Article | January 12, 2024

Five Financial Strategies Life Sciences Companies Should Consider

Source: Life Science Leader

By Jody Staggs

J Staggs 2022
Jody Staggs

The life sciences industry is characterized by innovation and groundbreaking discoveries that transform healthcare. However, securing funding remains challenging, particularly for companies in the early stages of clinical development. As we enter 2024, here are five considerations for companies navigating the life sciences financing landscape:

Diversify Funding Sources

In a challenging financing environment, having multiple options is key. Relying solely on venture capital may not lead to a successful raise, nor provide the leverage needed to effectively negotiate with investors. Life sciences companies should explore a variety of funding sources, such as grants, strategic partnerships, and non-dilutive alternatives. Governments, foundations, and industry-specific organizations offer grants and awards to support research and development efforts. Strategic collaborations and partnerships with established pharmaceutical companies can provide both funding and valuable operational resources.

Explore Alternative Finance Structures

Life sciences companies raising capital in a difficult financing market face a trade-off, where securing investment via selling equity can lead to reduced ownership and autonomy. Funding alternatives like royalty financing may offer a compelling solution. Royalty financing provides up-front capital in exchange for the payment of a portion of future sales. This approach provides immediate liquidity, preserves the founders' ownership and decision-making power, and unlike traditional debt financing, ties repayment to commercial success. Royalty financings can be customized to achieve the needs of both the life sciences company and the investor. Royalty financing is a viable alternative to conventional equity or debt financing for commercial-stage companies as well as clinical-stage companies with Phase III assets.

Prioritize Key Clinical Milestones

Clinical development is the life blood of the life sciences industry and a specialized ecosystem exists to fund clinical projects. Even during the most challenging markets funding is available to complete promising and defined clinical programs. However, during challenging markets investors are less likely to fund general operational burn and earlier stage programs. To attract funding, companies should prioritize the most meaningful clinical milestones and deemphasize, out-license, or shutter non-core assets or those that won’t hit a value inflection milestone in a reasonable time frame. Demonstrating capital discipline and the ability to efficiently manage resources will increase the likelihood of a successful fundraise.

Don’t Let the Perfect Deal Be the Enemy of Good Enough

Similar to buying a house, life sciences management teams generally raise funds a few times during their careers and thus depend on third parties to guide the process. These third parties have their own incentives, which may not perfectly overlap with those of the companies. Additionally, funders are skilled at keeping their options open and not closing the door on investment opportunities. Combining these dynamics with unrealistic valuation expectations can lead to companies not pursuing feasible financing options while they wait for the perfect deal. Sometimes a bird in the hand is worth two in the bush. 

Exploring Niche Partnerships

Rather than pursuing collaborations solely with Big Pharma, life sciences companies should consider evaluating strategic partnerships on a smaller, more targeted scale. Collaborations with niche industry participants, including research institutions, specialized contract research organizations (CROs), or other startups with complementary technologies, can provide access to resources, expertise, and funding without the complexity of working with Big Pharma. These partnerships can support specific research projects or help navigate unique market niches, fostering innovation and attracting investors looking for focused, high-impact opportunities.

Financing challenges may persist for life sciences companies in 2024, but by diversifying funding sources, exploring alternative financing structures like royalty financing, prioritizing key clinical milestones, not waiting for the perfect deal, and engaging in niche partnerships, life sciences companies can weather a funding drought. These approaches offer a balanced path to secure financing while maintaining ownership and autonomy, managing regulatory challenges, and making significant progress in clinical development. And remember, in any market environment, a multifaceted strategy that balances the innovation that drives valuation with financial prudence is crucial for life sciences companies to thrive in 2024.

About the Author:

Jody Staggs is president and CEO of SWK Holdings, a life science-focused specialty finance company catering to small- and midsized commercial-stage companies. He initially joined the company in August 2015. Prior to joining SWK, Staggs served in various finance and executive roles at Annandale Capital, Alistair Capital, Highland Capital, and Raymond James. He cofounded PBS Capital, an investment management business investing in pharmaceutical royalties and healthcare equities.