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Financing Risk

PharmaDeals Review article by Dr Fintan Walton

Published: 2009-04-27

Financing Risk

One of the key issues to arise from the current economic climate is the significant drop in funding from early stage of discovery to proof of concept amongst biotech companies. Biotechnology enterprises continue to have a severe need for cash to fund the further development of their pre-proof of concept therapies.

Equally, pharmaceutical companies have limited resources to take compounds through to full commercialisation and are also having to look carefully at their R&D costs, yet balance this with an imperative to maintain product pipelines as their more mature products come off patent. Currently, pharmaceutical companies are looking at short-term solutions hence the rise in recent M&A activity. All these provide relatively immediate improvements in quarterly earnings as these companies face dramatic patent cliffs.

This new consolidation provides an opportunity for some assets within these companies to be spun-out. Pharmaceutical companies are getting more comfortable with this concept. However, the big issue of funding these spin-out companies still remains. The good news is that these assets, unlike biotech developed projects, have already passed the pharmaceutical test. Thus pharmaceutical companies have an opportunity to work with venture capital and private equity groups to potentially finance and merge these new entities into existing biotechnology companies and thus boost their portfolios and their cash position. Option agreements by the pharmaceutical companies provide a means to reduce the transactional costs and risks of future licensing transactions going forward. Although somewhat complex, these arrangements will ensure that product pipelines remain strong and provide a means for all parties to share and mitigate risk.