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Alternative Financing Strategies not a Cure-All for the Industry
(BioWorld Today Via Acquire Media NewsEdge) BIO 2008
SAN DIEGO - With the initial public offering window shifting from selectively open to firmly shut, it's no surprise that the 2008 Biotechnology Industry Organization meeting offered plenty of panels on alternative financing.
Executives crowded into sessions like "The Evolution of Capital: New Sources of Financing in the Life Sciences and Biotech's Best Bet: M&A, IPO or Alternative Financing." Yet Bob More, partner with Domain Associates LLC, cautioned companies to be wary of unproven financing vehicles.
"Your company is your baby," he told BioWorld Today, adding that if a school is experimenting with a new educational program, parents might not want their kid to be the guinea pig.
One dubious financing strategy discussed during a panel titled, "Winning with Alternative Financing: Creative Strategies for Bypassing the IPO," was the special purpose acquisition company, or SPAC. That approach involves forming a company with no assets, taking the company public and using the money to acquire assets and build a business.
Examples of that strategy working in biotech are few and far between, although both Waltham, Mass.-based Dynogen Inc. and Parsippany, N.J.-based Valeritas Inc. tried SPAC-like arrangements a few years back.
Another alternative exit strategy that hasn't exactly panned out for U.S. biotechs is listing on a foreign stock exchange like London's Alternative Investment Market. Such markets were stronger than U.S. exchanges a year ago but now are about equal, therefore offering a "very tough" option for U.S. companies that don't have an overseas following, according to Jennifer Jarrett, managing director with Credit Suisse Securities LLC.
Panelists also discussed reverse mergers, which Brian Cooke of Keating Investments LLC said can be a good option for companies stuck in the valuation gap between venture funding and Nasdaq listings.
For companies interested in pursuing that option, he recommended raising between $10 million and $30 million through a PIPE, merging with a public shell and then listing on the Over-the-Counter Bulletin Board for 12 months while using on-line tactics to build an investor base before jumping to Nasdaq.
More said he prefers to see companies obtain financing through royalty trusts, which entail moving from an alternative option to the mainstream. Earlier this year, London-based Vernalis plc sold a share of its Frova (frovatriptan) revenues to Paul Capital Healthcare, while Cambridge, Mass.-based Vertex Pharmaceuticals Inc. sold an interest in its royalties for Lexiva (fosamprenavir calcium) and Agenerase (amprenavir) to an unnamed buyer, and CV Therapeutics Inc., of Palo Alto, Calif., sold part of its Lexiscan (regadenoson) royalty stream to TPG-Axon Capital, just to name a few. (See BioWorld Today, April 17, 2008, April 22, 2008, and June 4, 2008.)
But the favorite alternative to the IPO in this day and age remains partnering activity.
"We used to tell people, 'If you don't have to partner, don't,'" said Rachel Leheny, co-founder and principal of Caxton Advantage Venture Partners. But with the rising costs of clinical trials and higher hurdles at the FDA, she admitted that it's very difficult to go it alone, especially when dealing with large indications like cardiovascular disease.
Big pharma certainly is hungry for partnerships, as well as for all-out acquisitions, but More encouraged executives not to bank on getting a deal. Successful transactions require "a lot of stars to align," he said, adding that "if M&A were the only option, we would fold up shop and go home."
Companies hoping for a future M&A deal would be wise to "think more like a pharmaceutical company" when designing clinical trials, Leheny advised. "People think they can save their way to success . . . but pharma wants to see a more complete package," she said.
And that creates a bit of a Catch-22 because assembling a robust data package takes money, and that money has to come from somewhere.
So when can biotech companies expect to get back to good old IPOs?
Jarrett said the window is "likely to stay closed in 2008," which will lead to consolidation and a "cleaning out" of the industry. But 2009 will be "a totally different story," she noted, predicting that an increase in follow-on financing activity and a truly successful IPO will help open the window once again.
Leheny said that if the biotech industry was "operating in a vacuum," the IPO window already would be open. Large-cap biotech stocks are starting to look expensive, she said, which should push investors seeking larger returns into smaller caps.
But thanks to the current historical low for liquidity, she agreed with Jarrett that the window won't open until mid-2009. n
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Copyright ? 2008 Thomson BioWorld, All Rights Reserved.
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