Finance Session II

The Evolution of Capital: Traditional and Non-Traditional Funding

Moderator: Walter Greenblatt, Managing Director, Walter Greenblatt & Associates
Zev Scherl, General Partner, NewSpring Capital
Mel Billingsley, Ph.D., President & CEO, Life Sciences Greenhouse of Central Pennsylvania
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.

Greenblatt: Opened with a discussion about the demand side of financing - biotech is hungry for cash. 35% of small biotechs have less than 12 months' cash. Nearly 100 of 330 public biotech companies have less than 6 months' cash on hand.

Scherl: Over the past five years, payments increased across all stages of development. Medtech M&A activity has slowed down dramatically this year, with Pharma and private equity emerging as buyers. There are some positive facts about the market: Many VC firms have raised substantial funds and are positioned to put significant capital to work. Pharma and medical device companies are desperate to fill product pipeline gaps with new products. He believes the recession will eventually have dramatic impact on health care and pharma/medtech spending, and that companies should consider all financing alternatives and vehicles.

Billingsley: Talked about non-dilutive funding. Non-dilutive funding preserves the current status of equity/cap table. If via peer review grant, it offers 3rd party vetting. It provides a limited scope of funding $100k-$200M, and some firms may convert to equity stake at a later stage. However, the timing may be difficult.
There are many types:

• Federal SBIR/STTR grants - must meet SBA criteria
  
• Contracts (federal and private) - federal contracts have considerable paperwork & required deliverables
  
• Venture philanthropy/foundation funding - often target specific diseases; may be derivative from main corporate mission.
  
• Convertible debt (may be paid back w/interest or converted to equity at a later point)
• Venture debt (non-convertible)
• Business development resources

VanLent: Spoke about alternative financing options:

• Royalty financing - takes on several forms
• a royalty interest - an asset purchase of pre-existing royalty resulting from an existing license agreement or cash flow stream
• a synthetic royalty 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
  
• Collaborative development (R&D) funding
• ex: Symphony
  
• on a successful product, the biotech company can go out and buy back all the product rights
• primarily has been done with private companies
  
• Priority review vouchers
• available to sponsor of newly-approved drug or biological for neglected tropical disease
• approved itself under Priority Review
• voucher is transferable or saleable
• applicable to any NDA/PLA submission
• NPV value of acceleration est. between $50-$500M

Sender: Gave an overview of the venture debt market

• Enterprise financing, pure working capital or combo
• Size ranges from $1M to $20M
• Maturity from 2-4 years
• Interest rate spread to LIBOR or other index. 11-13%
• Warrants struck at last financing round
• 2-5% of total debt facility equicy participation often attached.

Benefits:

• Near term non dilutive finacing.
• Reduced cost of capital vs. equity
• Capital-intenstive co-allow equity to finance R&D
• Runaway extension
• Equipment draws can often exactly match the timing of expenditure

Risks

• Payback timing has to be carefully managed
• Triggering of Material Adverse Change clause can be burdensome
• In a liquidation, debt holders get paid back first
• Will debt providers have money if draws are staggered?

Schnittker: Addressed M&A Considerations
Make sure you are considering yourself as a target for M&A. Most lately have been pharma-biotech, but expect an uptick in biotech-biotech. Valuations are challenging in this environment. It's not a speedy process - 6 months at best. Therefore, it's not a last resort strategy. Don't forget to consider spin-outs and carve-outs.

Reverse Mergers are an alternative to the IPO route. There are 2 types:
1. Company that's lead product has failed but they have excess cash to deploy.
2. Publicly listed shell company with no assets.

Benefits of reverse mergers:

• Access to capital markets and public listing.
• Often less dilutions vs. IPO or other capital raise.
• Change in investor base and board membership.

Hidden Costs:

• External perception of a "short cut" to the market
• Reduced debt 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.

By Danielle Kozich on behalf of Pennsylvania Bio

I apologize if there are any errors in this post; I am a layperson and many of these terms are out of my field of expertise.