How Biotech Startups Can Raise Money in a Down Market: Debt, Royalties

  • The market downturn is slowing the flow of venture capital into biotech.
  • Companies still need to find a way to raise enough money to bring products to market.
  • Debt financing, royalty partnerships and hybrid models could be good sources of new capital.

SAN DIEGO — The economy is trending down, and the biotech industry is no exception.

Some 200 biotech companies are listed on “negative business value“, which means they have more cash on their balance sheet than the sum of their market capitalization and debt. Others are at risk of run out of cash either go bankrupt.

And it’s not just public companies that the recession is hurting. VCs are encouraging new businesses a grab all the money they can to weather the coming storm. For many companies, however, this is easier said than done. Venture finance has slowed down significantly compared to last year, and is on track to be at least a third lower than in 2021 according to Crunchbase.

Fortunately, there are ways besides venture capital that companies, even in their early stages, can raise money. At the 2022 Biotech Innovation Organization conference, biotech finance experts discussed the unconventional ways startups can raise the funds they need to stay on track.

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Companies have traditionally viewed debt financing as a way to raise money to market a product, but that has been changing, said Celia Economides, chief financial officer at Gritstone Bio.

“Today we are seeing these debt deals happening at earlier stages, even phase 1 or 2,” he said.

There are two keys to taking on debt responsibly, said Igor DaCruz, CEO of Runway Growth Capital: finding the right partner and taking on the right amount of debt. It’s important to find a partner that has a lot of experience in the life sciences industry and is comfortable working with a company long-term, he said.

In terms of how much debt to take out, DaCruz said needs vary, but in general he recommends companies take out enough money to sustain operations for three to six months.

Another thing to consider is what type of debt to take on, said Cecilia Gonzalo, a partner at Oberland Capital Management. Some private companies may want to take on risky debt, which they repay after their next funding round. Meanwhile, other companies might be better off with long-term debt that they can pay off in five or six years.

Both Gonzalo and DaCruz agreed that they are open to providing debt financing to early-stage companies, as long as the company has a diverse pipeline of drug candidates.

Make a deal on future royalties

You don’t have to have an FDA-approved drug to start a royalty partnership, said Marshall Urist, head of research and investment at Royalty Pharma Management. For companies in mid- and late-stage clinical trials, it might be time to talk deals.

“We start working with companies once there is a very clear proof of concept,” said Urist. “We are more useful as you go further in development, when capital needs are greater.”

Making a deal on future royalties may be an easier sell for executives and board members because it feels less risky. “Royalties are not debt in any way, shape or form,” he said. “We think of it as a partnership.”

If the drug doesn’t sell well, both parts of society lose, and if it does well in the future, both parties win.

Create your own hybrid finance plan

Going into debt or forming a royalty partnership are not the only two options, according to the panelists. If you find a partner you want to work with, you can negotiate a hybrid financing model that involves a combination of debt, royalties, milestone payments, or other incentives.

“It can really be mixing and matching the various elements depending on the situation,” Gonzalo said.

The most important thing to remember, Urist said, is that all businesses will need to use various forms of financing as they grow. He said the best way to think about it is, “what is the right form of capital for that company, at that time.”

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