By Ben Comer, Chief Editor, Life Science Leader
In an effort to provide a diversity of viewpoints on pressing questions related to biopharma financing and funding in 2023, Life Science Leader reached far and wide in soliciting executive responses to questions featured in our December Industry Outlook 2023 special issue. We greatly appreciate the volume and quality of responses received from leaders across the industry, many of which appeared in the print magazine: those finance and funding questions and responses can be found here. The following collection of responses did not appear in the December magazine, due to space constraints, and are presented here as part one of a three-part online supplement aimed at providing additional insights on financing, funding and manufacturing products in 2023.
What kinds of alternative financing arrangements are available for early and mid-stage companies choosing to postpone or cancel an initial public offering?
There are several pathways for companies who are in the position of having to postpone or cancel an initial public offering, with each having its own benefits and challenges. One option is looking at a hybrid model of supplementing a portion of the desired equity financing with the concurrent issuance of a “responsible” level of debt. For the debt financing portion, there is also the possibility of some of those lenders converting that debt into equity over time. In the past, private market equity investors have been hesitant about investing in companies carrying debt, but with the difficulties of the current equity markets, it’s currently more acceptable to investors to take on some level of debt to be able to continue operations.
Another option would be to reopen the most recent private round to new investors, generally with the same terms. The challenge here would be the need to get buy-in from existing holders and the understanding that the valuation of the company will be viewed differently now versus when the original round was done – this essentially represents a flat round, which for many may present an attractive longer-term opportunity.
In terms of doing a flat or a down round, if the company’s longer-term prospects remain promising, focusing on the long game and the ultimate exit valuation, these options can still represent a “win” in this market for both issuers and investors.
There are various options available for companies to consider: (1) a capital injection by means of a cash contribution from existing shareholders; (2) a capital injection against collateral or selling a smaller block of shares; (3) taking out a loan or credit line, although this should first be discussed with the company’s principal bankers; or (4) a less familiar solution would be to issue a bond, either a private or public bond or a convertible debenture. A private bond is a promise to third parties to repay their investment, with interest, after a two- to five-year period. This requires a detailed “investor memorandum” to be prepared, which presents the company and its growth prospects to prospective investors. Pension funds, insurance companies, health insurance companies, medical associations, etc. are likely to be potential investors in such private bonds. Collateral can be provided, but it does not have to be offered; a public bond is available to anyone and may be listed on a stock exchange. A securities prospectus must be prepared, which must be approved by the financial supervisory authority in each country. A convertible debenture allows the choice between paying back the respective amount or instead giving a participation on a share price to be agreed upon at the beginning.
Given that the traditional IPO market has dried up, companies still have the option of being listed on Nasdaq either via a merger with a SPAC or via a reverse merger with a public entity that is exploring strategic options. Either of those two routes will need the company to be well capitalized in order to get through the transaction and associated processes. There are also an increasing number of lenders prepared to put in place equity facilities that a newly public company can draw down on depending on the trading volume of the stock. In these markets, insider participation is very important, and having a diverse investor base with committed capital is important to finance companies that elect to stay private. Companies also can put in debt facilities but should carefully consider their utility.
Chief Operating and Financial Officer
In a bear market, companies need to recognize that access to equity capital is not certain, even with the successful achievement of business and clinical milestones. Early- and mid-stage companies should focus on the aspects of their business they can control, such as operational excellence and prudent financial management – the fundamental disciplines of budgeting, forecasting, and scenario planning take on increasing importance during a sustained bear market. Both public and private biotech companies should consider both alternative and strategic sources of capital, including venture debt or strategic capital from larger pharma players who have an interest in the pipeline, to bridge the gap to value creation or improvement in general equity market conditions.
How can biopharma companies best prepare for a potential recession in global financial markets?
To be prepared for a potential recession, companies need to be strategically, financially, and operationally focused. Given the increased scrutiny on resource allocation as a not only a driver of value but as proxy for good financial stewardess/cash runway management, good portfolio management is fundamental to survival. In a nutshell, portfolio optimization/prioritization transcends capital allocation decisions across an organization. As part of this analysis, an important filter and critical success factor is competitive differentiation, particularly in a fluid commercial landscape. Ultimately, it will be addition by subtraction: capital-efficient organizations “kill” programs early and establish pipeline decision mile markers along with ROI metrics. It is important to avoid maintaining/rationalizing developmental programs for the wrong reasons (e.g., emotional attachment, cajoling to the investment community).
In addition, cost structure can be a lightning rod for self-inflicted wounds, and it needs to be proactively challenged. Lastly, innovation should go well beyond the science and apply to all aspects of an organization’s operations. Remember, the balance sheet is a strategic tool, not a scorecard, so continue to improve capital allocation and leverage the ecosystem to stretch capital and unlock value. The optimal deployment of organizational resources is a fundamental metric in differentiating management’s performance and navigating turbulent times.
Biopharma’s have been in a fundraising recession for over a year which has forced many to already begin making tough choices. These “belt-tightening” decisions, like prioritizing programs and pushing back hiring plans, or even laying off employees, may help them to begin to weather a global financial recession but more cuts will likely need to be made and if things don’t get better more capital will certainly be needed.
The first thing I think companies should do is to have a good handle on their cash runway and understand what will need to be done if unfavorable scenarios come to pass and that runway needs to be extended. Even if cuts to spend were already made, it doesn’t hurt to re-evaluate your spend every quarter. Things can change rapidly in drug development and what you thought was necessary just a couple of months ago might not be now or, can be delayed to a later date. Making decisions to reduce spend early can have a much bigger impact than if you wait. Also, with most biopharma’s having operations and/or running clinical trials in foreign regions, companies need to understand that the strong dollar and high inflation rates mean to that spend. There may be ways to limit, or take advantage, of exposure to those regions through hedging and other strategies.
Ideally Biopharma companies try to put themselves in a financial position where they are funded long-term, with a liquidity cushion to be prepared for unexpected events or external challenges in the global financial markets. Raising capital on the back of good news when a company does not necessarily need additional funds is much easier than trying to raise capital when your cash runway is short. Following the close of our strategic collaboration with Shionogi & Co., at F2G, we immediately reinvigorated prior discussions with investors building off the recent news, resulting in a significant financing that closed within a few weeks.