The story of a development-stage biotech company is one of almost continuous fund-raising. Why, you may ask? Well, in the absence of revenue, the expense of progressing a drug candidate through preclinical and then clinical studies falls squarely on a company’s shareholders and supporters.
Once a biotech company is public however, the number of funding options that are available become more plentiful and rewarding – that is the benefit of going through the IPO process. Typically, such companies are also much further along in the development of their assets, which further increases financing options.
Private, early-stage biotechs typically survive on seed funding, early round financing from venture capitalists, and non-dilutive grants from government, industry, or charitable organizations. Once they are publicly listed, however, their increased fundraising options include follow-ons, a variety of secured or unsecured debt financing, convertibles, partnership or licensing agreements (in which the company typically sells off foreign markets for its drug that is has no plan to commercialize itself), and at-the-market (ATM) facilities.
In the biotech world, ATM facilities have become so popular that it’s almost unheard of for companies to NOT put one in place on the first anniversary of their IPO, which is the first available date that such an undertaking is typically possible. ATM financing used to get a bad rap, but over the past decade they have come to be seen as a logical and necessary part of a biotech’s financial arsenal.
An ATM allows a biotech to selectively and confidentially sell blocks of new shares to known, would-be buyers. Such transactions take place through, and in active dialogue with, the company’s ATM manager, with Cantor Fitzgerald and Cowen typically winning the lion’s share of such biotech business.
Although the number of shares that can be covered and issued by an ATM is limited by a company’s size (shares outstanding) and liquidity (trading volume), such facilities help smooth a biotech’s fundraising profile, which might otherwise be characterized by large, one-off follow-ons. These follow-ons typically only occur in the aftermath of major beneficial development milestones.
Aside from the flexibility and optionality, a key attribute of ATMs is that their utilization is disclosable only after the event. In fact, even funds using ATMs to buy stock are often unaware of the shares’ source. Instead, disclosure of ATM utilization is made after the event in the company’s 10-Q filing with the Securities and Exchange Commission (SEC).
This arrangement therefore enables a biotech to “hedge its bets” ahead of major data announcements, ensuring the company’s survival (and some residual value) in the event that such data turns out to be negative. Let’s walk you through a hypothetical example.
Without an ATM in place, Awesome Therapeutics, our example biotech company, is approaching the announcement of pivotal Phase 3 data for its potential cure for the common cold. It does not have the funds necessary to fully commercialize its drug, but plans to complete a follow-on offering in the event that the Phase 3 data is positive. Management are obviously confident that their drug works, and have lined up a syndicate of supportive banks who are standing by.
One of two scenarios now unfold:
Scenario 1: The Phase 3 data is positive, Awesome Therapeutics’ stock soars on the back of the news, and its banks leap into action and raise hundreds of millions of dollars for the company through a follow-on, enough to fund the company through the commercialization of its drug. Everyone is happy.
Scenario 2: If the Phase 3 data is negative, Awesome Therapeutics’ stock might tank by perhaps 50-70%, the banks will quietly move on to their next deal, and Awesome Therapeutics will be left with a diminished development pipeline and insufficient cash-on-hand to fully develop its remaining assets (if any).
Now, let’s replay the above scenario with an ATM facility in the mix:
In the six months leading up to the announcement of Phase 3 data, Awesome Therapeutics’ stock price is pushed up, perhaps driven by retail investors, in anticipation of the announcement of pivotal clinical trial results. In the last few months before data, Awesome Therapeutics, in dialogue with its ATM manager, sells shares into this demand. This results in tens of millions of dollars in new funding (perhaps even more) that it doesn’t have to disclose until its next 10-Q filing.
Once again, one of two scenarios now unfolds:
Scenario 1: If the Phase 3 data is positive, Awesome Therapeutics’ stock soars on the back of the news, and its banks still leap into action and raise hundreds of millions of dollars for the company through a follow-on. The company now has enough resources to fund through the commercialization of its drug. Shareholder ownership and upside has been partially diluted by the pre-data ATM offering, which the company eventually discloses, but everyone has nevertheless made money and therefore should be happy.
Scenario 2: If the Phase 3 data is negative however, Awesome Therapeutics’ stock will still tank (and the banks will still quietly move on to their next deal), but Awesome Therapeutics now has sufficient cash-on-hand (thanks to its ATM proceeds) to regroup and refocus on the development of its remaining assets. It will have survived a major (and unexpected) negative data event, and its management will have second chance to rebuild shareholder value.
Hopefully, the Awesome Therapeutics example helps you visualize how ATMs represent a valuable addition to a biotech’s fundraising options. While they were once associated with companies who couldn’t raise money any other way – especially through a formal follow-on process – they are now almost universally accepted as necessary to smooth the otherwise “lumpy” and uncertain landscape of biotech financing.
Inflexion points like data aside, an ATM–which, by the way, typically incurs half the banking fees associated with follow-ons and IPOs raising equivalent amounts–can also be used in the course of normal financing, side by side with a strategic investor relations program that seeks to raise awareness of a company’s investment thesis and prospects. Managed properly, biotechs can actually raise just as much through an ATM facility over several months as they can via a fully-fledged secondary market offering. For more on ATMs and other financing options, contact us.
Laurence Watts, Managing Director