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Biotech 2008 Evolution Of Capital Session Slides For Walter Mel Anne Gary Chris

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  • 1. Traditional and Non-Traditional Funding
    • Moderator:
    • Walter Greenblatt , Managing Director, Walter Greenblatt & Associates
    • Panelists:
    • Zev Scherl , General Partner, NewSpring Capital
    • Mel Billingsley, Ph.D ., President & CEO, Life Sciences Greenhouse of Central PA
    • Anne VanLent , President, AMV Advisors
    • Gary Sender , CFO and Vice President of Finance & Administration, Tengion Inc.
    • Chris Schnittker , CPA, Vice President & CFO, VioQuest Pharmaceuticals, Inc.
    The Evolution of Capital:  November 11, 2008
  • 2. Demand Side: How Cash-Starved Is Biotech?
    • 38% of small biotechs reported having less than 12 months’ cash 1
    • Nearly 100 of the ~330 public biotech companies have less than six months cash on hand 2
    • Of 370 small biotechs surveyed, as reported by the Biotechnology Industry Organization
    • Wall Street Journal, 10-29-08.
  • 3. $20.5
  • 4.  
  • 5.  
  • 6. *Q3 angel investment estimated from H1 data $13.5
  • 7. Non-Dilutive Funding Mel Billingsley November 11, 2008
  • 8. Non-Dilutive Funding
    • Pros and cons of non-dilutive funding
    • Types of non-dilutive funding
    • Stage-specific funds- early vs. revenue stage
    • Qualifications and conditions
    • Additional issues
  • 9. Non-Dilutive Funding
    • Pros and cons of non-dilutive funding
      • Preserves current status of equity/ cap table
      • If via peer-review grant, offers 3 rd party vetting
      • Limited scope of funding- $100K- $2M
      • Some forms may convert to equity stake at later stage
      • Timing may be difficult
  • 10. Non-Dilutive Funding
    • Types non-dilutive funding
      • Federal SBIR/STTR grants: competitive
      • Contracts (federal and private): service-directed
      • Venture philanthropy/ foundation funding
      • Convertible Debt (may be paid back with interest or converted to equity at a subsequent stage)
  • 11. Non-Dilutive Funding
    • Qualifications and Conditions
      • Federal SBIR/STTR grants: must meet SBA criteria (>51% ownership, <500 employees)
      • Contracts: federal contracts have considerable paperwork; deliverables required
      • Venture philanthropy/ foundations- often target specific diseases; may be derivative from main corporate mission
  • 12. Non-Dilutive Funding
    • Qualifications and Conditions: Convertible Debt
      • Terms are time-limited (3-5 yrs)
      • Conditions for conversion into equity spelled out: usually based on 3 rd party financing milestone
      • May be repaid plus interest (and/or warrants)
      • Avoids issue of immediate valuation
  • 13. Alternative Financing Options Anne M. VanLent November 11, 2008
  • 14. Options for Discussion
    • Royalty Financing
    • Collaborative Development (R&D) Financing
      • Symphony as a model
    • Priority Review Vouchers
    • Others?
  • 15. Beyond Traditional Equity and Debt… Royalty Financing Reverse Mergers Committed Equity Financing Facility Venture Debt CRO-Linked Financing Collaborative Development Financing Structured Product Financing Charitable Foundations Partnerships with Big Pharma Funded Spin-Outs
  • 16. What is Royalty Financing?
      • Royalty financing is a transaction in which a company receives an upfront payment, and in some cases future payments, in exchange for a percentage of the company’s future product revenues
      • Royalty financings can take on several forms:
        • A Royalty Interest or passive royalty financing is an asset purchase of a pre-existing royalty resulting from an existing license agreement or cash flow stream
        • A Synthetic Royalty SM financing is the creation of a royalty around a single product or a basket of product revenues
        • A Hybrid financing may combine royalty-based financing with structured debt and equity investments
  • 17. Why is Royalty Financing Relevant?
