Treasure Hunt: Seeking Biotech Investors
There may be no summer lovin’ for biotechs. By most accounts, investors will remain tightfisted with their cash for some time, opening up their wallets for only the most promising investments. In a sign of how devastating the global economic crisis has become for the industry, more than a third of the 344 public biotechs had less than six months cash on hand by the end of March 2009, according to Burrill & Company statistics. And the situation is probably even bleaker among smaller, private companies.
Despite the gloom, there’s still investment money out there, but companies will have to work harder to get it, experts say. The key to being successful at raising money in the current environment will be to think creatively, remain flexible, and start talking to potential investors well before there is an urgent need for cash.
Michael Hanewich, who heads Silicon Valley Bank’s life science practice, says the bar continues to be high for companies seeking traditional venture capital, long considered the biotech industry’s lifeblood. VCs are most interested in companies with multiple compounds, and preferably ones that have more than one indication, he says. “It is best if they are in clinic as opposed to not in clinic,” says Hanewich, who is based in Boston. “It is not really that different than it has been in the past.”
One difference for venture-backed companies, however, is that rather than attracting new investors, many are turning to their existing backers to raise more money. “What we’re seeing with our later-stage companies is most of the rounds that they are doing are inside-led rounds,” Hanewich says.
Another route to consider is venture debt, which allows a company to borrow money from VCs — often on favorable terms — without having to sell more equity, as in a typical equity financing through VCs. But Hanewich says venture lenders will want to make sure that the money is being deployed with growth in mind, rather than simply being used to pay off existing debt. “They want to make sure that the money is going to extend the company’s runway and that it is going to be quite helpful to get to the next milestone,” Hanewich says.
Public companies may have more options, as long as they are willing to think outside the box, says Frank Karbe, chief financial officer of Exelixis. The publicly listed South San Francisco-based biotech, which is focusing on small molecule drugs to treat cancer and other serious diseases, has blazed new trails in order to continue to fund its robust drug discovery and development operation of 560 or so scientists.
One key strategy began with a plan to invest heavily in discovery, with the goal of cranking out three to four investigational new drugs every year. With the fuller pipeline, the company has been able to expand its out-licensing activities, giving it access to a steady influx of cash. “As we headed into tougher economic times, we had the ability to increase our partnering efforts,” says Karbe. The strategy paid off big time in December 2008, when its late-stage drug candidate XL184 developed to treat a rare form of thyroid cancer, and another compound called XL281, netted the company some $240 million in upfront and intermediate payments from Bristol-Myers Squibb in a partnering deal.
The advice for companies looking for cash, Karbe says, is that they should always be having lots of discussions with all types of investors, including bankers, venture capitalists, specialty funds, and other biotech and pharma companies. Even though investment is tight, a lot of wealthy investors are sitting on the sidelines looking for the best place to put their money. “Maintain a very active dialogue with all sorts of people,” Karbe says. “If you have good products and good science, there will be ways to fund it.”
Another strategy that has worked for Exelixis: setting up special financing deals that allow it to lower the risks—and costs—of development. In one such deal, Exelixis in 2005 arranged with New York-based Symphony Capital to create a special drug-development entity. Under the terms, Exelixis contributed the intellectual property around three compounds, while Symphony, a private equity firm, in turn put up $80 million to fund the development. In exchange for the financing, Exelixis had to give up some of the potential upside, as it would have had to buy back the intellectual property at a premium.
For now, the company has decided not to exercise the IP buyback option, but it doesn’t owe Symphony any money. “The Symphony deal provided us with $80 million and allowed us to move a group of compounds to proof-of-concept without taking financial risk,” says Karbe. “If successful, the company could raise money on the back end, potentially at a higher stock price, to repay the investors. But if none is successful, you don’t owe any money back to Symphony.”
Mindful that the economy was going south, Exelixis more recently set up a unique line of credit in case it would need a cushion down the road. In June 2008, it opened a $150 million credit line with New York-based Deerfield Management. Among some of its features, the line allows Exelixis to draw down as needed in $15 million increments, as opposed to maxing out the entire $150 million. “You don’t have to pull the trigger on the whole $150 million,” says Karbe. “You can do it in little steps.” So far, the company hasn’t had to take out any money on the line, but he says the credit has provided an important “safety net.”
What’s more, having the credit line in its back pocket has given Exelixis more strength at the bargaining table when it comes to seeking other investment. “The best position to be in is one of indifference,” says Karbe. “When you are strapped for cash, you are negotiating out of weakness.” The message for other companies, Karbe says, is “start your negotiations early before you really need the money.”
Some companies, however, may be forced to change their business plans to get cash, says financing expert Jerome Engel, executive director at the Lester Center for Entrepreneurship and Innovation at U.C. Berkeley’s Haas School of Business. “The therapeutic model requires such momentum in the financing space,” says Engel. “There is going to more emphasis on process technologies where the business development cycles are shorter.” Changing a focus to process technologies from therapeutics is surely a radical change, but in difficult times, exploring all the options is never a bad idea.