2nd QUARTER 2014
47
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F
inancing drug development in a
biotech from discovery through to
market is no easy task. The human
body is a complex environment whose
basic underlying mechanics are not well
understood. This fact can translate into years
of negative cash flow, despite the business
achieving multiple development milestones
that can generate value for shareholders.
Throw in volatile or cyclical financing
markets, and you’ve got yourself an interesting
strategic debate of accepting the potential dilu-
tion from additional equity financings (and
sizing that financing appropriately) versus
sharing the upside opportunity by partner-
ing assets with larger strategic parties. Herein
lies the major dilemma facing many biotech
CFOs: How to best finance the business.
In recent history, biotech companies
typically needed to have clinical proof-of-
concept data in hand before accessing the
public markets, where the use of proceeds
from an initial public offering were to fund
that final pivotal study that would open the
doors to an FDA approval. The last biotech
“IPO window” closed abruptly in 2007 and
was followed by a cold three-year winter
for biotechnology financing. Many of the
venture funds, struggling to generate returns
to their limited partners, began to rely on a
struggling M&A market environment where
larger-capitalized pharma had their choice of
the litter. Innovation stalled.
Then buyers began to get smarter. Why
not structure acquisitions like licensing deals,
with smaller up-front payments; pay for the
clinical studies, and then make milestone
payments or have pre-defined acquisition
prices based upon success? This risk-sharing
model came into vogue, as it relieved the
venture investors from a need for additional
financing, but provided meaningful sharing
in the upside opportunity.
The capital dripped back into biotechnology.
Innovation, the engine for the sector, began to
generate steam. Multiple new therapies dem-
onstrated success in late-stage clinical trials,
obtaining regulatory approvals and generating
positive cash flow for companies and outsized
returns for investors. Success begets success
and more innovation gets funded. And so the
industry comes full circle over about a 10-year
period—coincidentally, about the average
time it takes to bring a new therapy to market.
The CFO’s Dilemma
For the CFO of a biotechnology business,
the big questions are: Where are you in
development of your drug candidate and the
value-creation milestones? Where are you in
the financing cycle? And how do you best
finance your business to get to the ultimate
goal of bringing new therapies to patients?
The “go-it-alone” path can yield the
greatest value creation for shareholders, but is
risky from both a development and financing
point of view. If the equity market environ-
ment is favorable, how much dilution should
you be willing to take to de-risk the business
through the next major value inflection point
versus pursing the business-development
alternative or trying for financing at a later
date with a higher valuation?
Each business faces a unique set of
circumstances. In any market environment,
understanding the financing alternatives,
persevering despite challenges, and making
good decisions should lead to the right answer.
Current market conditions are quite favorable
to biotech. My advice: When the weather’s
warm, don’t wait. Get some sun!
C
FINANCING
INNOVATION
IN THE SEASONAL BIOTECH FINANCIALMARKETS ...
THEWEATHER’SWARM
CFO 2
By Shane Kovacs
Chief Financial Officer, PTC Therapeutics
CFO
