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Smaller devices and pharmaceutical companies are exploring different means of raising financing but M&A and partnership deals seem to be the mainstay, industry experts told Pharmawire.
Every four or five years the industry goes through a “nuclear winter,” said Jim Webster, managing partner at Capital Royalty. During such climate the most common exit for smaller companies is a sale, he said. Companies such as GlaxoSmithKline (GSK) and Bristol-Myers Squibb (BMS) are always on the prowl. He cited GSK buying Boston-based Sirtris for about USD 700m last year and BMS’s bid for ImClone as examples.
A portfolio manager at a hedge fund agreed saying the M&A markets seemed to be healthy and these companies are in bad need of products. These companies also have a tremendous amount of cash and because of this are free from the capital markets.
Any area that has an unmet medical need will always interest large pharma, said John Leone, partner at Paul Capital Healthcare. Oncology continues to be a favorite and compounds related to the central nervous system (CNS), especially addressing diseases related to aging, will be looked at. These CNS trials are long and costly and if a small company originates such a compound then it will eventually need help in developing it, he said.
Embryonic stem cell research and RNAi technology are also popular areas, Webster noted
Gary Kurtzman, vice president and managing director, life sciences group at Safeguard, said companies are looking at opportunities to increase their footprints in medical diagnostics, as well as regenerative medicine. He said firms that Safeguard is partnered with, such as Avid Radiopharmaceuticals – a private company developing diagnostic imaging agents, including radiopharmaceutical imaging agents for CNS diseases – would be a good therapeutic play.
Regenerative medicine companies such as Advanced BioHealing, which is also partnered with Safeguard, would also be attractive as it generates revenue, he added.
For companies who are not yet thinking of selling, raising financing could be difficult in this environment, the industry sources agreed. The equity and debt markets seem to be all but closed to small and mid-size companies. But despite the lack of access to the public markets, they have other options that are tailor made for the pharma and biotech space.
Partnering out the licensing rights of a drug is one way to raise capital, said Andrew Busser, a principal at Symphony Capital, a private equity firm specializing in biopharmaceutical companies. It gets involved with public companies with market caps of under USD 1bn and tends to stay away from companies in A, B or C rounds of financing or those who need investment for preclinical products. At the end of the deal, most of the companies end up partnering their products, he said. Symphony has entered into deals with Isis Pharmaceuticals, Lexicon and Exelixis.
Royalty financing is a unique and growing method of raising capital for public companies that have a product on the market, said Busser. This allows companies to monetize the royalties on their products, or they receive capital in exchange for a future revenue stream.
Paul Capital Healthcare was one of the firms that started royalty financing in 2000. In the last eight years it has provided “growth capital” for companies and engaged in 38 deals. Paul Capital considers both public and private emerging biotech and smaller pharma companies. Most of these investments are under USD 1bn and are not dilutive, Leone said.
He described royalty financing as an attractive alternative to the equity markets. Small companies who would usually turn to the debt market for financing are unable to do so in this climate, he said. Listed pharmaceutical companies are “getting hammered” on the stock market and this makes it very costly for them to raise financing in the debt market as well.
Royalty financing is still not a very big trend, noted Webster of Capital Royalty, another royalty financing firm. Nor is this the place for early stage companies who do not have commercialized products, he said. Venture capitalist (VC) funds can help the younger companies out. The returns in this area are not VC returns either, he said. Capital Royalty looks for “decent returns”, which he described as being in the teen to mid-double digit figures.
It is also infrequent that Capital Royalty will decide to make a deal with a company with a product still in development. This adds to the risk and most royalty financing firms are not willing to take it, Webster said. Leone agreed, saying most of Paul Capital’s investments have commercialized products.
Hedge Funds are willing to invest in younger companies, Webster said, but even they are suffering in the current climate. They are aggressive and will withdraw a lot faster than private equity investors. Young companies are seen as highly risky and few are willing to put in the investment, he said. There is, however, some capital available to them from VC funds.
The other option for such companies is a firm like Hercules Technology Growth Capital (HTGC), which provides venture debt of private investment in public equity (PIPE). This firm lends to companies with products in late stage development and prefers that the pipeline has more than one compound in the clinic, said Kathy Conte, managing director of life sciences for HTGC, and its sweet spot is between USD 10m and USD 20m.
While PIPEs and venture debt are still being done, said Webster, the money generally needs to be returned in three years and the amounts are not very large. Also, debt has become difficult to obtain and can be quite costly in this market, he noted.
One thing we have not seen any of late is IPOs, Conte said. The last pharma/biotech IPO was in the Q4 2007 and there have been none this year, she pointed out, even though there are a lot of companies in registration.
Instead some companies are choosing not to ride out the down swing of the equity markets and are opting to withdraw their registration. Life Sciences Oncology and Elixir Pharmaceuticals are examples of companies who did just that.
For a private company, an IPO is almost out of the question, said the CEO of a private pharmaceutical company, because the equity market is so tight. And there is no telling when the markets will let up, he added.
Reverse merger options are also an on-going situation, David Horn, executive director at Morgan Stanley, told this news service, as there have not been any biotech IPOs in 2008. This has led to a backlog in emerging companies that need financing.
In April Dara BioSciences used listed entity Point Therapeutics as a way to go public. And more recently, last month, OncoGenex reverse merged with Sonus Pharmaceuticals to become a listed entity on the NASDAQ.
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