      • In turbulent equity and debt capital markets, royalty-based financing is a constant source of capital
      • Royalty financing is a way to raise non-dilutive capital to:
        • Finance new development opportunities
        • Acquire new products or technologies
        • Build-out commercial infrastructure
        • Launch a product; Fund working capital needs
        • Unlock unrealized value in product royalties
      • Benefits of royalty financing include:
        • Non-dilutive to equity
        • Typically lower cost than equity
        • Lack of rigid covenants - greater alignment with equity holders
        • Flexibility of structuring
        • Simple transaction with single counterparty
  • 18. Characteristics of Royalty Financing
      • Commercial-stage healthcare products - existing or near term product sales
          • Performance based - paid off percentage of product sales
      • Intellectual property protection
          • Valid patent protection with significant patent life remaining (i.e. 5+ yrs)
      • Product type - a diverse mix; any therapeutic category
          • Pharmaceuticals, drug delivery, medical devices, diagnostics
      • All stages of growth: recently launched, mature, declining
      • Other dynamics of royalty deals can include
          • Advanced Phase III products
          • Basket of products to diversify portfolio
          • Structured returns with company maintaining upside
  • 19. Clinical Development Collaboration Structure 2-4 years 2-4 strategically important drugs BiotechCo Investment Inception $40-100 million Symphony + Co-Investors Pre-negotiated Exit Via Purchase Option 2-3x cash-on-cash returns More valuable drugs BiotechCo Symphony + Co-Investors Symphony’s Active Involvement Development Committee Clinical expertise Regulatory expertise Board of Directors Strategic governance Financial control Clinical Development Collaboration
  • 20. Clinical Development Collaborations Generate Value for Shareholders and for Symphony 12 months 24 months Time Value Illustrative Note: Red line does not include value of BiotechCo equity received by Symphony 36 months Out-license any one product to Large Pharma on superior terms Incremental value to BiotechCo Attractive return to Symphony: 2.3x Multiple ~35% IRR + Additional Upside in BiotechCo Equity Product Value $50MM from Symphony + 2-4 products from BiotechCo Symphony Collaboration formed Phase 1 Phase 2 triggers Purchase Option exercise $115MM Purchase Option Exercise Price
  • 21. Value of Collaborative Development Financing
    • Strategic Value
    • Accelerate pipeline
    • Preserve control
    • Share risk
    • Clinical Value
    • Development Committee value add
    • Expand internal capabilities
    • Financial Value
    • Guarantee funding
    • Preserve future economic upside
    • Minimize dilution and cost
  • 22. Priority Review Vouchers (PRVs)
    • Available to sponsor of newly-approved drug or biological for neglected tropical disease
    • Approved itself under Priority Review
    • Voucher is transferrable or saleable
      • Biotech can sell to big pharma
    • Applicable to any NDA/PLA submission
    • NPV value of acceleration estimated at between $50 million and $500 million
  • 23. Venture Debt Market Overview
  • 24. Structure of Typical Venture Debt Deal
    • Can either be equipment financing, pure working capital or a combination
    • Size range: $1MM - $20MM
    • Maturity: 2 to 4 Years
      • Oftentimes starts with an interest only period
    • Interest Rate: Spread to LIBOR or other index
      • ~11% to 13%
    • Warrants struck at last financing round
      • 2 to 9% of total debt facility
      • Equity participation oftentimes attached
  • 25. Benefits of Venture Debt
    • Near Term non dilutive financing
    • Reduced cost of capital vs. equity
    • For capital intensive companies, allows equity to mostly finance R&D
    • Runway extension
    • Equipment draws can oftentimes exactly match timing of expenditure
    • Provides an additional equity investor
  • 26. Risks of Using Venture Debt
    • Payback timing has to be carefully managed
      • Constant reminders to current investors that burn will increase
    • Triggering of Material Adverse Change clause can be burdensome
    • In a liquidation, debt holders get paid back first
    • Will debt provider have the $ if draws are staggered?
