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From VC to alternative financing: Navigating a treasure of cash available to biotechs

There is a wealth of financing available for biotech companies, according to Sofia Ioannidou, the Director for Edmond de Rothschild Investment Partners (ERIP). Leading a panel discussion on capital financing opportunities during BIO-Europe Spring® 2018, Ioannidou provided a spot-on example, announcing her firm in February closed a fresh fifth fund of EUR 345 million, of which 70 percent will be dedicated to biotech programs.

"Yet, not every type of financing alternative is appropriate for every company. There can be misalignments with certain types of financing. The trick is finding investors who are appropriate to a given stage of a company's development," she said.

According to the Investment Director for Arix Bioscience, Jonathan Tobin, the universe of companies suitable for venture capital is relatively small within healthcare.

Jonathan Tobin, Investment Director, Arix Bioscience

"Not all managers are VC-friendly or want to have investors breathing down their necks or owning three-quarters of their company. There has to be an alignment of interests," he said before adding a provocative observation that, "The company where venture capital is appropriate is one that can absorb a very large bolus of money in one go and generate a disproportionate value in a very short space of time. This is why it is so appropriate to biotech, because companies are generating IP rather than tangible products. There is a large amount of good will in valuations because these companies are creating something that is intangible, whereas companies developing products that have revenue are evaluated on a more tangible basis and there is less opportunity for investors to make ridiculous returns. It is the potential to make these sometimes absurd returns that we hear about that creates the interest in biotech venture capital even though on a risk-adjusted basis it does not make sense."

Michael McCully, the Managing Director of Terranova Bioventures said, "I see companies that accelerate toward venture capital prematurely without the management team in place and the expertise around the company. Yet in this environment, many of these companies are getting funded because there is so much capital chasing deals right now."

Prior to approaching VCs, he urged biotech companies to first explore non-traditional financing sources by maximizing opportunities for grant funding or foundation money, "anything that is truly non-dilutive capital that allows you to advance the company. Here you are not beholden to investors and it is funding that is more flexible for the timelines you will need.

"The bridge that I see companies using between grant funding and venture capital is to turn towards high-net-worth individuals and family offices," he said. While these sources may seem to be a panacea with capital that is easier to access, "To be polite, it can be challenging. My preference is for convertible debt, rather than trying to live together. It is less complicated and leaves your options open downstream," he said.

The Managing Director at Norgine Ventures, Julien Michaux, describes his business as venture debt, by definition later stage biotech companies.

"When we started in 2012, there was a lot of risk aversion by European companies to taking on debt, where in the United States it had already become a mainstay of the financial toolbox for companies to take on debt on top of equity financing. This situation has dramatically changed and today we find there are a lot of friendly competitors in the marketplace," he said.

Yet, he notes, "it has become fairly easy for biotechs over the past two or three years to raise equity capital. And to be completely frank, with all the capital in the market, that has made our lives that much harder. Our latest investments have been in medtech or digital health exactly for this reason, because these companies are not as lucky."

This Monday afternoon BD panel featured Sofia Ioannidou, Edmond de Rothschild Investment Partners; Deborah Chen, Head of BD and Licensing at A*STAR; Jean-Paul Mannie, Associate Director of Equity Capital Markets at NIBC; Michael McCully at Terranova Bioventures; Julien Michau at Norgine Ventures, and Jonathan Tobin, Arix Bioscience.

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