the purpose of serving as a vehicle to take another private firm public. A private biotech, for example, would then reverse-merge with the Form-10 shell. The trick, however, is that the merged entity would likely have to trade on the Pink Sheets or OTC Bulletin Board until it could qualify to transfer to a more mainstream exchange like the AMEX or Nasdaq, and Nasdaq has recently moved to make that transfer a lot harder for companies formed through reverse mergers. (See story this issue.)

Hence, Coronado skipped the reverse merger and filed its own Form 10. The biotech plans to list initially on the OTCBB, but hopes to transfer to AMEX or Nasdaq before the end of this year.

Unlike an IPO, the Form-10 pathway does not involve a process in which institutional investors help set the initial stock price. That might not be a bad thing: a recent BioWorld Today analysis showed biotech IPOs in 2011 priced 59.6 percent below their initial targets, on average. But with the Form-10 filer's stock price completely at the mercy of whatever buyers and sellers agree is fair, trading is likely to be erratic at first, Grimaldi said.

Also unlike an IPO, the Form-10 pathway does not involve investment bankers trotting management around to meet with institutional investors, raising awareness and creating a shareholder base. Thus, like firms that go public on a foreign exchange and then transfer to the OTCBB, or those that reverse merge into an OTCBB-listed firm, trading volume can be pretty low at the start. (See BioWorld Insight, March 21, 2011.)

And while an IPO usually involves the issuance of new shares in a financing, the Form-10 pathway does not. The company would either need to raise money privately ahead of listing its shares, or it would need to do a public offering or a PIPE once it was listed. The public listing would certainly provide more financing options, but initial illiquidity could make the investment less appealing.

Yet there are benefits to the Form-10 pathway. With even Phase III biotechs getting a chilly reception from IPO investors, the Form 10 offers an option to earlier-stage firms like Coronado, which is still in preclinical stage with its autoimmune and cancer programs, although it aims to have both in Phase II trials by early next year.

In a recent report, Grimaldi noted that the Form-10 pathway virtually eliminates exposure to market risk and greatly lowers transaction costs compared with an IPO. It also avoids the baggage that often comes with a reverse merger: unhappy shareholders, hidden liabilities and low market capitalization.

Coronado found those benefits appealing as well. The biotech didn't need money because it had just raised $25.8 million in a Series C financing, and it didn't need help building a shareholder base because it had more than 500 investors already.

"Coronado is in a position not a lot of companies are in," Stoller said.