Biotech Financing Gathers Steam
Despite a steady improvement in the capital markets during the second quarter of 2009, biotech and specialty pharma companies actually raised less money than they did in the first quarter of the year. However, the drop was slight -- a relatively modest $180 million (four percent) – and obscures the overall positive trend we’re seeing in biotech financing these days.
Indeed, the situation has improved considerably since the summer of 2008. For the first six months of 2009, biotech and specialty pharma firms raised more than $8.3 billion from all sources (excluding revenues and payments from corporate partners). That’s 41 percent more than the roughly $5.9 billion these firms raised in the first six months of 2008. Public offerings garnered more than $1.2 billion this year, up 78 percent from the year-ago period. Money raised by public companies through alternate financing schemes – such as convertible debt, private placements and registered direct offerings – totaled about $4.8 billion this year, up 75 percent from the year-ago period. In contrast, venture capital financing took a hit this year: The $2.2 billion raised in the first six months of 2009 was down 8 percent from the roughly $2.4 billion raised in the first six months of 2008.
The bump in public stock offerings is encouraging, and may indeed indicate that investors are warming up to biotech again. In the first half of 2009, 12 companies in the U.S. and 2 in Canada raised more than $1.2 billion through follow-on stock offerings – up significantly from the $605 million raised by 9 firms in the year-ago period. There’s even been an IPO in 2009: At the end of April, Irvine, CA-based HepaHope Inc., which is developing biological products to support patients with liver failure, raised $3 million in its IPO in Germany and Luxembourg. By comparison, four companies completed IPOs in the first half of 2008 -- one in the U.S. (Bioheart Inc.) and the rest overseas (Molmed SpA, Genera Biosystems Ltd. and PCI Biotech AS). (For a list of U.S.-based public stock offerings in 2009, see the Signals article, “The Class Of 2009: Waiting For A Rebound.”)
In many cases this year, already listed companies went to the public well shortly after the release of great news – confident in their ability to attract excited investors. InterMune Inc., for example, priced a public offering of 3.5 million shares in February, 10 days after it reported that pirfenidone, its experimental drug for idiopathic pulmonary fibrosis, had met its primary and secondary endpoints in a Phase III trial.
Geron Corp. took a little longer to get its stock offering going: In late January, the FDA cleared Geron to begin the first-ever clinical trial of a human embryonic stem cell-based therapy. Three weeks later, the company sold 7.25 million shares in a follow-on offering.
In mid-May, Dendreon Corp. raised an impressive $230 million through a follow-on offering little more than a week after it reported that its experimental drug candidate Provenge significantly prolongs the survival of patients with advanced prostate cancer.
Other firms banked on their reputations, and the ongoing clinical success of a late-stage drug candidate, to charm investors. Vertex Pharmaceuticals Inc., for example, raised $320 million through a follow-on offering in February – enough to bring its Phase III hepatitis C virus drug candidate telaprevir to market.
But Cephalon Inc. pulled off the biggest financing in late May, when it simultaneously raised $300 million in a follow-on public stock offering and another $500 million through the sale of convertible senior subordinated notes. These offerings followed a string of positive news from the company, including the release of statistically significant results from three clinical trials on Nuvigil, its drug for treating excessive sleepiness in a number of situations.
Importantly, these companies were able to sell their shares rather quickly because they were already registered with the SEC by means of a shelf registration statement. Biotech and specialty pharma firms have been relying on shelf registrations for years now – and they continue to prove their worth in underwritten public offerings as well as other sorts of financings.
This year, registered direct offerings (RDOs) -- in which registered shares are sold by a placement agent to selected investors -- have caught everyone’s attention. They avoid the downward pricing pressure of underwritten public offerings as well as the illiquidity of traditional PIPE offerings, in which the stock is not registered until after the sale. Additionally, in most PIPE transactions the stock is sold at a discount to market, a situation that doesn’t occur with RDOs. RDOs can also be less expensive to the issuing company than other types of financing.
In the early months of the year, only a few firms tested the RDO waters: Antiviral drug developer Pharmasset Inc. raised $45.5 million through an RDO in January and cancer drug specialist Ariad Pharmaceuticals Inc. raised $24.3 million in February. In March, four more companies used RDOs to raise much-needed cash, and the numbers have increased steadily since then. (There were nine RDOs in June and at least seven in July).
Registered direct offerings may still be on the rise, but convertible debt offerings have been few and far between this year. That’s not surprising, since most biotech companies are financially insecure at the moment. Not so Amgen Inc., which raised $2 billion in a two-part debt offering in January. Nor Bio-Rad Laboratories Inc. and Inverness Medical Innovations Inc., which raised $300 million and $400 million, respectively, in May. And then there’s Cephalon, which raised $500 through a convertible debt offering, also in May.
Together, these four debt offerings raised $3.2 billion, two-thirds of the total $4.8 billion raised by public companies through alternate financings in the first six months of 2009. For comparison, in the first six months of 2008 there were also four debt financings – and although they raised less (about $1.5 billion in all), they still accounted for more than half the money raised by public offerings through alternate financings.
Biotech and specialty pharma companies can tap into another source of cash through equity financing facility agreements with private investment firms. These agreements, which became popular in 2008, provide the biotech client with a guaranteed source of income for a specific period of time (usually three years). The investment firm provides the money by purchasing newly issued shares of the client’s stock, but the client has the power to determine the timing and amount of these transactions. As an added bonus, this type of financing is minimally dilutive.
