Publicly traded life science companies are constantly searching for new sources of capital to fund their activities. Companies generally follow a traditional approach employing conventional financing vehicles such as secondary offerings, registered directs, and private investments in public equities (PIPEs).
When possible, issuers attempt to time offerings to coincide with the reaching of important company milestones such as a positive clinical data release, FDA action, or partnering activity. Another goal is to raise sufficient capital to provide a cash runway that will enable the company to fund operations through to the next milestone event.
Conventional financing vehicles have a long and successful history of raising capital for emerging companies. However, they can present existential risks, especially for companies with very long product-development timelines such as life science companies if the issuer depends on conventional financings alone.
A conventional financing is a single discrete event. The ability to complete the transaction is thus dependent on the general financing environment at the time the deal is announced. Financing windows open and close unpredictably, so a planned transaction may not occur.
Extrinsic events, such as market volatility, or intrinsic events, such as a data announcement or anticipated partnering deal may not turn out as planned. Any delays in financing could put the company in a perilous financial position.
Traditional financings can be expensive to execute particularly for life science companies. Offerings today are typically announced at an average discount to the prior closing price of about 7.5%. Underwriters’ fees run about 5%.
Warrants are also a significant cost for life science companies, averaging 24% of a transaction or higher. Companies that are running out of capital will confront costs above these numbers. All together, transaction costs could total about 35% of the raised capital.
Finally, management time and attention can be significant. For some transactions, time spent with prospective investors can be significant. The company may need to proceed through a quiet period when management is precluded from discussing the company and its prospects with investors.
Considering these issues with conventional financings, management might want to consider additional tools to broaden the financing options.