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The Funding Landscape for Small Biopharma Ventures, 2010-2015: Trends, Strategies and Priorities
Business Insights, July 2010, Pages: 133
The funding landscape for small and mid-cap biomedical companies has changed enormously over the past two years, driven by recessive public markets and withdrawal of private equity financing. The cost of raising capital has increased, and investors have become very selective about the type of transactions they participate in. Most small biopharma ventures are struggling to raise funds and maintain enough working capital for their clinical endeavours. As with any negative development, there are greater opportunities for both buyers and sellers.
This report investigates the implications of the credit crisis over the next five years and suggests strategies that can improve the chances of raising money without compromising on the inherent strengths of a company or clinical asset. The emerging trends, priorities and strategies of investors are described to help entrepreneurs target the right type of investor and communicate their value proposition in the best possible manner.
Key features of this report
- The long-term and short-term implications of the credit crisis on investors and entrepreneurs seeking to raise funds from public and private markets.
- Established and emerging preferences in the actual deal valuation and execution process- both at a conceptual level and in terms of specific inputs that industry professionals will need. Additional insights on the due-diligence process are also provided.
- Trends associated with “conditional” investments that are better able to share the risks, uncertainties and upsides; especially relevant for alliances between large pharmaceutical companies and smaller biotechnology companies.
- Insights on the negotiations between deal-makers: their focus areas, issues of concern, preferences in risk-sharing and how these preferences are reflected in the actual deal terms and conditions.
Scope of this report
- Facilitate communication between entrepreneurs and investors by appraising them of each others priorities, areas of concern and operational constraints.
- Plan in advance by understanding how such priorities, concerns and constraints will evolve over the next five years.
- Understand the role of large pharmaceutical companies in funding the clinical initiatives of small biopharma players via options-based deal structures that best resolve the conflicting incentives of the two parties.
- Understand the exit strategies of healthcare investors and tailor asset valuations and negotiation points accordingly.
- Use the top-line industry ‘average’ data to shape economic assessments and communication.
Key Market Issues
- IPOs are not around anymore and private equity funds are struggling to raise capital and yesteryear’s artificially suppressed rates. This has severely restricted the funding options for the majority of small-mid cap biopharmaceutical companies.
- Large pharmacutical companies, with their AAA credit ratings and stable cash flows, have become the major source of funds for smaller biotechnology ventures via an array of collaborative arrangements like product licensing, co-development, etc.....
- This situation has greatly improved the bargaining position of the large pharma companies, enabling them to pick and choose from a wide range of relatively lower priced assets to replenish their ailing pipelines.
Key findings from this report
- Existing investors are reinvesting in assets they have already committed funds to because newer investors are demanding excessively dilutive investment structures that do not favor the existing owners.
- Small biotech companies are struggling to maintain working capital reserves as private equity investments have been scaled back and the IPO is no longer a feasible source of funds.
- Both supply and demand-side factors are reducing the earnings potential of biopharma assets. The higher cost of raising capital has fundamentally reduced the capacity to invest in risky drug development assets. Simultaneously, budgetary pressures on healthcare spending are reducing society’s willingness to pay premium prices for therapies that offer marginal improvement.
- Drug manufacturers are likely to become the primary source of funding for small-mid cap biopharma via a variety of established arrangements such a licensing/ marketing agreements, co-development, joint-ventures or M&A.
- The financial crisis has not changed the geographic distribution of venture financing in any discernable manner. The US and Canada will continue to remain the hubs of biopharma innovation in the next five years.
Key questions answered
- How has the financial crisis impacted the funding environment for small-mid sized biomedical companies? What will be the short-term and long-term effects of the crisis for biopharma companies?
- How do healthcare investors value opportunities in early stage biomedical assets? Are there any preferences by investor type in terms of methodologies, discount rates and cash flow projections?
- What are the priorities and preferences of different types of private equity funds? What issues should entrepreneurs prepare answers for to successfully negotiate the due-diligence process of private equity investors?
- How has venture financing changed in response to the credit crisis? Is there a renewed interest in some therapy areas, geographies or stages of the development lifecycle?
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