      • Get references and inquire about substance of funders’ balance sheet and their investors
  • 27. Catalysts for Reopening of Biotech IPO Window
  • 28. All Respondents (N=331) (a) Source: Results from Lazard 2008 Healthcare Survey (a) 2 respondents skipped this question 47% 15% 12% 9% 5% 5% 7%
  • 29. What do the Banks Say? - Market Condition Requirements-
    • Input from two heads of equity capital markets desks:
      • Improved share performance of small and mid cap biotech companies
      • Lower volatility in the equity markets. Investors need to feel that they can invest for 2-5 year return and not be watching their screens constantly
      • Inflows into equity mutual funds
      • Stability in hedge fund Industry
      • Wave of M&A slows leaving lower supply of biotechs looking to be financed
      • Conclusion : need market stability and better returns on publicly traded biotechs. Window could open 2H09 or 1H10
  • 30. What do the Banks Say? - Company Specific Requirements-
    • Input from two heads of equity capital markets desks:
      • Clear pathway to regulatory approval.
      • 18-24 months of financing post IPO.
      • $15-25 million on the balance sheet at the time of the offering.
      • Well-known to investors. Strong management with 1) a history of taking products through the FDA and 2) that worked at leading thought centers (where PhD investors also trained.
      • Focus on tangible areas. Alzheimer's and neurology may be tough.
      • A little bit of luck....that markets perform well during the roadshow.
  • 31. M&A Considerations Christopher P. Schnittker, CPA November 11, 2008
  • 32. Biotech M&A Trends Source: Collins Stewart LLC
  • 33. Pharma/Biotech M&A Deals
    • Novo Nordisk acq’d Neose Technologies ($21m)
    • Eli Lilly acq’ing ImClone Systems ($7.1b)
    • Sanofi-Aventis acq’d Acambis ($548m)
    • Roche acq’ing Genentech ($44b)
    • Novartis acq’d Protez ($400m)
    • Fresenius acq’d APP Pharma ($3.7b)
    • Stiefel acq’d Barrier Therapeutics ($148m)
    • Galderma acq’d CollaGenex ($420m)
  • 34. Biotech/Biotech M&A Deals
    • Ligand acq’d Pharmacopeia ($73m)
    • Arca Biopharma acq’d Nuvelo (ND)
    • ViroPharma acq’d Lev Pharmaceuticals ($443m)
    • Cubist Pharmaceuticals acq’d Illumigen ($342m)
  • 35. Future Landscape of M&A
    • Many large Pharmas have recently publicly stated they are increasing their biotech M&A focus
    • Deal burden in Pharma’s BD departments increasing, with fewer resources and their own internal turmoil
    • Valuations are challenging in this environment
    • Fair value accounting rules in 2009 may have impact
    • Not a speedy process – be prepared for a 6 month journey, at best. Not a ‘last resort’ strategy
    • Don’t forget to consider spin-outs and carve-outs
  • 36. Reverse Mergers
    • Growing alternative to classic IPO route
    • Two main types of transactions:
      • Companies whose lead product has failed but have excess cash to redeploy
      • Publicly listed shell companies with no assets
    • Selected 2008 deals:
      • ONCOGENIX  Sonus Pharmaceuticals
      • CELLDEX  Avant Immunotherapeutics
      • DARA  Point Therapeutics
      • TRANSCEPT  Novacea
  • 37. Reverse Mergers
    • Benefits:
      • Access to capital markets and public listing
      • Often less dilution vs. IPO or other capital raise
      • Change in investor base and Board membership
    • Hidden costs:
      • External perception of “short cut” to market
      • Reduced debut marketing and later trading volume issues
      • Analyst coverage and other Wall Street sponsorship
      • May need to consider a concurrent cash raise
      • Shaking the “baggage” of the acquired company can be difficult