Royalty streams. One such alternative is the sale of royalty streams on future product sales of commercial or very late-stage clinical candidates to institutional investors to fund the advancement of promising earlier-stage drug candidates. Under this model, which has brought several billion dollars of capital into the biotech industry in recent years, a defined portion of future product sales is provided to investors in exchange for upfront capital.
Committed equity financing facilities. More recently, the biotech industry has turned to a second alternative source of financing: committed equity financing facilities or ‘CEFFs’. Under the CEFF model, an investor agrees to purchase a defined amount of equity from a biotech issuer at prices slightly below market over a fixed period of time, but at the demand of the issuer. Because the biotech can issue the new shares at a time of its choosing within the deal window, the guessing game of organizing a single large public offering of stock or PIPE is largely eliminated—the biotech can predictably issue shares over time at prices it deems fair.
CRO-linked financing. In this third model, a CRO partners with a biotech company to provide both capital and value-added development resources. NovaQuest, the partnering arm of Quintiles Transnational (Research Triangle Park, NC, USA) has invested over $1.6 billion in 60 partnerships since its founding in 2000—approximately three-quarters of these deals have been with biotech partners. CROs typically receive royalties on future product sales, an ownership position in the biotech company it is partnering with or both in return for its capital contributions and development services and expertise provided. Similarly, Pharmaceutical Product Development (Wilmington, NC, USA) has been active in such arrangements.
Collaborative development financing. Collaborative development financing provides a source of capital that uniquely addresses the financing and development resources needs of biotech companies with products in early-stage clinical development. This financing model emerged in the early 1980s and has been instrumental in the development of several commercially successful biotech products to market. Collaborative development financings allow biotech companies to broaden and accelerate their clinical development programs through the application of dedicated capital and clinical expertise, to preserve control of key strategic programs through key value inflection points and to off-load the risks of program failure, all in a manner that is minimally dilutive to its shareholders and neutral or accretive to its earnings. Under this model, a biotech company licenses a portfolio of drug candidates to a company funded by external investors with the exclusive purpose of advancing the development of those drugs. In return for the technology licenses, the biotech company receives the exclusive right to reacquire the drugs at a later date at prenegotiated prices (if, in its view, the drugs have shown sufficient safety and efficacy to warrant the buyout price), thereby allowing the innovator to retain the lion’s share of future upside. Should the trials fail, the investors bear 100% of the risk of loss of their invested capital that funded the development effort. In addition, the collaboration enables the biotech company to access clinical development expertise.