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
GREG BROWN PARTNER, PAUL CAPITAL PARTNERS
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
BOB KEITH, COO, VERUS PHARMACEUTICALS
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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