Similarly, although CEFFs provide biotech companies with more control over the issuance of new shares at fair prices, CEFFs still require issuing equity at prices that may not fully reflect the potential of a company’s pipeline, causing considerable dilution. In the case of CRO-linked financings, a nondilutive, two-pronged solution is provided that addresses biotech’s dual need for capital and development expertise. However, like royalty monetizations, CRO-linked financings also have the potential to leak significant future value from biotech shareholders to the investing organization.
Collaborative development financing represents an attractive alternative for companies to retain an option on the future value of their products that can be exercised within a defined period of time and at a defined cost. In addition, when coupled with access to premier clinical trial design and management expertise, it can further increase the likelihood of clinical success.
Taken together, these advantages differentiate collaborative development financing from dilutive equity issuances, costly premature deals with big pharma and other alternative sources of funding available to the biotech industry.
There are several key strategic benefits to this financing model. First, it provides the ability to accelerate early- and mid-stage clinical programs. Given the vicissitudes of the public equity markets, biotech companies manage the clinical programs to a large extent based on a budgeted cash burn rate that is not necessarily tied to the most advantageous development plan, that is, one that is conducted better and faster to maximize the value of the drugs, even if the plan requires more capital than the biotech company would have been able to finance on its own.
Second, unlike a deal with big pharma, there is a complete alignment of interests between the collaborating development company and the biotech company. The investors have no other competing drugs that are being developed and no long-term interest in retaining the drugs. The complete focus of the collaboration is to maximize the value of the development programs: as the difference between the value created by the collaboration and the price to be paid by the biotech company to buy back the drugs increases, the incentive for it to exercise its buy-out option also increases.
Third, the financing results in off-loading all or part of the risk of development failure. Should the trials fail for whatever reason, the investors lose their invested capital that funded the programs. In effect, this results in the biotech company funding its development programs after key data are known and key milestones are met.
And fourth, the biotech company has the opportunity to exercise the buy-out option. This enables it to preserve downstream control of key development programs and commercialization opportunities.
The financial benefits are also considerable. First, a dedicated pool of capital is provided that is designed to take the programs through predetermined phases of clinical development. There are no milestones or contingencies established for funding the programs. Second, as compared to other forms of capital, dilution of shareholders’ equity is minimized. And third, unlike the typical corporate deal, future economics are preserved for the biotech company’s shareholders. Given the rich valuations afforded to late-stage programs by the public markets, the net effect is a notable increase in shareholder value driven by the retention of economic upside by existing shareholders, as well as risk mitigation.