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OT: Early-Stage Biotech Value Creation: The Roles of Equity and PartnershipsHighly recommended reading for those that are biotech inclined. An insightful (long) blog-post by Steven Holtzman, CEO of Decibel Therapeutics (also see comments section). Below is a small excerpt. http://leadershipandbiotechnology.blogspot.com/2018/08/early-stage-biotech-value-creation_15.html August 15, 2018 ============================================== Prologue Building a great, sustainable biopharmaceutical company requires so many things: · Great science · Great drug discovery and development · Great people · Great culture · Great vision and strategy · Great execution · Great investors This piece addresses NONE of these. Its sole focus is the STRATEGIC FINANCIAL aspect of building a great, sustainable biopharmaceutical company: how do you put the “gas in the engine” in the period before revenues and profits in a manner that enables financial investors (and your employees who hold stock/stock options) to enjoy a return on their investment (= increase in share price relative to their purchase price). The appropriate financing strategy will be dictated by internal forces (the nature of your assets and vision) and externalities (the partnering and capital markets). There is no single strategy appropriate to every company in every environment. At the same time, the fact of the matter is that, in the period before you have product revenues, you have only two things to sell. The first is technology and information of current value to the customer (typically, a larger biopharmaceutical company). The second can be called “futures,” and those futures come in one of two flavors: equity (and instruments that look, smell, and taste like equity) and rights (marketing/profit participation rights) in/to the products (and the revenues they will produce) you are seeking to develop. As it were, you are selling participation in the future financial appreciation of the whole and/or of one or more of the parts. (Note: the sale of technology and information of current value to the customer can and most often involves a sale of rights.) Chapter 1: The Basics · Value creation is not about the size of your market cap, or not directly about that. It’s all about share price appreciation. o Market cap is about the size of a CEO’s ego. o Share price is what pays for your (and your investors’) kids’ college educations. · You can create a large market cap without creating shareholder value by taking too much dilution early when your stock price is at its lowest. Therefore, be wary of early dilution. · Yet beware that corporate partnerships are not an end in and of themselves and are not a (purely) “non-dilutive” form of cash; they are an implement of strategic value creation. o Use them to contain early dilution but only if you can do so in a manner that does not give away the major sources of your future value creation. · Ours is a business in which you can spend yourself to death, but you can’t save your way to glory. · Therefore, under-spending/under-capitalizing and over-spending/over-capitalizing both represent sources of risk to exceptional value creation. · The art lies in balancing the two different sources of capital as they represent two different forms of dilution and in recognizing the relative risk of the two that applies to your specific situation. · Identify your specific situation at the given moment in your evolution and act accordingly. Chapter 2: Product Companies In general, if you are a “product-based, single or limited assets” company[1], your primary risks are either over-spending/over-capitalizing early (dilution) or partnering in a manner that sells off your long-term value-creation potential. Your value is directly driven by the attainment of meaningful development milestones. § Drive your lead asset. Do not partner away (the majority of) your rights early; use equity as funding, otherwise you will have given away the source of your longer-term value and be “back on the hamster wheel” trying to develop the next shot on goal. Raise sufficient capital early; devote this early/expensive cash to driving to the value-inflection development milestones; but do not “over” capitalize too early. Be sure to be realistic and not find yourself—when the inevitable hiccups occur—with the gas tank approaching “E”…venture capitalists in such situations often morph into vulture capitalists. On the back of good data, raise more, large amounts of equity at higher prices: now is the time that the risk has shifted from over-capitalization to under-capitalization; keep doing so as you knock off the data-based milestones. o Achieve out-scale return via: § Get sold. § Get to market with your product. § Expand and diversify and grow: · Develop additional indications of the lead molecule. · Diversify via adjacencies, e.g., new formulations/analogs with better pharmaceutical properties of lead; attack same/related pathways as lead’s mechanism of action. · Forward integrate to the market. |
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