With $8.8 billion raised by global biotechnology companies through May 10 this year, there seems to be no shortage of money available. About $2.9 billion of that funding has gone to private companies, $2.2 billion to public offerings and a hefty $3.7 billion to other public company financing vehicles.
The "other" category includes not just equity options such as warrants or PIPEs, but a growing contingent of alternative, nondilutive financing options. Industry experts delved into those alternatives last week in a panel organized by the Southern California industry organization BIOCOM.
Andrew Busser, principal of Symphony Capital LLC, explained how his firm forms a joint venture with a biotech company, into which Symphony contributes funding and the biotech contributes several product candidates. The joint venture then funds the biotech's continued development of the products and adds support through a partnership with RRD International. Yet the biotech has an exclusive option to acquire the joint venture at a pre-negotiated price, thus regaining rights to its assets.
Busser acknowledged that biotechs might be a tad nervous about putting their most valuable assets into a joint venture, and noted that while the development committee is split 50/50, it is chaired by the company.
"We always make sure the biotech company has control," he said. "At all of our development committee meetings thus far, every decision has been unanimous."
Symphony has done deals with Guilford Pharmaceuticals Inc., Exelixis Inc., Isis Pharmaceuticals Inc., Dynavax Technologies Corp. and Alexza Pharmaceuticals Inc. Busser said Symphony also would consider working with late-stage private companies. (See BioWorld Today, June 21, 2004, June 14, 2005, and April 11, 2006, and April 21, 2006.)
Celtic Pharma offers a different take on asset acquisition as a nondilutive financing option by combining a private equity fund with a drug development team. The $400 million fund backs the purchase and development of late-stage products, which later are sold to pharmaceutical companies.
Celtic senior associate Ellen Lubman said her firm may acquire products through traditional licensing, product acquisition or acquisition of an entire company. Joint ventures also are a possibility if Celtic retains a controlling interest. Once acquired, the asset usually is developed by Celtic's team and a network of contract research organizations, although the firm also is willing to collaborate with the licensor on clinical trials, such as it does with Neurobiological Technologies Inc. on Xerecept. Once significant value has been added to the asset, Celtic auctions it off to a pharmaceutical company. (See BioWorld Today, Sept. 21, 2005.)
A Dip In The Stream
For either public or private entities with a revenue or royalty stream, selling off a piece of that asset can offer a "dilution-friendly" option, noted Matt Wotiz, an associate with Paul Capital Partners LLC.
For example, when Acorda Therapeutics Inc. needed money to expand its sales force for Zanaflex, among other objectives, Paul Capital committed $15 million up front and up to $10 million in milestone-based capital in exchange for a portion of Zanaflex's future net revenues. And when Dyax Corp. needed flexibility to deal with the FDA's request for more data on DX-88 in hereditary angioedema, Paul Capital provided $30 million up front and a possible additional $5 million in exchange for rights to revenues from Dyax's phage-display licensing program. (See BioWorld Today, Aug. 28, 2006.)
On the panel, Wotiz explained that Paul Capital's deals usually involve a tiered waterfall structure, and that the company is willing to include caps so the royalty or revenue returns terminate after a certain point. Paul Capital invests $20 million to $100 million into deals with an eight- to 10-year time horizon, about 90 percent of which are marketed products and 10 percent of which are late Phase III or NDA-stage products.
A similar option is offered by companies like Drug Royalty Corp. Inc. and Royalty Pharma. Earlier this month, Drug Royalty bought a stake in ex-North American sales of Enbrel (etanercept, Amgen Inc. and Wyeth Pharmaceuticals Inc.) from Massachusetts General Hospital, while Royalty Pharma acquired an interest in Remicade (infliximab, Centocor Inc.) from New York University.
In addition to the nondilutive aspect of royalty or revenue deals, the "cost of this type of financing is very competitive in its own right," said David MacNaughtan, executive vice president of business development at Drug Royalty. He added that licensing royalties of a single product doesn't "encumber the general assets of a company," and that such royalties are "often not fully valued by the equity markets."
The Big D
Panelist Kathy Conte, managing director of Hercules Technology Growth Capital Inc., cited a "tremendous demand for debt in the market right now." Hercules provides average direct debt financings of $10 million to $20 million for technology and life science companies at all stages of development, most of which are venture-backed private or small-cap public plays.
For those companies, an equity financing or partnership deal may be in the cards once the next value-inflection point is achieved, Conte explained, but getting to that point requires money.
"We finance time - we provide time to get you to the next clinical milestone so you can go raise money at a higher valuation," she said.
A recent example is Portola Pharmaceuticals Inc., which obtained a $20 million debt financing from Hercules last October, announced positive Phase II data with its oral Factor Xa inhibitor in April and closed a $70 million Series C in May. Mardi Dier, Portola's CFO, said the venture debt provided "tremendous flexibility" and "was less dilutive than an equity financing would have been at that time." (See BioWorld Today, May 8, 2007.)
Chris Woolley, president of Square 1 Bank West, agreed that the lack of dilution is the primary appeal of debt, but noted that it also can be done very quickly and without re-valuing the company.
Square 1 specializes in $1 million to $10 million venture-debt deals for technology and life science companies.
An Alternative Future
Venture-debt, royalty monetization and joint ventures are just the tip of the alternative financing iceberg.
"There are a lot of different ways to skin this cat," said Adam Goldston, senior vice president of investment banking with Jefferies & Co. Inc.
For companies about a year from going public, Goldston said Jefferies offers a "pre-IPO convert" in which the convertible aspect is struck at a discount to the IPO price so the investor can lock in a return. For companies, the security is "in most cases less dilutive than a straight Series C preferred" and doesn't involve giving up any assets. He also noted that the convertible aspect does not turn into a "toxic" or "death-spiral" structure.
Looking forward, Goldston predicted an increase in alternative financing activity.
In the debt field, relatively new entrants like Square 1 and Hercules have upped the competition faced by long-timers such as Comerica Bank and Western Technology Investment, creating what Woolley termed a "buyers market."
MacNaughtan, too, cited an increase in royalty and revenue-based deals since his firm's founding in 1992, and he expects that trend will continue as long as a healthy number of new products keep gaining approval each year.
Celtic and Symphony also are relatively new models, both founded within the last three years. "You find people who are financially savvy looking for new ways to bridge the gap between large pharma needing to fill its pipelines and biotechs facing financial challenges," Lubman said.
"It's not a one-size-fits-all world anymore," Goldston added. "It's not as simple anymore as doing a Series C and comparing five term sheets from five venture capitalists. But options are a good thing. More money flowing into the space is a good thing."