Finance: Good Alternatives

With more ways to raise cash, biotechs with hot products can extend their independence.
Sep 01, 2006
By Pharmaceutical Executive Editors

Private equity financing has provided the majority of growth capital to the biotech sector for some time. But new financing models are increasingly available and en vogue, allowing biotechs a chance to hold off on early-stage deals and create more value for their companies. As more firms buy into this approach, the landscape will shift to even more of a seller's market—making the already competitive licensing environment even tougher for Big Pharma. These movers and shakers, who are finding success in a variety of new models, help illustrate how alternative financing is taking shape.

Revenue-Based Financing


We provide financing either by purchasing existing product royalties or by creating royalty streams for drugs, also known as revenue-based financing. For companies that are confident in their ability to perform and have commercial products, increasing revenues, and an understanding of the market, revenue-based financing is a very attractive alternative or complement to equity or debt.

Take Acorda Therapeutics, which has a multiple sclerosis product called fampridine in late-stage clinical trials. Acorda also acquired an already approved product called Zanaflex (tizanidine), and was looking for capital to fund sales-force expansion. We provided Acorda $15 million upfront and then committed $10 million in milestone payments based on sales. In return, Paul Royalty Fund [Paul Capital Partners is a private equity firm that manages the Paul Royalty Fund] is entitled to receive a percentage of revenues of Zanaflex.

We closed the Acorda Therapeutics deal in December 2005. It is important to mention that the company successfully completed its initial public offering in February 2006. The extra cash [from Paul Capital Partners] allowed Acorda to enter the IPO market with a full tank, but it also validated for the equity investors that the company could go and market Zanaflex in addition to being a development company. This is an example of how we've put capital to work in a non-dilutive way, isolated our performance to a single product, and left the upside to the equity investors.

A second scenario [that we'll finance] is when a company has a Phase III product, and is looking for a drug that's already generating revenue to establish a commercial base that it can use to launch the product currently in clinical trials. A third scenario is for companies with a compound in late Phase III. We have done deals where we put in some equity prior to a pharmaceutical product receiving FDA approval, and then staged our revenue-based financing as the pharmaceutical product gets approved, launched, and meets certain milestones.

Client Perspective


We felt there was a phenomenal opportunity to go out and build a company pretty quickly, with both the commercial and development sides. We clearly were looking for large amounts of capital. We started with more traditional routes, venture firms. We wanted firms that had deep pockets, that understood the operating side of the business very well, and with which we had relationships through prior experiences.

At the same time, we knew that to get to that $100 million level, we had to also look at alternative sources of financing. That's when we started with Paul Capital Partners and others. What's interesting about the Paul Capital deal is that they participated on the equity and the debt side—and brought in a significant amount of capital.

We went from nine employees to almost 100 in a year. As we went through that, we needed to look at the alternatives [required for financing]. However, I would bet that today, there are even more alternatives out there.

To enter the market, Verus Pharmaceuticals gained a $78 million Series A preferred stock financing—the largest sum ever raised in a Series A round in San Diego, according to Verus—which was augmented by a $20 million product-specific royalty financing.

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