Late-Stage Capital Options for Biopharma Companies Require Taking a Longer View

Editor’s note: Deborah Hylton is an attorney in the Research Triangle Park office of Womble Carlyle Sandridge & Rice, PLLC. Hylton will moderate a panel on late stage financing at the Council for Entrepreneurial Development’s (CED) Biotech 2005 conference, which is May 24-25 at the RTP Sheraton Imperial Hotel. This Entrepreneurial Spirit column is the latest in a series for LTW from membership of CED.
_______________________________________________________________________________________Many late stage growth or technology companies seeking financing may chose among going public, raising additional private equity, selling out to an industry player, or raising money via a strategic partnership. The substantial capital requirements of biopharma companies increase the importance of choosing a strategy that optimizes continuing access to the capital markets over time rather than at a single point in time.

In order to make the best late stage financing decision, biopharma companies should conduct an internal review while surveying the external market conditions that help define viable options. Reviewing the following internal factors should help biopharma companies evaluate the alternatives.

What is the Product and Pipeline Picture?

The key factor in whether a biopharma company is a viable IPO candidate is product stage. Public investors want to minimize development risk. Over three-quarters of the IPO Class of 2005 had lead candidates in Phase 2 or beyond. Assessing the lead drug candidate’s real stage of development (e.g., would a Phase 2B trial be needed after completion of Phase 2?), together with inherent risks such as timing of trial results, is critical.

Pipeline is also very important for long-term capital opportunities. The one-trick pony company is especially vulnerable in public markets without a safety net for failure of the lead compound and without demonstrated opportunities for future growth. Even though platform companies are strictly “RIP”, future product opportunities from a proprietary discovery engine may help to sustain valuations in an IPO and to support long-term market interest.

How Ready is the Company for Being Public?

Being public imposes substantial demands on corporate infrastructure. Financial statements must be compiled in short time frames (45 days after quarter end; 90 days of year end) and SEC accounting standards impose an additional layer of compliance standards. The impact of Sarbanes-Oxley Act on board infrastructure is great. Chief executives should expect to spend up to 25 to 50 percent of their time devoted to compliance and other issues relating to “being public.” As a result, the management team needs breadth and depth, beyond just finance, to manage business objectives.

Another way to ask this question might be “Is the company a late-stage company, or just an earlier stage company with late stage clinical products?” A company is generally ready to select the public market route only if it has made significant progress in building a management team, becoming Sarbanes-Oxley compliant and implementing other IPO preparatory steps.

What is the Strategic Partnership Strategy?

The many factors that influence optimum times to partner a drug or group of leads are too extensive to explore in this column. The company’s strategy for partnering its product, and the progress made towards any needed partnerships, helps define the best capital strategy. The value from a licensing deal in up-front payments, milestones, validation of the product and increased likelihood of successful commercialization may be a useful interim step for some companies before approaching the public markets. For some companies, existing partners represent the most attractive exit vehicle.

What are the Needs of Investors and Other Constituents?

Investor needs drive the ultimate financing decision. Investors’ tolerance for down rounds and diminished interest or ability to make future investments may encourage a company to access the public markets even in less favorable markets. In contrast, confidence in improving valuations and willingness to invest to achieve key milestones can keep a company private for a longer time. The needs of other constituents such as strategic partners may have some influence on the company’s options, but no influence will be as significant as the capital inclinations of the existing controlling investors.
_______________________________________________________________________________________

During the Biotech 2005 conference on May 25, Deborah Hylton will moderate a panel discussion on “The Challenges of Later Stage Financing in 2005.” Joining Hylton on the panel will be Charles Baltic, Managing Director, Healthcare Investment Banking, Wachovia Securities; Donald deBethizy, Ph.D., President and CEO, Targacept, Inc.; Lee Stettner, Managing Director, Head of Healthcare Investment Banking, Deutsche Bank; and Kay Wagoner Ph.D., Co-Founder and Chief Executive Officer, Icagen, Inc.