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12:00 AM
Jan 03, 2011
 |  BioCentury  |  Finance

More to life than debt

Creative financing deals could keep money flowing into public biotechs in 2011

The name of the game last year for financing was debt, which predominantly went to the largest companies.

As long as interest rates remain low, insiders don't expect biotech appetite for debt to diminish. But some are hopeful that other forms of financing for a broader range of companies could be available in 2011.

"Companies were able to raise cash at incredibly low interest rates. Most of the big pharmas and biotechs have been taking advantage of that," observed Michael Brinkman of Jefferies. "If you can raise money at less than 5%, you'd be crazy not to. Because if you can't beat a 5% cost of capital, you shouldn't be in business."

"You have to stratify the financing data. The big cap companies are doing debt deals, with mid-caps and some smaller caps doing equity deals in the wake of positive events," said Peter Reikes of Stifel Nicolaus Weisel.

"The market is getting better," Reikes added, but there is a caveat. "There is more receptivity of investors to new financings, but there are not new investors." He expects this situation to continue for the foreseeable future.

Under these circumstances, Reikes sees company boards as very sophisticated at this point, and willing to evaluate a wide range of options.

"Fully marketed follow-on, wall-cross follow-on, plain vanilla registered direct, PIPE, convert: all of these, excluding converts, are available to everyone these days," he noted.

Reikes added that recap financings are on the table and that he's seeing direct approaches to companies by the buyside.

Amongst the smallest public biotechs - those with market caps of $500 million or less - 204 out of a universe of about 420 managed to finance last year. Of those companies, 57% did a PIPE (private investment in public equity), with an average size of $10.2 million.

Bankers were encouraged by the fact that financing activity was vigorous going into year end. In fact, companies raised $10.5 billion in 4Q10, roughly one-third of the total for the year.

"Getting investment into deals this late in the year is encouraging," Annette Grimaldi of BMO Capital noted in mid-December.

Neil Riley of Piper Jaffray agreed. "For fourth quarter, the bid and investor appetite really punched into the end of the year, whereas last year, the spigot started to slow in the early to mid-part of the fourth quarter. This year, there's been a fairly strong bid into the end of the year. I think that's going to translate into strong momentum," he said.

Riley noted that early December saw the biggest follow-on window ever across all sectors - with 40 deals getting done

Paul Wagner of Allianz RCM was a little less optimistic. He noted that he expects the big cap debt deals to continue, but he expects the financing environment for smaller caps to remain conservative.

"Except for the higher quality names, I believe the market will continue to be conservative with respect to secondaries unless the investments are derisked by incorporating incentives like pricing concessions or attached warrants," he said.

John Borer of Rodman & Renshaw noted he's seeing smaller cap companies doing smaller raises more often, which he doesn't expect to change soon.

Borer, who advises a lot of small and micro-caps, works to "keep the financings as simple and short-term as possible. Not a five-year warrant, but a one-year warrant. Or put more like a green shoe on the deal, a 180-day warrant. With volatility, investors are interested in that."

Leerink's Tony Gibney noted that biotechs also are increasingly tapping into alternative capital - such as royalty financing and private debt - and that more players are offering it.

"There is a lot of alternative capital, because interest rates are where they are. Funds are probably searching for a little more diversification," he said. "We've seen much more aggressive and accommodating private debt players. Historically, there were 5-10 investors, but now there are...

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