During the first six months of 2009, a number of public firms took advantage of such deals. For example, in March Arena Pharmaceuticals Inc., whose lead drug candidate lorcaserin is in Phase III clinical trials for obesity, obtained an 18-month equity financing commitment of up to $50 million from Azimuth Opportunity Ltd. In April Pharming Group NV, a Dutch firm that specializes in transgenic protein production and development, entered into a standby equity distribution agreement with Yorkville Advisors Global Master SPV (YA Global), under which YA Global committed to buy up to EUR 20 million ($26.3 million) worth of newly issued Pharming shares over a three-year period. And in May PolyMedix Inc., which is developing biomimetic therapies for infectious and cardiovascular diseases, signed an agreement with Dutchess Equity Fund for up to $10 million in financing through a three-year equity line facility.
Privately held firms raised less money in the first half of 2009 than they did in the year-ago period, but not by much. In the first half of 2008, 140 companies on a global basis raised $2.4 billion in venture financing; this year, 143 companies on a global basis raised about $2.2 billion – a drop of eight percent.
As always, a handful of companies attracted tremendous amounts of cash in the second quarter of 2009 – especially start-up Clovis Oncology Inc., which raised $145 million right out of the gate. Demonstrating once again venture capitalists’ (VC) old adage that there will always be money for the right company, this financing was a no-brainer. Clovis was founded by Patrick Mahaffy and other members of the executive team from Pharmion Corp., who turned that company into a major player and then sold it to Celgene Corp. in 2008 for $2.9 billion. Not surprisingly, then, the VCs that supported Pharmion in its early days lined up for Clovis Oncology, which is planning to in-license and develop promising cancer therapies.
Monoclonal antibody specialist NovImmune SA took the fund-raising prize in Europe, when it raised 62.5 million Swiss francs ($54.8) in a Series B extension in May. That’s apparently the largest European VC financing this year.
With the further exception of specialty pharma Hyperion Therapeutics Inc.’s $60 million Series C round in June, the rest of the VC financings during the second quarter were well under $50 million, with some coming in at $2 million or less.
Interestingly, the fraction of fledgling firms raising money in Series A (and pre-A) rounds in the first half of 2009 was 36 percent, slightly higher than the 34 percent of companies raising money in A and pre-A rounds in the first half of 2008. These data indicate that VCs are not turning their backs on biotech start-ups, contrary to some analyses. In fact, the latest MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA) shows the same trend across industries. “With the improvement we’ve seen over the past few months in the capital markets and a small crack in the IPO window during Q2, we’re already beginning to see VCs turn their focus back to new investments, as the 67% increase in seed and early stage fundings in the second quarter would suggest,” explained PwC’s Tracy Lefteroff in prepared remarks.
Furthermore, the report found that investment activity (across industries) for the second quarter of 2009 increased 15 percent in terms of dollars but remained essentially flat in number of deals as compared to the first quarter of 2009. So there’s still reason for caution: ”Until we see notable upticks in venture fundraising and exit activity – which drive investment levels – we won’t expect considerable increases in the number of deals completed each quarter,” explained Mark Heesen, president of the NVCA, in prepared remarks.
By all accounts, then, the capital markets are starting to ease – if ever so slightly. Biotech and specialty pharma companies are raising money again through underwritten public offerings (20 of them by the end of July) and registered direct offerings (33 by the end of July). The credit markets opened to a few select biotech firms in May, and venture capital investments are holding steady.
But make no mistake: The financial crisis is far from over. While the biotech sector raised 41 percent more money in the first half of 2009 than it did in the first half of 2008, it’s still severely under-funded. Companies raised 55 percent less money in the first half of 2009 than they did in the first half of 2007 ($18,559M) and 49 percent less in the first half of 2009 than they did in the first half of 2006 ($16,458M).
What’s next? Well, some analysts predict that money will continue to be in short supply for at least the next year, perhaps two. Stock prices will remain depressed, lowering company valuations and making them unattractive buyout candidates. Some companies, at least, will be able to catch investors’ attention, but only because they have developed drug candidates with proven potential.
The answer, according to some, lies in creative financing. These include, among others, reverse mergers, venture debt, committed equity financing facilities, credit lines, collaborative development financing (the “Symphony” model) and royalty and structured revenue financing arrangements.
“The world has changed,” explained John Leone, a partner at Paul Capital Healthcare. “With limitations in the equity and debt markets, companies are having trouble raising the capital” they need to continue the development of their drug candidates. As a result, he continued, “there is more partnering than in the past, including with smaller companies,” and some are looking to big pharma for an exit.
But big pharma has its own problems. In the last 12 months, “pharma companies across the board have had to adapt to a new business model,” explained Walter Flamenbaum, founding partner of Paul Capital Healthcare. “Where is revenue growth going to come from? Everybody has been talking about the impact of generic drugs for years.” The advent of generics will drastically cut income at affected pharmas, he continued, so those companies are asking themselves if they “can afford to do R&D to bolster the top line.” And, with healthcare reform looming ever larger, “we are spending much more time looking at reimbursement as an issue,” Flamenbaum said.
Paul Capital Healthcare has provided financing for healthcare companies, institutions and inventors for a decade – with a focus on commercial-stage products. It’s best-known, perhaps, for its royalty and structured revenue deals. These arrangements, naturally, are only finalized after extensive due diligence – and in the current environment, it becomes even more important.
“We’ve been spending a lot of time looking at our legend investments and helping them,” Flamenbaum said. And though the firm has yet to publicize a new deal this year, announcements are forthcoming, he explained. Paul Capital is being cautious, he said.
And so, it seems, are most investors – even those with a high tolerance for risk.
originally published 07/31/2009