Fundraising Choices in Life Sciences: What, When & Why?

By Linda Rubinstein

This article is the second in a two-part series about fundraising strategies for life science companies.

In our last article, A Menu of Financing Alternatives for Life Science Companies, we looked at the continuum of choices available to life science companies who are actively engaged in fundraising to power up their progress toward their development and commercial milestones.

This week, we focus on criteria for life science CEOs and Boards to use when making decisions about what type of financing to deploy, when, and why. These considerations inform both strategy and financing over time as a company proceeds along its product roadmap, increases its value and assets over time, and reaches its ultimate goals of regulatory approval, commercial success, and financial sustainability.

Key Considerations in Life Science Company Fundraising and Capitalization

There are six key questions life science CEOs, boards and investors should ask themselves before making financing decisions:

1. What stage of development are you in and what financing options are available?
2. How much cash do we need to get to your next milestone?
3. What is your ultimate strategic path?
4. What types of investors can you access with a given type of financing?
5. What is the cost of capital that investors and creditors will demand for various fundraising options?
6. What other economic and non-economic terms impact the choice of fundraising option?

#1: What Stage of Development Are You In?

As I described in my earlier article, the financing alternatives available to a life science company vary depending on company stage. Very young companies often rely on friends and family, incubators, and angels for seed funding; government and foundation grants; and eventually equity funding, typically from venture capital investors.  Early stage companies may also secure pharma R&D funds to build out their technology while working on their proprietary programs.  As companies mature, they may be able to raise equity in larger amounts, at higher valuations and potentially from the public markets and to license product candidates to larger pharma/biotech companies.  Venture debt is an option to extend the runway provided by equity and other financing.  As product approval and commercialization near, more funding options present themselves, including structured financings involving the sale of a royalty interest in a commercial or pre-commercial product; various forms of equity; convertible debt; and conventional lines of credit and other fixed income financing.

#2: How Much Cash Do You Need to Get to Your Next Value-Creating Milestone?

While it may seem that life science companies are always fundraising, each financing, in particular each equity round, should be structured to in order to reach a company’s next milestone(s) on its strategic path, including a buffer to allow sufficient time to complete the next fundraising cycle.  Milestones that constitute value inflection points can be data that validates a program or technology, reduces product risk – for example by advancing from Phase II to Phase III, or enhances market opportunity; a pharmaceutical partnership that provides validation and capital; or expansion of key capabilities such as building a commercial salesforce or adding downstream R&D.  Running out of capital before hitting key milestones can mean having to raise the next equity round at a lower instead of higher valuation, stopping a project before it’s complete, or discovering that financing is just not available.

#3: What is your longer-term path?

Where do you believe your journey as a life science company will ultimately lead?  Will you decide to develop and commercialize your proprietary products independently? Partner with Big Pharma?  If you’re in a risky therapeutic area requiring large clinical trials, for example Alzheimer drugs, the type and amount of capital you will need is different, and the likelihood of needing a large partner is higher. This situation is very different from one, for example, where you are pursuing an ultra-orphan indication for which there are no competing approved therapies and for which a small company might be able to obtain regulatory approval and commercialize independently.  It’s helpful to pave the way toward your longer-term future with every financing. Even at an early stage, the industry, board, investor, and other relationships you form may be instrumental to your later success as a life sciences company.

#4: What types of investors can you access with a given type of financing?

Accessing different types of capital broadens a company’s pool of potential investors.  Each type of investor has its own time horizon and rate-of-return expectations.  Potential venture capital investors include institutional VC funds, family offices, hedge funds, sovereign wealth funds, etc.  Some are specialist biotech investors; others may be generalist or tech investors.  For example, there have been multiple waves of interest on the part of tech companies in making genomics investments.

#5: What is the cost of capital investors and creditors will demand for various fundraising options?

Cost of capital is a key metric for any CFO in any industry.  In the case of equity, return derives from expected value accretion as US life science companies rarely pay dividends.  Different equity investors have different return thresholds, investment time horizons, control requirements, and minimum/maximum equity stakes.  In assessing a potential investment, equity investors will look at likely downstream financings to understand whether the potential dilution and valuation premiums in later rounds are consistent with their return expectations.  The cost of debt capital includes the coupon or interest rate; additional upfront, final and other payments; and sweeteners such as warrants or royalties.

#6: What other economic and non-economic terms impact the choice of fundraising option?

Other economic and non-economic factors may affect which financing option or investor syndicate you choose.  Beyond the size and valuation of an equity round, myriad considerations include board composition, liquidation and participation rights, blocking rights, and other protective provisions.  Beyond interest rate and repayment schedules, debt financing considerations include the nature and extent of collateralization, financial covenants, and prepayment flexibility.

FLG helps clients in the life sciences, technology and other sectors architect their financing strategies to support their near- and long-term objectives.  Our partners bring experience in planning, sourcing, negotiating, and closing the broad continuum of financing alternatives presented here. If you are a life sciences CEO, board member or investor, we hope you’ll tap into our expertise.